Business context and reporting period
Federal Agricultural Mortgage Corporation (Farmer Mac) is a federally chartered secondary-market provider supporting agricultural and rural financing. This unaudited Form 10-Q covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated.
Key financial and operating metrics
- Profitability: Net income was $25.2 million; net income attributable to common stockholders was $21.9 million, or $2.03 per diluted share, versus $22.5 million and $2.10 per diluted share. Non-GAAP core earnings were $22.2 million, or $2.06 per diluted share, versus $21.8 million and $2.03.
- Revenue and margins: Interest income was $155.5 million and interest expense $114.9 million, producing net interest income of $40.6 million versus $43.2 million. Net interest yield was 0.86% versus 0.98%; non-GAAP net effective spread was $38.8 million, or 0.89%, versus $37.1 million, or 0.91%. Non-interest income was $3.7 million versus $0.2 million, reflecting substantially lower derivative losses.
- Expenses and credit costs: Non-interest expense rose to $12.8 million from $11.6 million. Farmer Mac released $0.4 million from its allowance for losses, compared with a $0.4 million release in Q1 2018.
- Cash flow: Operating cash flow was $18.5 million versus $117.8 million; investing used $980.1 million versus $383.3 million; financing provided $912.5 million versus $456.7 million. Cash and cash equivalents fell $49.1 million during the quarter to $376.1 million.
- Balance sheet and funding: At March 31, total assets were $19.8 billion, total liabilities $19.0 billion, and equity $763.3 million. Notes payable totaled $17.25 billion, including $8.57 billion due within one year. Outstanding business volume was $20.5 billion, up $782.4 million from year-end.
- Liquidity and capital: Farmer Mac reported 175 days of liquidity at quarter-end and a 194-day quarterly average, against a 90-day regulatory minimum. Core capital was $742.0 million, $169.1 million above the minimum requirement; the company was in compliance with statutory capital requirements and its capital adequacy policy.
Material changes versus comparable periods
- Common-stockholder net income declined $0.6 million year over year, primarily from lower net interest income and higher operating costs, partly offset by lower losses on undesignated derivatives. Core earnings increased $0.4 million, mainly on higher net effective spread, partly offset by higher expenses.
- Net interest income fell $2.6 million year over year. Management cited fair-value changes in fair-value hedge relationships and higher LIBOR-based funding costs, partly offset by business growth and higher spreads on refinanced AgVantage securities.
- Operating expenses increased, including compensation and benefits of $7.6 million versus $6.7 million, amid increased headcount and investment in technology and infrastructure.
- Rural Utilities and Institutional Credit drove business-volume growth, up $482.6 million and $349.0 million, respectively. The Rural Utilities increase included a $546.2 million portfolio of loan participations purchased from CoBank, a related party. Farm & Ranch and USDA Guarantees volume declined modestly.
- Farm & Ranch 90-day delinquencies increased to $52.4 million, or 0.73% of that portfolio, from $26.9 million, or 0.37%, at year-end. Substandard assets rose to $246.7 million, or 3.4%, from $232.7 million, or 3.2%. Management attributed much of the delinquency increase to seasonal payment timing, but reported modestly weaker overall credit quality.
Outlook, risks, and unusual items
- Management sees growth opportunities across its business lines but gave no specific earnings or business-volume forecast. It expects 2019 operating expenses to increase approximately 8%–9% from 2018 as it invests in personnel, technology, and infrastructure.
- Management cited agricultural-sector risks including trade disruptions and tariffs, commodity-price and export-demand changes, weather and flooding, and potential pressure on borrower repayment capacity. It noted that prolonged trade disputes or lasting adverse weather effects could stress the portfolio.
- The filing highlights interest-rate, refinancing and basis risks. LIBOR-based assets, debt, and swaps create transition exposure; Farmer Mac issued its first SOFR-based medium-term note in Q1, an $80 million one-year note.
- The 2018 Farm Bill raised authorized USDA guarantee and individual-loan limits, potentially supporting USDA Guarantees growth. A separate acreage-limit change for Farm & Ranch lending depends on an FCA feasibility assessment due to Congress by June 18, 2019.
- Derivative and hedge fair-value movements materially affected GAAP results; management’s non-GAAP core earnings exclude specified fair-value fluctuations and other adjustments. Farmer Mac reported $6.5 billion of Level 3 fair-value instruments, 33% of total assets.
- Potential off-balance-sheet exposure included $814.6 million of guaranteed securities and $3.1 billion of long-term standby purchase commitments. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the increase in Farm & Ranch delinquencies and substandard assets proves seasonal or develops into sustained credit deterioration, particularly in crop and livestock exposures.
- The credit and concentration implications of AgVantage securities and the related-party CoBank loan-participation purchase.
- Whether net interest yield and funding spreads stabilize as debt refinances and LIBOR transition plans progress.
- Whether liquidity remains adequate given near-term debt maturities and continued access to capital markets; compare reported liquidity with the 90-day minimum.
- How management’s expense-growth outlook, Farm Bill implementation, trade conditions, and weather developments affect earnings, capital headroom, and future business volume.