Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 1, 2019. Farmer Mac provides secondary-market financing and credit support for agricultural and rural utility lending through loan purchases, guarantees, long-term standby purchase commitments (LTSPCs), USDA-guaranteed assets and AgVantage securities.
Financial and operating performance
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income attributable to Farmer Mac | $34.0 million for Q2; $59.2 million for six months | $29.6 million and $55.5 million, respectively, in 2018 |
| Net income attributable to common stockholders | $28.3 million for Q2; $50.2 million for six months | $26.3 million and $48.9 million, respectively, in 2018 |
| Diluted GAAP EPS | $2.63 for Q2; $4.66 for six months | $2.45 and $4.55, respectively, in 2018 |
| Net interest income | $43.1 million for Q2; $83.7 million for six months | $43.9 million and $87.2 million, respectively, in 2018 |
| Net interest yield | 0.87% for Q2; 0.87% for six months | 0.96% and 0.97%, respectively, in 2018 |
| Non-GAAP core earnings | $23.6 million for Q2; $45.9 million for six months | $19.4 million and $41.2 million, respectively, in 2018 |
| Assets / notes payable | $20.74 billion / $18.19 billion | $18.69 billion / $16.24 billion at December 31, 2018 |
| Equity / cash and cash equivalents | $773.7 million / $396.6 million | $752.6 million / $425.3 million at December 31, 2018 |
Q2 net interest income was slightly lower year over year despite higher interest income, as interest expense rose. Management attributed the six-month decline in net interest income mainly to fair-value effects from derivatives and hedged items and lower income on LIBOR-indexed assets. In contrast, six-month core earnings grew, supported by higher net effective spread and business growth. Net effective spread, a non-GAAP measure, was $41.4 million (0.91%) in Q2, versus $36.2 million (0.86%) a year earlier.
Other comprehensive loss was $34.1 million in Q2 and $37.8 million for the first half, principally reflecting unrealized losses on available-for-sale securities and cash flow hedges. Consequently, Q2 comprehensive income attributable to Farmer Mac was approximately negative $0.1 million despite positive net income.
Cash flow from operations was negative $100.7 million in the first half, compared with positive $162.2 million in 2018; investing used $1.74 billion, while financing provided $1.81 billion. Cash ended the period at $396.6 million. The filing describes Farmer Mac’s cash generation and funding as reliant on debt issuance, asset repayments and maturities, fees, and capital-market access.
Business, balance sheet and capital changes
- Outstanding business volume increased $1.02 billion from year-end 2018 to $20.75 billion. Q2 net growth was $239.8 million, with growth across all four lines of business. Rural Utilities loan balances rose notably, and AgVantage securities remained the largest business-volume category.
- Total notes payable increased $1.94 billion from year-end. $9.94 billion of notes payable were due within one year, compared with $8.25 billion due after one year. Farmer Mac had $18.2 billion outstanding against a board-authorized $20.0 billion debt issuance limit.
- Farmer Mac issued $100 million of 5.700% Series D preferred stock in May and redeemed $75 million of 6.875% Series B preferred stock in June. It recorded $2.0 million of deferred issuance costs as a loss on retirement. Management expected aggregate quarterly preferred dividends of about $3.4 million beginning in Q3 2019.
- Core capital was $786.6 million, $191.6 million above the $595.0 million minimum requirement. Farmer Mac reported a 13.6% Tier 1 capital ratio and compliance with statutory capital requirements, at the highest compliance level.
- Farmer Mac reported 179 days of liquidity at June 30 and an average of 170 days during Q2, above the regulatory minimum of 90 days. Available liquidity assets totaled $3.36 billion, including cash and investment securities.
Outlook, risks and contingencies
- Management expects continued growth opportunities across business lines, while noting that growth depends on customer financing needs, capital and liquidity, credit quality, competition and market conditions. No specific earnings or revenue guidance was provided.
- Management expects 2019 operating expenses to increase approximately 8%–9% over 2018, citing planned growth and strategic initiatives, despite a 3% year-over-year increase in first-half operating expenses.
- Agricultural credit conditions warrant monitoring. Substandard Farm & Ranch assets were $242.7 million, or 3.3% of that portfolio, up from $232.7 million, or 3.2%, at year-end. Ninety-day delinquencies were $28.0 million (0.38%), versus $26.9 million (0.37%) at year-end; management noted their seasonal pattern and that both measures remained below historical averages. The allowance for losses was $9.1 million.
- Management highlighted trade-policy disruption, commodity-price and farm-income volatility, and difficult 2019 planting weather. It estimated 27% of Farm & Ranch volume was exposed to affected corn and soybean growing areas. Crop insurance and USDA market-facilitation payments were cited as mitigants, but prolonged trade stress or adverse conditions could impair borrowers.
- Interest-rate, basis and refinancing risks remain. At June 30, $5.1 billion of floating-rate assets, $4.1 billion of floating-rate debt and $13.0 billion notional of swaps reset based on LIBOR. Farmer Mac was evaluating the transition from LIBOR, and had issued $255 million in SOFR-based medium-term notes during the first half.
- Off-balance-sheet exposures included $829.0 million of guaranteed securities and $3.0 billion of LTSPCs, before collateral, recourse or other offsets. Rural Utilities and USDA portfolios had no reported delinquencies or credit losses; USDA exposure is supported by the U.S. government guarantee. AgVantage counterparty exposure and collateralization remain relevant risks.
- The filing reported no legal proceedings and no material changes to previously disclosed risk factors. Management stated that it had sufficient liquidity and capital for the next 12 months, assuming continued capital-market access; it also maintains a contingency liquidity plan.
Important facts for investors to verify
- How much earnings growth is recurring core performance versus derivative fair-value gains and other GAAP-to-core adjustments; core earnings are non-GAAP and may not be comparable across companies.
- Whether net interest spread and margins hold up as funding costs, refinancing needs and interest rates change.
- Trends in Farm & Ranch substandard assets, delinquencies, collateral values, commodity exposures and loss provisions, particularly given trade and weather stresses.
- Liquidity and refinancing capacity, including the large amount of notes due within one year and reliance on continued capital-market access.
- AgVantage counterparty concentrations, collateral terms, and the scale of off-balance-sheet guarantees and LTSPCs.
- The effects of LIBOR replacement, the planned expense increase, and the Series D issuance and Series B redemption on future earnings, dividends and capital.