Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 6, 2019. Farmer Mac is a federally chartered secondary-market provider supporting agricultural and rural-utility lending through loan purchases, guarantees, standby commitments, and institutional financing.
Key financial results
Amounts are in millions, except per-share data. Q3 comparisons are with Q3 2018; nine-month comparisons are year over year.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total interest income | $161.5 | $142.6 | $482.1 | $397.8 |
| Net interest income | $40.1 | $45.1 | $123.8 | $132.2 |
| Net income attributable to Farmer Mac | $17.8 | $29.8 | $77.0 | $85.2 |
| Net income attributable to common stockholders | $14.4 | $26.5 | $64.6 | $75.3 |
| Diluted EPS | $1.33 | $2.46 | $5.99 | $7.01 |
| Core earnings (non-GAAP) | $23.4 | $22.4 | $69.3 | $63.6 |
Q3 net interest yield was 0.78%, down from 0.99% a year earlier. Net effective spread, a non-GAAP measure, was $42.5 million and 0.90%, compared with $39.1 million and 0.93%. Net interest income and GAAP earnings were affected by interest-rate-related fair-value movements in derivatives and hedge relationships; management’s core earnings measure excludes specified fair-value fluctuations and other adjustments.
- Profitability drivers: Q3 common earnings fell $12.1 million year over year, with management citing derivative fair-value effects, lower net interest income, higher operating expenses, and a $0.5 million after-tax provision for total loan losses. Core earnings rose $1.0 million, primarily on stronger net effective spread, partly offset by higher expenses.
- Costs and credit: Q3 non-interest expense was $13.5 million versus $11.7 million. Nine-month operating expenses were $38.6 million versus $36.1 million; compensation, general and administrative costs, and regulatory fees all increased. The nine-month provision for loan losses was $1.1 million.
- Cash flow: For the first nine months, operating cash flow was negative $138.1 million (versus positive $252.2 million), investing cash flow was negative $2.06 billion (versus negative $233.5 million), and financing cash flow was positive $2.36 billion (versus positive $115.4 million). Cash and cash equivalents ended at $587.9 million, up from $425.3 million at year-end 2018. Asset purchases and financing activity were substantial; operating cash flow is not directly comparable to earnings for this financing business.
Balance sheet, debt, liquidity, and capital
- Total assets were $21.32 billion, up from $18.69 billion at December 31, 2018; total liabilities were $20.56 billion, up from $17.94 billion. Total equity was $750.3 million, compared with $752.6 million.
- Notes payable totaled $18.83 billion, including $9.89 billion due within one year and $8.94 billion due after one year, versus total notes payable of $16.24 billion at year-end. Debt securities of consolidated trusts held by third parties were an additional $1.53 billion.
- Cash and cash equivalents plus investment securities totaled $3.74 billion. Farmer Mac reported 199 days of liquidity at September 30, above its 90-day regulatory minimum, and an average 186 days during Q3. Management said available liquidity and capital should support operations for at least 12 months, assuming continued capital-market access.
- Core capital was $793.3 million, $184.9 million above the $608.4 million minimum requirement. The Tier 1 capital ratio was 13.2%, versus 13.4% at year-end 2018. The company reported compliance with statutory capital requirements and its capital adequacy policy.
Material changes and portfolio developments
- Outstanding business volume reached $20.93 billion, up $1.21 billion from year-end 2018. Q3 net growth was $185.6 million; Rural Utilities and Farm & Ranch grew, while Institutional Credit declined following the maturity of a $75 million AgVantage security that did not renew.
- Farm & Ranch credit indicators weakened: 90-day delinquencies rose to $59.7 million, or 0.81% of that portfolio, from $26.9 million, or 0.37%, at year-end. Substandard assets increased to $290.5 million, or 3.9%, from $232.7 million, or 3.2%. Management attributed much of the deterioration to a few large, borrower-specific situations and noted that delinquencies remained below its historical average.
- The allowance for losses was $9.8 million, or 0.13% of the Farm & Ranch portfolio, versus $9.2 million at year-end. Rural Utilities had no reported delinquencies or credit losses; USDA-related exposures are backed by the full faith and credit of the U.S. government.
- In May, Farmer Mac issued $100 million aggregate liquidation-preference Series D preferred stock at a 5.7% fixed dividend rate and in June redeemed $75 million of 6.875% Series B preferred stock. The retirement generated a $2.0 million charge in nine-month GAAP results. Common dividends were $0.70 per share per quarter in 2019, up from $0.58 in 2018.
Outlook, risks, and unusual items
- Management described opportunities for continued growth across business lines but gave no specific earnings forecast. It expected 2019 operating expenses to increase approximately 8%–9% over 2018, citing growth and strategic initiatives; nine-month operating expenses were already about 7% higher year over year.
- Management discussed agricultural-sector risks from trade disputes, commodity-price volatility, weather and planting disruptions, farmland values, and borrower repayment capacity. It highlighted 2019 Midwest planting difficulties and trade-related pressure, while noting federal crop insurance and USDA assistance as mitigants. Prolonged trade stress or adverse weather could still harm borrowers and portfolio credit quality.
- Interest-rate, funding, and basis risk remain material. Farmer Mac uses derivatives to manage exposures; fair-value changes can make GAAP earnings volatile. The filing reported $13.8 billion of interest-rate-swap notional outstanding and disclosed LIBOR transition exposure across floating-rate assets, debt, and swaps. It had issued $755 million of SOFR-based medium-term notes during the first nine months.
- Fair-value measurement involves substantial estimation: Level 3 instruments totaled $7.2 billion, or 34% of total assets. Off-balance-sheet exposure included $828.6 million of guaranteed securities and $3.1 billion of LTSPCs at maximum potential principal amounts, before collateral or other recoveries.
- The Farm Bill is expected to expand the acreage exception for certain Farm & Ranch loan limits from 1,000 to 2,000 acres effective June 18, 2020. The company also said the expected January 1, 2020 adoption of the credit-loss accounting standard was not expected to have a material effect, though the final impact would depend on portfolio and economic conditions.
- Farmer Mac reported effective disclosure controls, no material changes in internal control over financial reporting, no legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether rising delinquencies and substandard assets persist or lead to higher provisions and realized credit losses, particularly among large Farm & Ranch exposures.
- How much GAAP earnings volatility from derivative and hedge fair values differs from underlying core earnings and cash economics.
- Whether business growth, net effective spread, and margins can offset higher funding costs, portfolio reinvestment at lower spreads, and expense growth.
- Continued access to debt markets, liquidity coverage, refinancing needs, and compliance with capital requirements as assets and borrowings expand.
- Concentration and valuation assumptions in Level 3 assets, AgVantage exposures, off-balance-sheet guarantees and LTSPCs, and the transition away from LIBOR.
- The practical effects of trade policy, USDA support, crop conditions, and the 2020 acreage-limit change on borrower credit quality and future business volume.