Federal Agricultural Mortgage Corporation (Farmer Mac) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. Farmer Mac is a federally chartered, stockholder-owned GSE providing a secondary market for agricultural, USDA-guaranteed, and rural utilities loans. Its obligations are not guaranteed by the full faith and credit of the United States.
Financial performance and position
| Metric | FY 2019 / Dec. 31, 2019 | Prior comparable period |
|---|---|---|
| Interest income / interest expense | $645.1 million / $472.0 million | $544.3 million / $369.8 million in 2018 |
| Net interest income | $173.1 million; yield 0.87% | $174.4 million; yield 0.96% in 2018 |
| Net effective spread (non-GAAP) | $168.6 million; 0.91% | $151.2 million; 0.91% in 2018 |
| Net income / income attributable to common stockholders | $109.5 million / $93.7 million | $108.1 million / $94.9 million in 2018 |
| Diluted EPS | $8.69 | $8.83 in 2018 |
| Core earnings (non-GAAP) | $93.7 million; $8.70 diluted per share | $84.0 million; $7.82 diluted per share in 2018 |
| Total assets / total liabilities | $21.7 billion / $20.9 billion | $18.7 billion / $17.9 billion in 2018 |
| Notes payable | $19.1 billion | $16.2 billion in 2018 |
| Cash and investment securities | $3.6 billion | $2.7 billion in 2018 |
| Operating / investing / financing cash flow | $(19.7) million / $(2.385) billion / $2.583 billion | $200.0 million / $(591.5) million / $514.7 million in 2018 |
Outstanding business volume grew to $21.1 billion from $19.7 billion, a net increase of $1.4 billion. Core earnings rose 11.5%, mainly on higher business volume and net effective spread; GAAP common-stockholder earnings declined slightly. The 2019 provision for losses was $3.5 million versus $0.3 million in 2018.
At year-end, core capital was $815.4 million, $196.7 million above the statutory minimum. The Tier 1 capital ratio was 12.9%, down from 13.4%; Farmer Mac remained at the highest regulatory compliance level. Liquidity was 176 days at year-end, above the 90-day minimum; the 2019 average was 181 days.
Material changes, outlook, and risks
- Farm & Ranch 90-day delinquencies increased to $61.0 million, or 0.78% of that portfolio, from $26.9 million, or 0.37%. Substandard assets increased to $310.0 million (4.0%) from $232.7 million (3.2%). Management cited broad agricultural credit deterioration but said substandard levels were around the historical average and the portfolio remained adequately collateralized.
- AgVantage securities were $8.4 billion; three counterparties accounted for approximately 92% of the balance. A counterparty default or collateral-value decline could materially affect results.
- Management sees growth opportunities across business lines, including renewable-energy lending, but expects operating expenses to rise over the next several years as it invests in personnel, technology, and infrastructure. Some planned hiring shifted into 2020.
- The filing describes agricultural risks from commodity prices, trade policy, weather, farm profitability, and farmland values. Management reported that USDA forecast 2020 net farm cash income to fall 9.9%, largely due to lower government support payments and higher expenses. Rural Utilities growth was expected to be moderate near term.
- Farmer Mac identified LIBOR replacement as a risk: substantial floating-rate assets, debt, and swaps were LIBOR-linked. It had issued $765 million of SOFR-based medium-term notes in 2019 and was evaluating the transition.
- Other material exposures include interest-rate and refinancing risk, capital-market access, concentrated counterparties, contingent guarantee and LTSPC obligations, and valuation uncertainty. Level 3 fair-value instruments totaled $7.2 billion, or 33% of assets. The $3.5 billion of off-balance-sheet guarantees and LTSPCs is maximum exposure before collateral and recoveries, not an estimate of expected loss.
- In 2019, Farmer Mac issued $100 million of Series D preferred stock and redeemed $75 million of Series B preferred stock, recognizing a $2.0 million retirement loss. The board declared a first-quarter 2020 common dividend of $0.80 per share, up from $0.70 quarterly in 2019. The 2018 Farm Bill acreage exception was scheduled to expand on June 18, 2020.
Key investor verification points
- Track delinquencies, substandard assets, provisions, and the specific poultry-loan reserve; assess whether credit deterioration leads to higher realized losses.
- Review AgVantage issuer concentration, collateralization, and scheduled maturities, particularly the large balances due in 2020 and 2021.
- Assess funding spreads, refinancing needs, liquidity, and capital-market access alongside the growth in notes payable and short-term debt maturities.
- Monitor LIBOR transition execution and the sensitivity of earnings and hedges to interest-rate and funding-spread movements.
- Distinguish GAAP earnings from management’s non-GAAP core earnings and net effective spread; both exclude or reclassify specified items.
- Consider that the auditor identified the Farm & Ranch general allowance methodology as a critical audit matter. The auditor gave unqualified opinions on the financial statements and internal control; management reported effective controls.