Federal Agricultural Mortgage Corporation (Farmer Mac) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. This is an annual report, not a Q4-only filing. Farmer Mac is a federally chartered, stockholder-owned GSE providing a secondary market for agricultural, USDA-guaranteed, rural-utility, and institutional-credit assets. Its principal revenue sources are interest income net of funding costs and guarantee and commitment fees. Its debt and obligations are not guaranteed by the U.S. government.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $190.6 million | $173.1 million |
| Net interest yield | 0.85% | 0.87% |
| Net effective spread (non-GAAP) | $197.0 million; 0.93% | $168.6 million; 0.91% |
| Net income | $108.6 million | $109.5 million |
| Net income attributable to common stockholders | $89.2 million; diluted EPS $8.27 | $93.7 million; diluted EPS $8.69 |
| Core earnings (non-GAAP) | $100.6 million; diluted EPS $9.33 | $93.7 million; diluted EPS $8.70 |
| Provision for credit losses | $8.1 million | $3.5 million |
| Operating expenses | $61.4 million | $51.9 million |
Cash provided by operating activities was negative $94.5 million, versus negative $19.7 million in 2019. Investing activities used $1.7 billion; financing activities provided $2.3 billion. Cash and cash equivalents increased $429.6 million to $1.03 billion.
At year-end, total assets were $24.36 billion, notes payable were $21.85 billion, total liabilities were $23.36 billion, and total equity was $992.5 million. Cash and investment securities totaled $4.93 billion. Farmer Mac reported 207 days of liquidity against a 90-day regulatory minimum. Outstanding business volume was $21.92 billion, up $806.2 million, or about 3.8%, year over year.
Core capital was $1.006 billion, $325.5 million above the statutory minimum; the Tier 1 capital ratio was 14.1%, compared with 12.9% in 2019. Regulatory capital exceeded the $197.4 million risk-based requirement by approximately $826.6 million. Farmer Mac was in the highest regulatory capital compliance category.
Material changes versus 2019
- Net interest income rose $17.5 million, primarily with business growth, while net interest yield declined 0.02 percentage points as funding and liquidity costs increased.
- Net effective spread increased $28.3 million, mainly from new business volume and lower non-GAAP funding costs. Core earnings rose $6.9 million, while net income attributable to common stockholders declined $4.5 million.
- Farm & Ranch and Rural Utilities grew; Institutional Credit volume fell $700.9 million, principally due to scheduled AgVantage maturities and repayments. Total business volume growth therefore slowed from $1.39 billion in 2019 to $806.2 million in 2020.
- Operating expenses increased $9.5 million, including higher compensation, headcount, technology, and strategic investment costs. Preferred dividends also rose following new Series E and F issuances.
- Farmer Mac adopted CECL on January 1, 2020, recording a $2.7 million pretax-equivalent cumulative transition increase to allowances and reserves and a $2.1 million reduction to retained earnings. The year-end total allowance and reserve were $17.6 million; 2019 comparison is affected by the accounting change.
Outlook, risks, and unusual items
- Management sees opportunities for profitable growth across its businesses, including agricultural lending, institutional funding, renewable energy, and potential rural broadband-related financing. It expects operating expenses to continue increasing over the next several years, with investment and expense growth monitored against revenue growth.
- COVID-19-related payment deferments covered approximately $432.0 million of unpaid principal at year-end, about 1.97% of business volume. Deferred loans were not treated as past due, and interest continued to accrue. Management reported uninterrupted remote operations and continued access to debt markets.
- Credit metrics improved in parts of Farm & Ranch: 90-day delinquencies were $46.2 million, or 0.54% of that portfolio, versus $61.0 million, or 0.78%, in 2019; substandard assets were $291.5 million, or 3.4%, versus $310.0 million, or 4.0%. A $5.8 million charge-off was primarily tied to a specialized poultry facility. Rural Utilities had no delinquencies, but CECL led to an allowance despite no historical credit losses in that line.
- Concentrations are material: three counterparties issued $7.0 billion of $7.7 billion in AgVantage securities; ten institutions generated about 57% of Farm & Ranch loan purchase volume. Farmer Mac also highlighted weather, commodity prices, farmland values, borrower repayment capacity, interest-rate and funding spreads, capital-market access, cybersecurity, and regulatory or political changes as risks.
- LIBOR transition is a significant exposure: as of year-end, $5.1 billion of floating-rate assets, $4.7 billion of floating-rate debt, and $14.6 billion notional of swaps reset to LIBOR; Series C preferred stock is also scheduled to float based on LIBOR after July 2024.
- Level 3 fair-value instruments were $7.0 billion, equal to 29% of total assets and 65% of fair-value-measured financial instruments. The auditor identified valuation of available-for-sale AgVantage securities as a critical audit matter. Farmer Mac redeemed $60 million of Series A preferred stock and issued Series E and F preferred stock in 2020; the redemption produced a $1.7 million loss on retirement.
- For 2021, the board declared a common dividend of $0.88 per share, 10% above the 2020 quarterly rate; future dividends remain discretionary and subject to capital requirements. No specific earnings or volume guidance was provided. Management noted that, as of February 25, 2021, it was not aware of Texas freeze damage likely to cause a material credit loss.
Investor verification priorities
- Reconcile GAAP earnings with management’s non-GAAP core earnings and net effective spread, including excluded fair-value and unusual items.
- Review CECL assumptions and the sensitivity of allowances to unemployment, credit spreads, commodity prices, and collateral values; assess the specialized poultry exposure and charge-off.
- Evaluate AgVantage and customer concentration, upcoming maturities, and the effect of large-counterparty runoff on business volume and earnings.
- Assess liquidity and refinancing needs against the $21.85 billion notes payable balance, including maturities and LIBOR-linked assets, liabilities, and derivatives.
- Track deferment outcomes and subsequent credit performance, along with the evolving effects of COVID-19, agricultural conditions, rural utility demand, and Texas freeze costs.
- Confirm capital, dividend, and preferred-stock implications, and scrutinize Level 3 valuation assumptions and LIBOR transition plans.