Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 9, 2017. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
Farmer Mac provides a secondary market for agricultural and rural financing through Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. Outstanding business volume was $18.3 billion at quarter-end, up $0.4 billion from March 31 and $0.9 billion from year-end 2016.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total interest income | $98.0 | $77.2 | $184.7 | $151.1 |
| Net interest income | $39.7 | $34.4 | $76.8 | $68.0 |
| Net income attributable to common stockholders | $17.5 | $12.0 | $36.1 | $22.3 |
| Diluted EPS | $1.62 | $1.13 | $3.35 | $2.07 |
| Core earnings, non-GAAP | $16.0 | $13.0 | $31.6 | $25.4 |
| Net effective spread, non-GAAP | $35.6; 0.92% | $31.0; 0.84% | $68.5; 0.92% | $61.0; 0.83% |
Q2 net interest yield was 0.95%, versus 0.88% a year earlier. Q2 net income attributable to Farmer Mac, before preferred dividends and non-controlling interest, was $20.8 million. Higher net interest income and improved derivative fair-value results supported year-over-year earnings growth; core earnings also rose, reflecting higher spread income and a gain on real estate owned (REO) sales.
At June 30, total assets were $17.27 billion, compared with $15.61 billion at December 31, 2016. Total liabilities were $16.59 billion, including $15.14 billion in notes payable and $1.25 billion in third-party trust debt. Total equity was $680.9 million. Cash and cash equivalents were $320.0 million; cash plus investment securities totaled $2.68 billion. Operating cash flow for the first half was $90.6 million, investing cash flow was negative $1.43 billion, and financing cash flow was positive $1.39 billion; cash ended the period at $320.0 million.
Core capital was $638.5 million, $134.1 million above the $504.4 million statutory minimum. Farmer Mac reported a 13.0% Tier 1 capital ratio and compliance with capital requirements. It reported 208 days of liquidity at quarter-end, above the 90-day regulatory minimum.
Material changes and notable items
- Q2 new business volume was $1.86 billion, led by $1.30 billion of AgVantage securities. On-balance-sheet AgVantage holdings increased after Farmer Mac refinanced a $1.0 billion MetLife security that matured in April; $970 million of the prior security had been off balance sheet. The new securities are held on balance sheet.
- Farm & Ranch loans and loans in consolidated trusts totaled $3.88 billion; net loans were $4.90 billion. Total Farmer Mac Guaranteed Securities were $7.42 billion, up from $6.00 billion at year-end.
- REO property sales generated a $0.8 million gain in Q2. Farmer Mac redeemed its 65% ownership interest in AgVisory on May 1 for $5,000 and recognized an after-tax loss of approximately $0.1 million.
- The board extended the Class C share repurchase program through August 2019, with up to $5.4 million remaining under its authorization. No shares were repurchased in the first half of 2017. Common dividends were $0.36 per share per quarter in the first half, versus $0.26 in 2016.
- Adoption of share-based compensation guidance reduced income tax expense by $0.2 million in Q2 and $0.8 million in the first half. CME variation-margin accounting changes affected derivative presentation; management said these accounting changes did not alter the instruments’ underlying economics.
Outlook, risks, and contingencies
Management sees opportunities for continued growth, particularly in Farm & Ranch, USDA Guarantees, and Institutional Credit, but provided no specific earnings or growth guidance. It expects growth to depend on customer capital and liquidity needs and on market conditions. Management noted declining farm income since its 2013 cyclical peak, weaker farmland values in some regions, and rising substandard assets and delinquencies from historically low levels. It said portfolio diversification and collateralization should moderate potential losses, while warning that further credit deterioration could increase provisions.
Farm & Ranch 90-day delinquencies were $41.9 million, or 0.65% of that portfolio, down from $50.8 million at March 31 but up from $22.1 million at June 30, 2016. Substandard assets were $192.1 million, or 3.0% of the portfolio, versus $165.2 million at year-end 2016. A single borrower’s two permanent-planting loans accounted for $15.4 million of exposure and more than half the increase in delinquencies since year-end; management believed the loans remained adequately collateralized. Total allowance for losses was $8.1 million.
Potential undiscounted exposure under off-balance-sheet Farmer Mac Guaranteed Securities was $866.9 million; LTSPC commitments were $3.0 billion. Risks also include interest-rate and basis risk, agricultural commodity and weather conditions, farmland values, access to debt markets, regulatory developments, and fair-value estimation. The company reported no legal proceedings and no material change in previously disclosed risk factors. Management said it had sufficient liquidity and capital for the next 12 months, assuming continued capital-market access.
Most important facts for investors to verify
- Whether credit quality trends continue: delinquencies improved sequentially but were higher year over year, while substandard assets increased.
- How the $1.0 billion AgVantage refinancing affects on-balance-sheet concentration, funding costs, and spread earnings.
- Whether Farmer Mac maintains access to funding markets and capital/liquidity buffers as assets and debt grow; $7.86 billion of notes payable was due within one year at June 30.
- How much reported earnings growth reflects recurring spread and fee performance versus derivative fair-value movements, REO gains, and stock-compensation tax benefits; core earnings and net effective spread are non-GAAP measures.
- Potential effects of agricultural conditions, interest-rate and basis movements, and estimated fair values; management reported $5.3 billion of Level 3 fair-value instruments.