Federal Agricultural Mortgage Corporation (Farmer Mac) — 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; filed November 9, 2017. Amounts below are U.S. dollars. Farmer Mac provides liquidity and credit guarantees for agricultural and rural infrastructure lending through Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit businesses.
Key financial metrics
| Metric | Q3 2017 / September 30, 2017 | Comparison |
|---|---|---|
| Interest income | $104.5 million | $79.5 million in Q3 2016 |
| Net interest income | $39.6 million; 0.92% net interest yield | $35.6 million; 0.89% yield in Q3 2016 |
| Net effective spread (non-GAAP) | $36.2 million; 0.92% | $32.2 million; 0.86% in Q3 2016 |
| Net income attributable to common stockholders | $18.5 million; diluted EPS $1.71 | $16.4 million; diluted EPS $1.54 in Q3 2016 |
| Core earnings (non-GAAP) | $17.0 million; diluted EPS $1.57 | $14.4 million; diluted EPS $1.36 in Q3 2016 |
| Assets / liabilities / equity | $17.69 billion / $17.00 billion / $694.2 million | At December 31, 2016: $15.61 billion / $14.96 billion / $643.6 million |
| Cash and investment securities | $2.60 billion combined | $2.78 billion at December 31, 2016 |
| Debt | $15.51 billion notes payable, including $8.11 billion due within one year; plus $1.33 billion trust debt held by third parties | Notes payable were $13.66 billion at December 31, 2016 |
| Capital and liquidity | $653.4 million regulatory core capital, $137.6 million above minimum; 200 days of liquidity at quarter-end | Capital cushion was $143.2 million at December 31, 2016; regulatory liquidity minimum is 90 days |
| Cash flows, nine months | Operating +$157.3 million; investing −$1.78 billion; financing +$1.72 billion; cash increased $101.5 million | Prior-year operating cash flow +$120.8 million; investing −$930.0 million; financing −$87.3 million |
Nine-month results and changes versus prior year
- Net income attributable to common stockholders was $54.6 million, or $5.06 diluted EPS, versus $38.7 million, or $3.60, in the first nine months of 2016. Non-GAAP core earnings were $48.6 million, or $4.50 diluted EPS, versus $39.9 million, or $3.71.
- Net interest income rose to $116.4 million from $103.6 million; net effective spread rose to $104.7 million from $93.2 million. Management attributed growth primarily to larger Farm & Ranch loans and AgVantage holdings, other business growth, and favorable funding conditions.
- Total assets increased about $2.1 billion from year-end, largely reflecting growth in Farmer Mac Guaranteed Securities and loans. Outstanding business volume reached $18.6 billion, up $1.2 billion from year-end.
- Business volume grew across several products. During Q3, new business volume totaled $893 million; net portfolio growth was about $0.4 billion. A $1.0 billion AgVantage refinancing shifted substantial volume previously held by third parties onto Farmer Mac’s balance sheet.
- Common dividends were $0.36 per share per quarter in 2017, up from $0.26 in 2016. The board extended the remaining $5.4 million share-repurchase authorization through August 2019; no shares were repurchased in the first nine months of 2017.
Outlook, risks, and unusual items
- Outlook: Management sees potential growth across all four business lines, supported by lender capital and liquidity needs, expanding lender relationships, Farm & Ranch demand, and opportunities with larger rural utilities borrowers. No specific earnings or growth guidance was provided. Management expects continued access to capital markets and believes liquidity and capital resources are sufficient for the next 12 months, subject to continued market access.
- Credit quality: Farm & Ranch 90-day delinquencies rose to $66.4 million, or 1.01% of the portfolio, from $41.9 million (0.65%) at June 30 and $21.0 million (0.34%) at year-end. Substandard assets increased to $219.6 million, or 3.3%, from $192.1 million (3.0%) at June 30 and $165.2 million (2.7%) at year-end. Management cited seasonal payment patterns and borrower-specific issues, while noting metrics remained around historical averages and the portfolio was believed adequately collateralized. A $15.3 million permanent-planting exposure to one borrower accounted for roughly one-third of the year-to-date delinquency increase.
- Total allowance for losses was $8.5 million, 0.13% of the Farm & Ranch portfolio, versus $7.4 million, or 0.12%, at year-end. Management said provisions reflected risk-rating downgrades and portfolio growth. It warned further deterioration in substandard assets could increase provisions.
- Key exposures include agricultural commodity prices, weather and farmland values; interest-rate, prepayment, and funding-basis risk; capital-market access; and regulatory or trade-policy changes. Farmer Mac reported no material potential exposure from Hurricanes Harvey or Irma or California wildfires based on its portfolio review. USDA-related credit exposure is backed by the full faith and credit of the U.S. government.
- AgVantage securities totaled approximately $7.9 billion, with meaningful counterparty exposure, including MetLife, CFC, and Rabo AgriFinance. Management reported no historical AgVantage credit losses. About $5.5 billion of fair-value financial instruments were Level 3, representing 31% of total assets; valuation relies on management assumptions and unobservable inputs.
- Unusual items included the May 2017 redemption of Farmer Mac’s 65% interest in AgVisory for $5,000, resulting in an approximately $0.1 million after-tax loss; and adoption of share-based payment accounting guidance, which generated $1.2 million of tax benefits for the nine-month period. CME’s variation-margin accounting change affected presentation of derivative settlements and results, but management said it did not change the underlying economics.
- Management reported effective disclosure controls and no material changes in internal control during the quarter. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether rising delinquencies and substandard assets persist or translate into higher credit losses and provisions, particularly in crop and permanent-planting loans.
- The concentration, collateralization, maturity profile, and refinancing risk of the $7.9 billion AgVantage portfolio, including counterparty credit quality.
- Whether growth in net effective spread and core earnings is sustainable as funding spreads, interest rates, asset mix, and maturities change; review the company’s non-GAAP reconciliations.
- Liquidity and capital headroom under stress: the $137.6 million cushion above minimum capital, 200 days of regulatory liquidity, and substantial short-term debt maturities.
- Level 3 valuation assumptions and sensitivity, alongside the effects of agricultural conditions, interest-rate movements, and continued capital-market access.