Business context and reporting period
Federal Agricultural Mortgage Corporation (“Farmer Mac”) filed this Form 10-K on February 21, 2019, for the fiscal year ended December 31, 2018. Farmer Mac is a stockholder-owned, federally chartered GSE that provides a secondary market for eligible agricultural, USDA-guaranteed, and rural utilities loans through loan purchases, guarantees, and long-term standby purchase commitments (LTSPCs). Its debt and obligations are not guaranteed by the U.S. government.
Outstanding business volume across its four lines of business was $19.7 billion at year-end, up 3.8% from $19.0 billion in 2017. Institutional Credit was the largest line, with $8.4 billion outstanding.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $174.4 million | $157.6 million |
| Net income | $108.1 million | $84.3 million |
| Net income attributable to common stockholders | $94.9 million | $71.3 million |
| Diluted earnings per common share | $8.83 | $6.60 |
| Core earnings, non-GAAP | $84.0 million | $65.6 million |
| Net effective spread, non-GAAP | $151.2 million; 0.91% | $141.3 million; 0.91% |
| Return on average assets | 0.52% | 0.43% |
| Operating cash flow | $200.0 million | $175.0 million |
| Cash and cash equivalents | $425.3 million | $302.0 million |
| Investment securities | $2.26 billion | $2.26 billion |
| Total assets / total liabilities | $18.69 billion / $17.94 billion | $17.79 billion / $17.08 billion |
| Notes payable | $16.24 billion | $15.52 billion |
Net cash increased $123.2 million during 2018; investing activities used $599.2 million and financing activities provided $522.4 million. Farmer Mac reported 205 days of regulatory liquidity at year-end, against a 90-day minimum. The average rate on year-end notes payable was 2.30%, compared with 1.56% in 2017.
Core capital was $727.6 million, $182.6 million above the $545.0 million statutory minimum. The Tier 1 capital ratio was 13.4%, and Farmer Mac was in the regulator’s highest capital-compliance category. The allowance for losses was $9.2 million; total provision for losses was $0.3 million. Common dividends were $2.32 per share for 2018; preferred stock dividends totaled $13.2 million.
Material changes versus the prior comparable period
- Common-stockholder net income rose $23.6 million. Management attributed the increase principally to an $18.4 million reduction in income tax expense following the federal corporate tax-rate reduction and a $13.3 million after-tax increase in net interest income, partly offset by higher derivative losses and operating expenses.
- Net interest income increased $16.8 million, supported by growth in AgVantage securities, Farm & Ranch loans, and USDA Securities. Net effective spread increased in dollars but remained at 0.91%.
- Business volume growth was led by Institutional Credit (+$477.9 million), Farm & Ranch (+$366.4 million), and USDA Guarantees (+$163.4 million); Rural Utilities volume declined $290.5 million.
- Farm & Ranch 90-day delinquencies decreased to $26.9 million, or 0.37% of that portfolio, from $48.4 million, or 0.71%. Substandard assets increased to $232.7 million from $221.3 million but remained 3.2% of the portfolio. Net credit losses were $40,000, versus net credit gains of $1.4 million in 2017.
- Non-interest expenses increased to $49.9 million from $42.8 million, including higher compensation and technology, infrastructure, and office costs. Other comprehensive income fell by $26.2 million, largely reflecting unrealized losses on available-for-sale securities.
Outlook, risks, and unusual items
Management sees growth opportunities across its lines of business but expects operating expenses to rise approximately 8%–9% in 2019 as it invests in staff, technology, and infrastructure. It cited modest near-term rural utilities loan growth and competition and slower USDA guarantee issuance as potential constraints. The Farm Bill increased authorized USDA guarantee and individual-loan limits; an acreage-limit change for certain Farm & Ranch loans remains subject to FCA feasibility review.
Management highlighted agricultural credit risks from commodity prices, trade disputes and tariffs, weather, production costs, and farmland values. It also identified concentration risk: three counterparties issued approximately 91.8% of outstanding AgVantage securities, while CFC accounted for all Rural Utilities business volume to date. Other risks include capital-market access, refinancing of AgVantage securities, interest-rate and funding-basis risk, and the planned transition away from LIBOR. At year-end, $5.1 billion of floating-rate assets, $3.6 billion of floating-rate debt, and $9.8 billion notional of swaps reset on LIBOR.
Notable items include the adoption of hedge-accounting guidance in 2018, which changed presentation of certain fair-value changes but had no material overall effect; and the prospective expected-credit-loss accounting standard, whose financial impact was still being evaluated. In the fourth quarter, Farmer Mac repurchased $134.1 million of participation interests underlying Farm & Ranch guaranteed securities and placed the loans under LTSPCs. After year-end, it purchased $546 million of seasoned Rural Utilities loan participations from related party CoBank. The board raised the quarterly common dividend to $0.70 for 2019 and increased its core-earnings payout target from 30% to 35%.
PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The filing reports no legal proceedings.
Most important facts for investors to verify
- Reconcile GAAP net income growth with the tax-rate benefit, derivative results, and non-GAAP core earnings and net effective spread.
- Review AgVantage issuer and related-party concentrations, including CFC and the post-year-end CoBank portfolio purchase.
- Assess Farm & Ranch substandard assets, delinquencies, collateral values, and the adequacy of the allowance as agricultural conditions evolve.
- Evaluate the $16.2 billion debt balance, near-term maturities, liquidity measures, and Farmer Mac’s ability to maintain access to capital markets; its obligations are not U.S.-government guaranteed.
- Track management’s 2019 expense outlook, dividend policy and capital needs, as well as LIBOR-transition and expected-credit-loss implementation effects.