Business context and reporting period
Federal Agricultural Mortgage Corporation (Farmer Mac) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. It provides secondary-market financing, guarantees and liquidity for agricultural and rural utility lending through Farm & Ranch, USDA Guarantees, Rural Utilities and Institutional Credit businesses.
Financial performance and position
- Earnings: Net income attributable to Farmer Mac was $12.8 million, down from $25.2 million a year earlier. Net income attributable to common stockholders was $9.4 million, or $0.88 basic EPS and $0.87 diluted EPS, versus $21.9 million, or $2.05 and $2.03. Non-GAAP core earnings were $20.1 million ($1.88 basic EPS), compared with $22.2 million ($2.08).
- Interest income and spread: Interest income was $149.9 million versus $155.5 million; interest expense fell to $108.5 million from $114.9 million. Net interest income rose to $41.3 million from $40.6 million, while net interest yield declined to 0.78% from 0.86%. Non-GAAP net effective spread increased to $44.2 million from $38.8 million; its yield was 0.89% in both periods.
- Credit costs and expenses: The provision for credit losses was $3.8 million, versus a $0.4 million release in Q1 2019. Operating expenses rose 26% to $16.2 million, primarily reflecting higher compensation and technology-related costs.
- Assets, debt and capital: Total assets were $23.2 billion, up 7% from year-end 2019; notes payable were $20.7 billion, up 8%. Equity declined 13% to $693.6 million, mainly due to other comprehensive losses. Core capital was $815.1 million, $165.8 million above the minimum requirement; Farmer Mac reported compliance with capital requirements.
- Liquidity and cash flow: Cash and cash equivalents rose to $1.23 billion from $604.4 million. Regulatory liquidity was 202 days at quarter-end, above the 90-day minimum. Operating cash flow was negative $330.3 million versus positive $18.5 million; investing cash flow was negative $426.9 million and financing cash flow positive $1.38 billion. Management noted that the operating cash flow included substantial fair-value-related adjustments.
- Business volume: Outstanding business volume reached $21.54 billion, up $421.4 million from year-end. Growth was reported across all four business lines.
Material changes versus prior comparable period
- GAAP common earnings fell by $12.5 million year over year, chiefly due to less favorable fair-value changes in derivatives, higher operating expenses and increased credit provisions. The company’s non-GAAP core earnings also declined, by $2.1 million.
- Interest-rate and market movements contributed to a $105.3 million after-tax other comprehensive loss, compared with a $3.7 million loss a year earlier. Accumulated other comprehensive loss was $121.4 million at quarter-end.
- Business-volume growth was lower than Q1 2019’s $782.4 million increase, which included an unusual $546.2 million purchase of seasoned Rural Utilities loan participations from CoBank.
- Farmer Mac adopted CECL on January 1, 2020. The transition increased total allowances and reserves by $2.7 million and reduced retained earnings by $2.1 million, net of tax; management said the adoption did not materially affect financial position, results or cash flows.
Outlook, commentary and risks
- Management said it maintained access to debt markets and uninterrupted operations, and expects sufficient liquidity and capital for the next 12 months, assuming continued capital-market access. It provided no specific earnings or business-volume guidance.
- COVID-19 uncertainty affected credit-loss forecasts, particularly through higher credit spreads and expected unemployment; management attributed $3.5 million of the $3.8 million Q1 credit provision to updated economic factors, predominantly related to the pandemic. Lower commodity-price forecasts also affected Farm & Ranch estimates.
- Farm & Ranch 90-day delinquencies were $79.7 million, or 1.02% of the portfolio, versus $61.0 million, or 0.78%, at year-end. Management cited seasonal payment patterns, said the rate approximated its historical average, and warned it could rise. Approved Farm & Ranch payment deferments through May 1 totaled $78.9 million across 71 loans, approximately 1% of that portfolio.
- Management described disruption risks to agricultural revenues, supply chains, loan closings, borrower repayment, rural utility operations and financing markets. It also cited potential funding-cost pressure, operational and cybersecurity risks from remote work, and exposure to deferments and defaults. Three counterparties accounted for $8.0 billion of the $8.7 billion AgVantage portfolio.
- Management expects operating expenses to continue increasing through 2020 and over the next several years as it invests in personnel, technology and infrastructure. The share-repurchase program was indefinitely suspended to preserve capital and liquidity; the quarterly common dividend was $0.80 per share.
- Other notable items: $762.4 million of callable medium-term notes were called during the quarter; the company said it had not used its $1.5 billion U.S. Treasury borrowing authority and did not expect to do so. The Farm Bill acreage exception was scheduled to rise to 2,000 acres on June 18, 2020. No legal proceedings were reported.
Important facts for investors to verify
- Whether COVID-19-related deferments, delinquencies and expected credit losses increase in subsequent quarters, especially as additional Farm & Ranch payments come due.
- How changes in interest rates, derivative valuations and market spreads affect GAAP earnings, other comprehensive income, funding costs and capital.
- Whether Farmer Mac maintains debt-market access and liquidity above regulatory requirements while refinancing substantial near-term maturities.
- Credit quality and collateral coverage of major AgVantage counterparties, given the portfolio’s concentration.
- Whether business-volume growth, expenses and capital levels develop in line with management’s outlook; core earnings and net effective spread are non-GAAP measures and should be assessed alongside GAAP results.