Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 10, 2020. Farmer Mac provides secondary-market liquidity and credit support to agricultural and rural utility lenders.
Financial performance and position
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $127.6 | $165.1 | $277.5 | $320.6 |
| Net interest income | $48.3 | $43.1 | $89.7 | $83.7 |
| Net income attributable to Farmer Mac | $35.6 | $34.0 | $48.5 | $59.2 |
| Net income attributable to common stockholders | $31.7 | $28.3 | $41.1 | $50.2 |
| Basic EPS | $2.95 | $2.65 | $3.83 | $4.70 |
| Core earnings (non-GAAP) | $26.3 | $23.6 | $46.5 | $45.9 |
- Q2 net interest yield was 0.87%, unchanged year over year; net effective spread, a non-GAAP measure, was 0.89%, versus 0.91%.
- Six-month GAAP net income and EPS declined year over year, reflecting lower interest income and derivative/hedge fair-value effects, alongside increased operating costs and credit provisions. Q2 earnings improved year over year, supported by net interest income growth and other income.
- Total assets were $23.93 billion at June 30, up 10% from year-end 2019. Loans, net of allowance, were $7.89 billion; outstanding business volume was $22.04 billion, up $924 million since year-end.
- Cash and cash equivalents were $827.6 million; cash plus investment securities totaled $4.34 billion. First-half cash flow was $(306.9) million from operations, $(1.59) billion from investing, and $2.12 billion from financing; cash increased $223.2 million.
- Notes payable were $21.42 billion, up $2.32 billion from year-end; debt securities of consolidated trusts held by third parties were $1.48 billion. The weighted-average rate on notes payable was 1.18% at June 30.
- Equity was $824.1 million. Core capital was $915.6 million, $247.9 million above the $667.7 million minimum requirement; the Tier 1 capital ratio was 13.4%. Farmer Mac reported 212 days of liquidity against a 90-day regulatory minimum and compliance with capital requirements.
Material changes and operating developments
- Q2 net business volume grew $502.8 million, compared with $239.8 million in Q2 2019, primarily on strong demand for long-term funding at historically low interest rates. Rural Utilities and Farm & Ranch drove growth.
- Operating expenses rose 16% in Q2 year over year to $14.1 million; first-half expenses rose 21% to $30.3 million. Management cited higher compensation and benefits, including headcount and bonus costs, and increased IT and software spending.
- Farmer Mac issued $79.5 million of Series E preferred stock in May, with a 5.75% non-cumulative dividend rate. It suspended its share repurchase program indefinitely in Q1 to preserve capital and liquidity. Common dividends were $0.80 per share per quarter in Q1 and Q2, versus $0.70 in 2019.
- CECL was adopted January 1, 2020. The $2.7 million pre-tax increase in total allowances/reserves at adoption resulted in a $2.1 million after-tax reduction to retained earnings. The new standard materially affected reserve estimates, particularly for Rural Utilities, where Farmer Mac says it has never experienced a credit loss.
- Accumulated other comprehensive loss widened to $91.5 million from $16.2 million at year-end, largely due to fair-value changes in available-for-sale securities and cash-flow hedges.
Outlook, commentary, and risks
- No specific quantitative earnings or growth guidance was provided. Management described growth opportunities across its businesses, but noted that future performance depends on borrower demand, sector conditions, funding-market access, and the course of COVID-19.
- As of June 30, COVID-related payment deferments executed covered $241.7 million of principal, about 1.1% of outstanding business volume. Deferments generally ran three to six months; affected loans continued accruing interest and were not treated as past due under the disclosed policy.
- Management said operations continued without material disruption with employees working remotely. It reported uninterrupted access to debt markets and sufficient liquidity and capital for the next 12 months, assuming continued capital-market access.
- COVID-19 could weaken agricultural and rural borrowers, commodity prices, collateral values, and repayment capacity; increase deferments and credit losses; or disrupt funding markets and business operations. Management expects near-term Farm & Ranch delinquencies could exceed historical averages. Reported Farm & Ranch 90-day delinquencies were $68.7 million, or 0.86% of the portfolio, at June 30; COVID deferments were excluded from delinquency statistics.
- Concentration is a key credit risk: $7.9 billion of $8.7 billion in AgVantage securities was issued by three counterparties. Interest-rate and refinancing risks, LIBOR transition, and volatility in derivative fair values may also affect earnings and capital. The filing reported $5.8 billion of LIBOR-linked floating-rate assets, $5.2 billion of LIBOR-linked floating-rate debt, and $15.9 billion notional of LIBOR-linked swaps.
- The Farm Bill expanded the acreage exception for certain Farm & Ranch loan limits effective June 18, 2020, and increased USDA guarantee limits. These changes may support future business growth. Management also expects operating expenses to continue rising as it invests in staff, technology, and infrastructure.
Most important facts for investors to verify
- How deferments, borrower performance, and COVID-19 conditions affect delinquency trends, credit losses, and CECL reserves in subsequent quarters.
- Whether the $4.34 billion liquidity portfolio and reported 212 days of liquidity remain adequate if capital-market access or funding costs deteriorate.
- AgVantage counterparty concentration, collateral quality, and the potential impact of any counterparty stress or default.
- Underlying operating trends using GAAP results alongside management’s non-GAAP core earnings and net effective spread reconciliations.
- Exposure to interest-rate, refinancing, derivative valuation, and LIBOR-transition risks, including the effect on earnings and capital.
- Whether expense growth and capital distributions remain consistent with business growth, capital requirements, and pandemic-related uncertainty.