Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 9, 2020. Farmer Mac provides liquidity and credit support to agricultural and rural infrastructure lenders through loans, guarantees, standby commitments, and securities.
Financial performance and position
| Metric | Q3 2020 / September 30, 2020 | Comparison |
|---|---|---|
| Interest income | $108.6 million | $161.5 million in Q3 2019 |
| Net interest income | $44.7 million; 0.78% net interest yield | $40.1 million; 0.78% in Q3 2019 |
| Net income attributable to common stockholders | $18.7 million; diluted EPS $1.73 | $14.4 million; diluted EPS $1.33 in Q3 2019 |
| Core earnings (non-GAAP) | $27.7 million; diluted core EPS $2.57 | $23.4 million; diluted core EPS $2.17 in Q3 2019 |
| Nine-month common income / diluted EPS | $59.7 million / $5.54 | $64.6 million / $5.99 in 2019 |
| Nine-month core earnings (non-GAAP) | $74.2 million; diluted core EPS $6.88 | $69.3 million; diluted core EPS $6.43 in 2019 |
| Assets / equity | $24.0 billion / $930.3 million | Assets up 11% and equity up 16% from December 31, 2019 |
| Notes payable | $21.6 billion; weighted-average rate 1.05% | $19.1 billion; 2.05% at December 31, 2019 |
| Cash and liquidity | $910.6 million cash; 182 days of regulatory liquidity | $604.4 million cash at December 31, 2019; regulatory minimum is 90 days |
| Capital | $984.2 million core capital, $314.2 million above minimum; Tier 1 capital ratio 14.3% | $815.4 million core capital, $196.6 million above minimum; 12.9% Tier 1 ratio at year-end 2019 |
| Cash flows, nine months | Operating $(225.4) million; investing $(1.55) billion; financing $2.08 billion | Operating $(138.1) million; investing $(2.06) billion; financing $2.36 billion in 2019 |
Q3 net income improved year over year as higher business volume increased net interest income and derivative fair-value losses were smaller. Sequentially, common income declined from $31.7 million in Q2, partly because of derivative valuation changes, higher funding and liquidity costs, increased preferred dividends, credit-loss provisions, and $1.7 million of costs from retiring Series A preferred stock. Net effective spread, a non-GAAP measure, was $51.8 million (0.96%) in Q3, versus $42.5 million (0.90%) a year earlier. Nine-month GAAP common income fell year over year despite higher core earnings.
Business changes and credit
- Outstanding business volume was $22.0 billion, up $871.3 million from year-end 2019 but down $52.8 million from June 2020. The quarterly decline reflected $335.3 million of lower Institutional Credit volume, partly offset by growth in Farm & Ranch and USDA Guarantees.
- Loans, net of allowance, increased 16% to $8.1 billion from year-end; notes payable increased 13%. Cash and investment securities rose as Farmer Mac built liquidity during the pandemic and funded program growth.
- Farm & Ranch 90-day delinquencies were $88.0 million, or 1.07% of that portfolio, up from 0.86% at June 30 and 0.78% at year-end. Management cited seasonal payment patterns and said the rate exceeded its historical average, while expecting near-term pressure. Substandard Farm & Ranch assets were $321.2 million, 3.9% of the portfolio.
- COVID-19 payment deferments covered $374.5 million of principal across Farm & Ranch and USDA-related exposures, equal to 1.70% of total business volume. Deferment loans were not treated as past due. As of October 15, $153.3 million of Farm & Ranch deferments had ended, with none delinquent at that date.
- Farmer Mac adopted CECL on January 1, 2020. The $2.1 million after-tax opening retained-earnings adjustment was not material to its financial position. The allowance for loan losses was $15.8 million and the reserve for off-balance-sheet losses was $3.6 million at quarter-end. Nine-month credit-loss provision was approximately $5.1 million; management attributed $1.9 million to updated economic forecasts, predominantly COVID-related.
Outlook, risks, and unusual items
- No quantified earnings or business-volume guidance was provided. Management described opportunities for profitable growth across its lines, including agricultural lending, USDA-guaranteed business, rural broadband, and renewable energy; it anticipated further renewable-energy activity during the remainder of 2020.
- Management expects operating expenses to continue increasing over the next several years and to rise over the next 12–18 months as it invests in staff, technology, and infrastructure. Remote operations had continued without material disruption.
- COVID-19 risks include prolonged economic weakness, additional deferments, borrower repayment deterioration, commodity-price and export pressure, funding-market disruption, and reduced customer investment. Management noted improving commodity prices and stable farmland values but emphasized continuing uncertainty.
- Series E and F preferred stock issuances raised $79.5 million and $120.0 million of aggregate liquidation preference, respectively; Series A preferred stock with $60.0 million aggregate value was redeemed. The Series A retirement generated $1.7 million in reported expense. The common-share repurchase program was indefinitely suspended to preserve capital and liquidity.
- Interest-rate and valuation exposure remains material: derivatives had $15.1 billion notional value, and accumulated other comprehensive loss was $53.8 million. Fair-value movements contributed to the difference between GAAP results and core earnings. Farmer Mac also identified uncertainty in the transition away from LIBOR.
- Farmer Mac reported compliance with statutory capital requirements and the highest compliance level. It said liquidity and capital resources should be sufficient for the next 12 months, assuming continued capital-market access. Legal proceedings: none reported.
- The filing warned that Zions Bancorporation may sell a significant portion or all of its 600,000 Class C shares, potentially pressuring the stock price; Class C shares had traded between $43.02 and $83.55 from January through October 2020.
Important facts for investors to verify
- Whether rising Farm & Ranch delinquencies, substandard exposures, and COVID-19 deferments lead to further provisions or realized credit losses.
- Whether liquidity remains adequate and debt markets remain accessible as $10.9 billion of notes payable were due within one year at September 30, 2020.
- How much future earnings depend on business growth and net effective spread, versus volatile derivative and securities valuations excluded from core earnings.
- Whether capital remains comfortably above regulatory requirements after business growth, dividends, and preferred-stock costs.
- Potential effects of LIBOR transition, interest-rate movements, and Zions’ Class C share sales on funding, reported results, and the common-stock price.