Federal Agricultural Mortgage Corporation (Farmer Mac) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 8, 2018. This is an annual report, not a standalone quarterly filing. Farmer Mac is a stockholder-owned, federally chartered GSE providing a secondary market for eligible rural loans through Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. Its obligations are not guaranteed by the U.S. government.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $17.79 billion | $15.61 billion |
| Total liabilities | $17.08 billion | $14.96 billion |
| Stockholders’ equity | $708.1 million | $643.4 million |
| Total business volume | $19.01 billion | $17.40 billion |
| Interest income | $400.5 million | $311.9 million |
| Net interest income | $157.6 million | $140.3 million |
| Net interest income after provision for loan losses | $155.9 million | $139.2 million |
| Net income attributable to common stockholders | $71.3 million | $64.2 million |
| Diluted EPS | $6.60 | $5.97 |
| Core earnings and diluted core EPS (non-GAAP) | $65.6 million; $6.08 | $53.5 million; $4.98 |
| Net interest yield | 0.94% | 0.90% |
| Net effective spread and yield (non-GAAP) | $141.3 million; 0.91% | $123.1 million; 0.84% |
Full-year cash flow: operating activities provided $175.0 million; investing activities used $1.85 billion; financing activities provided $1.71 billion. Cash and cash equivalents increased by $36.8 million to $302.0 million.
At year-end, notes payable totaled $15.52 billion, including $8.09 billion due within one year and $7.43 billion due thereafter. Cash, cash equivalents, and investment securities totaled $2.56 billion. Farmer Mac reported 172 days of regulatory liquidity, against a 90-day minimum; average liquidity during 2017 was 195 days.
Capital remained above regulatory minimums: core capital was $657.1 million versus a $520.3 million statutory minimum, and regulatory capital exceeded the risk-based requirement by approximately $430.5 million. The Tier 1 capital ratio was 12.6%; Farmer Mac was in the highest regulatory compliance category.
Fourth-quarter context: 2017 Q4 net income attributable to common stockholders was $16.7 million and diluted EPS was $1.55, compared with $25.5 million and $2.38 in Q4 2016. Q4 2017 included a $1.4 million tax expense from remeasuring deferred taxes after federal tax reform.
Material changes versus 2016
- Business volume increased 9.2% to $19.0 billion. Growth was led by Farm & Ranch loans and on-balance-sheet AgVantage securities; new business volume was $4.74 billion versus $4.44 billion.
- Common-stockholder net income rose $7.1 million, while core earnings increased $12.1 million. Higher net interest income and spread were principal drivers; expenses and the one-time tax remeasurement partly offset the increase.
- Credit indicators weakened: Farm & Ranch 90-day delinquencies rose to $48.4 million (0.71% of the portfolio) from $21.0 million (0.34%); substandard assets increased to $221.3 million (3.2%) from $165.2 million (2.7%). The allowance for losses increased to $8.9 million from $7.4 million.
- Outstanding AgVantage business volume grew to $7.9 billion. A $1.0 billion MetLife security that had substantially been off balance sheet was refinanced into securities Farmer Mac purchased and retained, shifting exposure and funding presentation to the balance sheet.
- Common dividends were $0.36 per share quarterly during 2017; the board declared $0.58 per share for Q1 2018. Annual common dividends per share were $1.44 versus $1.04.
Outlook, commentary, risks, and unusual items
- Management cited potential growth across all four business lines, supported by lenders’ liquidity, capital, and concentration needs, expanded lender relationships, and institutional investment in agricultural assets. Growth depends on customer demand and replacement of maturing assets.
- Management expected combined compensation and general and administrative expenses to increase approximately 15% in 2018 versus 2017, with elevated increases likely to continue in 2019.
- Management estimated an approximately 21% annual effective tax rate beginning in 2018 following the reduction in the federal corporate tax rate. The 2017 deferred-tax remeasurement increased tax expense by $1.4 million; a separate $9.1 million accounting reclassification shifted amounts from retained earnings to accumulated other comprehensive income without affecting earnings or cash flow.
- Farmer Mac’s former CEO’s employment was terminated in December 2017 for violations of company policies described as unrelated to financial or business performance. Board chairman Lowell L. Junkins became Acting President and CEO while a successor search proceeded. FCA conducted customary oversight activity; the company said it did not expect a material financial or operational effect.
- Principal risks include agricultural borrower stress from commodity prices, weather, trade, and farmland values; concentrated AgVantage counterparties and key business partners; refinancing and capital-market access; interest-rate and LIBOR basis risk; and regulatory or political changes. Three counterparties issued $7.4 billion of the $7.9 billion AgVantage portfolio. Approximately $2.4 billion of AgVantage securities matured in 2018.
- Off-balance-sheet guarantees and LTSPCs totaled $4.0 billion at year-end. This maximum exposure is not an expected-loss estimate; Farmer Mac generally has recourse to collateral, but these obligations are not backed by the full faith and credit of the United States. Liquid assets of $2.6 billion were available as a funding source.
- Fair-value estimates require significant judgment: $5.5 billion of fair-value instruments were Level 3, representing 31% of total assets and 71% of fair-value instruments. Management reported no other-than-temporary impairment on the cited securities. No legal proceedings were reported.
- PwC issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether the rise in 90-day delinquencies and substandard assets persists, and how borrower-specific problem loans and collateral values develop.
- AgVantage issuer concentration, collateral coverage and covenants, and the ability of issuers to repay or refinance the 2018–2019 maturities.
- Liquidity and refinancing capacity given $8.1 billion of notes due within one year, capital-market dependence, and the absence of a public debt rating.
- How much earnings growth is recurring core performance versus fair-value, funding, accounting, or other adjustments; review the company’s non-GAAP reconciliations.
- Execution of the CEO search, the outcome of FCA follow-up, and whether forecast expense growth and the higher common dividend remain supported by earnings and regulatory capital.