Federal Agricultural Mortgage Corporation (Farmer Mac) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 28, 2022. Farmer Mac is a federally chartered, stockholder-owned secondary-market provider for agricultural and rural infrastructure credit. Its main income sources are interest spread on assets and fees for guarantees and loan commitments. Its obligations are not guaranteed by the U.S. government.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $132.3 million | $108.6 million |
| Net income attributable to common stockholders | $107.6 million | $89.2 million |
| Basic / diluted EPS | $10.00 / $9.92 | $8.31 / $8.27 |
| Core earnings (non-GAAP) | $113.6 million | $100.6 million |
| Net interest income / yield | $220.8 million / 0.94% | $190.6 million / 0.85% |
| Net effective spread (non-GAAP) / yield | $220.7 million / 0.98% | $197.0 million / 0.93% |
| Operating expenses | $73.4 million | $61.4 million |
| Total assets | $25.1 billion | $24.4 billion |
| Total equity | $1.20 billion | $992.5 million |
| Notes payable | $22.7 billion | $21.8 billion |
- Net cash provided by operating activities was $436.4 million, versus cash used of $94.5 million in 2020. Investing activities used $1.10 billion and financing activities provided $534.6 million; cash and cash equivalents declined $125.2 million to $908.8 million.
- Outstanding business volume grew 7.7% to $23.6 billion, from $21.9 billion. Agricultural Finance volume was $17.6 billion and Rural Infrastructure Finance was $6.0 billion.
- Liquidity was 367 days at year-end, against a regulatory minimum of 90 days; average liquidity during 2021 was 280 days. Cash, cash equivalents and investment securities totaled $4.79 billion.
- Regulatory capital was approximately $1.2 billion, about $486.8 million above the minimum requirement. The Tier 1 capital ratio was 14.7%, up from 14.1%; Farmer Mac was in the highest regulatory compliance category.
- The allowance and reserve for losses totaled $16.4 million, down from $17.6 million. The company recorded a $2.2 million net release of credit-loss provisions in 2021, compared with an $8.1 million provision in 2020.
Quarterly context: Fourth-quarter 2021 core earnings were $30.0 million versus $26.4 million in fourth-quarter 2020. Quarterly net effective spread was $54.3 million versus $54.5 million. These are reported quarterly measures; the filing is an annual report.
Material changes versus 2020
- Net income attributable to common stockholders rose $18.4 million, primarily on higher net interest income and improved credit-loss results, partly offset by higher expenses and preferred dividends.
- Net interest income increased $30.2 million, supported by new business volume and lower funding costs. Net effective spread increased $23.7 million.
- Operating expenses increased $12.0 million, reflecting headcount growth, technology and consultant spending, and the servicing acquisition. Farmer Mac added 32 net employees, a 26% year-end increase.
- Total equity increased $211.9 million, mainly from issuing $121.3 million of Series G preferred stock and higher retained earnings.
- In the fourth quarter, Farmer Mac completed its first newly designed structured agricultural mortgage securitization, selling a $299.4 million loan pool and recognizing a $6.5 million pretax gain.
Outlook, risks and unusual items
- Management sees opportunities for continued portfolio growth, including rural broadband, telecommunications and renewable energy finance. It expects operating expenses to continue rising over the next several years and to increase over the next 12–18 months as it invests in growth and infrastructure. No specific earnings or volume guidance was provided.
- Management described 2021 agricultural conditions as generally positive, with higher farm income, commodity prices and land values. It noted that higher input costs and interest expense could pressure farm profitability in 2022, while USDA projections cited in the filing indicated modestly higher net cash farm income.
- Key exposures include agricultural and rural borrower credit risk; concentration among a small number of AgVantage issuers and business counterparties; weather, drought and climate-related collateral risks; and changes in interest rates, funding spreads and market access.
- AgVantage securities totaled $8.1 billion; $7.6 billion were issued by three counterparties. Farmer Mac also reported that ten institutions generated about 62% of 2021 Agricultural Finance loan purchase volume.
- Off-balance-sheet LTSPCs and guaranteed securities totaled $3.8 billion. The filing states these obligations are not U.S.-government guaranteed; recoveries depend in part on collateral and other contractual protections. Separately, a conditional $1.5 billion Treasury borrowing authority for guarantee obligations has never been used.
- Fair-value estimation is a significant judgment area: $6.4 billion of assets measured using significant unobservable inputs represented about 25% of total assets. The auditor identified valuation of available-for-sale AgVantage securities as a critical audit matter.
- Other risks include the transition from LIBOR, derivative counterparty and collateral needs, continued COVID-19 uncertainty, and execution and control risks from expanding internal loan servicing. Management reported no material business disruption from remote operations.
- Common dividends were $0.88 per share quarterly in 2021; the board declared $0.95 per share for first-quarter 2022. The board’s stated target is common dividends equal to 35% of annual core earnings, subject to capital and other constraints.
Important facts for investors to verify
- Reconcile GAAP earnings with core earnings and net effective spread, which are non-GAAP measures with company-defined adjustments.
- Review AgVantage issuer concentration, maturities, collateralization and the valuation assumptions behind the $6.3 billion available-for-sale portfolio.
- Assess credit trends, including Agricultural Finance 90-day delinquencies of $47.3 million (0.48%) and substandard assets of $246.7 million (2.5%) at year-end.
- Evaluate debt refinancing needs, funding-market access, liquidity and sensitivity to rising rates and changing credit spreads.
- Monitor servicing-acquisition integration, expense growth, and the effects of the LIBOR transition on assets, liabilities, swaps and Series C preferred stock.
- Consider the scale and terms of guarantees and LTSPCs, related-party transactions, regulatory capital constraints and the board’s discretion over dividends.
PricewaterhouseCoopers LLP gave an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2021.