Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 9, 2022. Amounts below are in U.S. dollars. Farmer Mac is a secondary market and funding provider for agricultural and rural infrastructure finance.
Financial results and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Interest income | $112.2 million | $107.4 million in Q1 2021 |
| Net interest income / yield | $61.9 million / 1.00% | $53.3 million / 0.91% in Q1 2021 |
| Net income | $47.8 million | $33.2 million in Q1 2021 |
| Net income attributable to common stockholders; diluted EPS | $41.0 million; $3.77 | $28.0 million; $2.58 in Q1 2021 |
| Core earnings; core diluted EPS (non-GAAP) | $25.8 million; $2.37 | $25.9 million; $2.39 in Q1 2021 |
| Net effective spread (non-GAAP) | $57.8 million; 0.97% | $53.9 million; 0.97% in Q1 2021 |
| Total assets / equity | $25.8 billion / $1.19 billion | $25.1 billion / $1.20 billion at December 31, 2021 |
| Notes payable | $23.0 billion | $22.7 billion at December 31, 2021 |
| Cash and cash equivalents | $890 million | $909 million at December 31, 2021 |
Common-stockholder net income rose 47% year over year, while core earnings were essentially unchanged. The difference reflects, in part, fair-value and settlement effects on derivatives: reported gains on financial derivatives were $16.1 million, including $15.4 million from terminations or net settlements, compared with $4.3 million of derivative gains in Q1 2021. Operating expenses increased 13% to $21.4 million; the effective tax rate was 21.5%.
Other comprehensive loss was $43.5 million, mainly reflecting unrealized losses on available-for-sale securities as interest rates and market spreads changed. Accumulated other comprehensive income/(loss) moved to a $39.7 million loss from $3.9 million of income at year-end 2021.
Cash flow from operations was $269 million, versus $398 million in Q1 2021; investing used $717 million, versus providing $65 million; and financing provided $429 million, versus using $484 million. Cash declined by $18.7 million during the quarter. Farmer Mac reported $5.13 billion in cash and eligible investment securities for liquidity, 416 days of liquidity at quarter-end against a 90-day regulatory minimum, and a Tier 1 capital ratio of 15.0%. Core capital exceeded the minimum capital requirement by $488.7 million.
Material changes and business volume
- Outstanding business volume grew by $629 million from year-end to $24.24 billion. Net growth was $484 million in Agricultural Finance and $145 million in Rural Infrastructure Finance. Q1 new business volume was $2.98 billion, compared with $1.47 billion in Q1 2021.
- Net interest income increased $8.6 million year over year, mainly from new business volume, lower funding costs, designated-hedge effects, and cash-basis interest income. Net effective spread increased $4.0 million in dollars, while its yield remained 0.97%.
- Loan balances, net of allowance, rose to $9.36 billion from $9.25 billion at year-end. Notes payable increased $324 million. Total equity declined $11.6 million, principally due to the securities-related accumulated other comprehensive loss.
- Available-for-sale investment securities had $70.2 million of unrealized losses at March 31, versus $10.5 million at year-end; management attributed losses primarily to rate and spread movements, not credit deterioration.
Outlook, risks, and unusual items
- Management expects opportunities for profitable growth and generally supportive conditions for continued net portfolio growth in 2022, but gave no specific earnings or revenue guidance. It expects operating expenses to continue increasing over the next several years, with investment in personnel, technology, and infrastructure likely to rise over the next 12–18 months.
- Management cited rapid interest-rate increases, inflation and higher farm input costs, supply-chain disruption, and Russia’s invasion of Ukraine as sources of uncertainty for agricultural borrowers and commodity markets. Drought, severe weather, trade conditions, and changing farm real-estate values may also affect credit performance. Management said the agricultural portfolio remained diversified and reported improved substandard-asset measures, but direct Agricultural Finance 90-day delinquencies rose to $55.8 million (0.57%) from $47.3 million (0.48%) at year-end.
- Farmer Mac reported continued access to debt markets and stated that liquidity and capital resources should support operations for the next 12 months, assuming continued market access. About $6.57 billion of notes payable were due within one year. Borrowing-market access and refinancing costs remain important risks.
- Interest-rate risk is managed with debt and derivatives. The company had $12.9 billion notional of LIBOR-resetting swaps, $3.2 billion of LIBOR-linked floating-rate assets, and $0.3 billion of LIBOR-linked floating-rate debt, creating transition and contract-repricing risk. Interest-rate sensitivity measures are estimates and depend on assumptions about rates and prepayments.
- Off-balance-sheet exposure included $547 million of Farmer Mac Guaranteed Securities and $3.20 billion of maximum principal under long-term standby purchase commitments. The reported guarantee and commitment obligation was $43.3 million. A $350 million AgVantage security traded but unsettled at quarter-end contributed to higher other liabilities.
- There were no reported legal proceedings. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings growth is repeatable: reconcile GAAP common earnings with core earnings and review derivative fair-value and settlement effects.
- Whether rising funding costs and the $6.57 billion of debt due within one year affect future net interest income and net effective spread.
- Credit trends in Agricultural Finance, particularly the increase in direct 90-day delinquencies, borrower concentrations, and exposure to input-cost, weather, and commodity-price shocks.
- How unrealized securities losses, interest-rate movements, and LIBOR-to-alternative-rate transition affect capital, liquidity, and reported results.
- Whether portfolio growth and new commitments generate adequate risk-adjusted returns while operating expenses continue to rise.