Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; filed August 9, 2018. Farmer Mac provides secondary-market financing and credit support for agricultural and rural utility lending through Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit.
Financial performance and position
- Q2 earnings: Net income was $29.6 million and net income attributable to common stockholders was $26.3 million ($2.45 diluted EPS), versus $20.6 million and $17.5 million ($1.62 diluted EPS), respectively, in Q2 2017. Non-GAAP core earnings were $19.4 million ($1.80 diluted per share), versus $16.0 million ($1.48).
- First-half earnings: Common-stockholder net income was $48.9 million ($4.55 diluted EPS), versus $36.1 million ($3.35); core earnings were $41.2 million ($3.84 diluted per share), versus $31.0 million ($2.87).
- Interest and margins: Q2 net interest income was $43.9 million, up from $39.7 million a year earlier; net interest yield was 0.96%, versus 0.95%. Non-GAAP net effective spread was $36.2 million, or 0.86%, versus $35.3 million, or 0.91%. First-half net interest income was $87.2 million, versus $76.8 million; net effective spread was $73.3 million, or 0.88%, versus $67.9 million, or 0.91%.
- Revenue and costs: Q2 total interest income was $135.7 million and interest expense was $91.7 million. Non-interest income was $6.4 million; non-interest expense was $12.9 million. First-half income tax expense fell to $13.8 million from $21.9 million; the effective tax rate was 19.9%, reflecting the lower federal corporate rate and share-award tax benefits.
- Balance sheet and debt: At June 30, total assets were $18.63 billion, total liabilities $17.86 billion, and equity $766.2 million. Notes payable totaled $16.19 billion, of which $7.77 billion was due within one year. Cash and cash equivalents were $430.8 million, up from $302.0 million at year-end 2017.
- Cash flow: First-half net cash provided by operating activities was $162.2 million, compared with $90.6 million in 2017; investing used $609.1 million and financing provided $575.7 million. Cash increased $128.8 million during the period.
- Business and credit: Outstanding business volume reached $19.52 billion, up $517.5 million from year-end 2017. Farm & Ranch loans, guarantees, and commitments totaled $7.05 billion; AgVantage securities totaled $8.39 billion. The total Farm & Ranch allowance for losses was $9.0 million (0.13% of the portfolio). Substandard assets were $226.5 million (3.2%); 90-day delinquencies were $43.1 million (0.61%), down from $48.4 million (0.71%) at year-end.
- Capital and liquidity: Core capital was $692.8 million, $149.6 million above the $543.2 million statutory minimum; Farmer Mac reported the highest regulatory compliance level. It had 180 days of liquidity at quarter-end, versus a 90-day regulatory minimum.
Material changes versus comparable periods
- Q2 common-stockholder earnings increased year over year, supported by higher net interest income and lower taxes. First-half net interest income benefited from portfolio growth and higher short-term rates; the net interest-yield increase was modest.
- Q2 operating expenses rose: compensation and benefits were $6.9 million versus $6.7 million, and general and administrative expense was $5.2 million versus $3.9 million. Management cited technology and infrastructure investment, higher staffing and hiring costs, office leases, and legal expenses.
- Common dividends increased to $0.58 per share per quarter in 2018 from $0.36 in 2017. The filing reports an approximately 61% increase.
- Business volume increased from $19.01 billion at year-end, with Farm & Ranch and AgVantage portfolio growth. Q2 new business volume was $1.31 billion, below $1.86 billion in Q2 2017.
Outlook, risks, and unusual items
- Management sees growth opportunities across its four businesses but provided no specific earnings guidance. It expects combined compensation and general and administrative expenses to increase approximately 15% in 2018 versus 2017, with elevated increases likely to continue in 2019.
- A called interest-only investment caused a $2.0 million pretax Q2 amortization charge, reducing common-stockholder net income and core earnings by $1.6 million after tax. Management said the related five-year transactions generated a $3.2 million net after-tax economic benefit overall; Farmer Mac held no other interest-only securities in that investment portfolio.
- Management described a modest decline in Farm & Ranch credit quality, including a slight increase in substandard assets, though delinquencies declined and remained below historical averages. It warned that agricultural stress could increase with weaker farm income, commodity-price volatility, weather, farmland values, or prolonged U.S. trade disputes and tariffs.
- Interest-rate, prepayment, and basis risks remain relevant. The filing reports $2.0 million of uncollateralized net swap exposure to three counterparties. Farmer Mac relies on continued capital-market access; management said it had sufficient resources for the next 12 months, assuming that access continues.
- The Acting President and CEO was serving while the board searched for a successor. The company reported cooperation with FCA oversight following the former CEO’s departure and did not expect a material effect on operations or financial condition.
- Farmer Mac adopted updated hedge-accounting guidance in Q1 2018 without material financial effect. It was evaluating the expected-credit-loss standard, which will require forward-looking loss estimates; the impact was not yet quantified. Management did not expect the new lease standard to have a material effect.
Important facts for investors to verify
- Whether portfolio credit deterioration, especially in agricultural sectors and regions affected by tariffs or commodity-price weakness, leads to higher delinquencies, substandard assets, or loss provisions.
- Whether business growth and net effective spread can offset refinancing, funding-cost, and interest-rate pressures, and how the called-security amortization affects period-to-period comparisons.
- The concentration, issuer credit quality, collateralization, and maturity profile of the $8.39 billion AgVantage portfolio, as well as the significance of Level 3 fair-value estimates.
- Capital and liquidity headroom, debt refinancing needs, and continued access to capital markets; also confirm the impact of the expected-credit-loss accounting standard when management’s assessment is available.
- Progress on the CEO search and the projected expense increases. Core earnings and net effective spread are non-GAAP measures and should be assessed alongside GAAP results.