Federal Agricultural Mortgage (AGM) - 2019 Q2 - Quarterly Report

PART I Item 1. Financial Statements This section presents Farmer Mac's unaudited consolidated financial statements for interim periods, covering balance sheets, operations, comprehensive income, equity, cash flows, and detailed notes on financial instruments Consolidated Balance Sheets The consolidated balance sheets show Farmer Mac's financial position, with total assets increasing to $20.7 billion from $18.7 billion, driven by investment securities and loans, while total liabilities and equity also rose | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Total Assets | $20,738,160 | $18,694,328 | | Total Liabilities | $19,964,418 | $17,941,771 | | Total Equity | $773,742 | $752,557 | | Cash and cash equivalents | $396,602 | $425,256 | | Investment securities | $2,967,536 | $2,262,884 | | Farmer Mac Guaranteed Securities | $8,614,843 | $8,071,115 | | USDA Securities | $2,137,579 | $2,176,173 | | Total loans, net of allowance | $6,316,005 | $5,515,052 | | Notes payable | $18,187,418 | $16,243,697 | Consolidated Statements of Operations The consolidated statements of operations show increased net income attributable to common stockholders, driven by higher non-interest income and gains on financial derivatives, despite a slight decrease in net interest income for the six-month period | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | |:---|:---|:---|:---|:---|\ | Total interest income | $165,128 | $135,670 | $320,643 | $255,216 | | Total interest expense | $122,074 | $91,737 | $236,990 | $168,054 | | Net interest income | $43,054 | $43,933 | $83,653 | $87,162 | | Non-interest income | $12,732 | $6,380 | $16,422 | $6,619 | | Non-interest expense | $12,052 | $12,921 | $24,813 | $24,563 | | Net income attributable to common stockholders | $28,304 | $26,340 | $50,178 | $48,864 | | Basic earnings per common share | $2.65 | $2.47 | $4.70 | $4.59 | | Diluted earnings per common share | $2.63 | $2.45 | $4.66 | $4.55 | - Net income attributable to common stockholders increased by $2.0 million year-over-year for the three months ended June 30, 2019, and by $1.3 million for the six months ended June 30, 2019[14] - Gains on financial derivatives significantly increased non-interest income, rising from $2.5 million to $8.9 million for the three-month period and from a loss of $1.3 million to a gain of $8.5 million for the six-month period[14] Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income show a significant shift from comprehensive income in 2018 to a comprehensive loss in 2019 for both the three and six-month periods, driven by substantial net unrealized losses on available-for-sale securities and cash flow hedges | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | |:---|:---|:---|:---|:---|\ | Net income | $34,045 | $29,636 | $59,215 | $55,455 | | Net unrealized (losses)/gains on available-for-sale securities | $(28,588) | $996 | $(25,347) | $22,224 | | Net unrealized (losses)/gains on cash flow hedges | $(9,972) | $2,194 | $(15,637) | $8,857 | | Other comprehensive (loss)/income net of tax | $(34,097) | $1,299 | $(37,799) | $22,298 | | Comprehensive (loss)/income attributable to Farmer Mac | $(52) | $30,935 | $21,416 | $77,753 | - Comprehensive income shifted from a gain of $30.9 million in Q2 2018 to a loss of $52 thousand in Q2 2019, and from a gain of $77.8 million in H1 2018 to a gain of $21.4 million in H1 2019[17] Consolidated Statements of Equity The consolidated statements of equity show an increase in total equity from $752.6 million at December 31, 2018, to $773.7 million at June 30, 2019, driven by net income and preferred stock issuance, partially offset by other comprehensive losses and preferred stock redemptions | Metric | December 31, 2018 (in thousands) | June 30, 2019 (in thousands) | |:---|:---|:---|\ | Total Equity | $752,557 | $773,742 | | Preferred Stock Amount | $204,759 | $228,374 | | Common Stock Amount | $10,669 | $10,700 | | Additional Paid-In Capital | $118,822 | $118,942 | | Accumulated Other Comprehensive Income/(Loss) | $24,956 | $(12,843) | | Retained Earnings | $393,351 | $428,569 | - Issuance of Series D preferred stock contributed $96.7 million to equity, while redemption of Series B preferred stock reduced it by $73.0 million[20] - Accumulated other comprehensive income shifted from a gain of $24.9 million to a loss of $12.8 million, reflecting significant other comprehensive losses during the period[20] Consolidated Statements of Cash Flows The consolidated statements of cash flows show a net decrease in cash and cash equivalents of $28.7 million for the six months ended June 30, 2019, primarily due to net cash used in operating and investing activities, partially offset by significant cash provided by financing activities | Metric | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | |:---|:---|:---|\ | Net cash (used by)/provided by operating activities | $(100,669) | $162,154 | | Net cash used by investing activities | $(1,741,530) | $(608,357) | | Net cash provided by financing activities | $1,813,545 | $574,993 | | Net change in cash and cash equivalents | $(28,654) | $128,790 | | Cash and cash equivalents at end of period | $396,602 | $430,812 | - Operating activities shifted from providing $162.2 million in cash in H1 2018 to using $100.7 million in H1 2019, largely due to net change in fair value of trading securities, hedged assets, and financial derivatives[26] - Financing activities provided $1.8 billion in cash in H1 2019, significantly higher than $575.0 million in H1 2018, driven by increased proceeds from issuance of discount and medium-term notes, and Series D preferred stock[26] Notes to Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, offering explanations of accounting policies, financial instrument compositions, and segment performance 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines Farmer Mac's significant accounting policies, including principles of consolidation, earnings per common share, comprehensive income, and recently adopted and issued accounting guidance - Farmer Mac consolidates its two subsidiaries (FMMSC and Farmer Mac II LLC) and Variable Interest Entities (VIEs) where it is the primary beneficiary[31] Consolidation of Variable Interest Entities (VIEs) as of June 30, 2019 | Metric | Farm & Ranch (in thousands) | USDA Guarantees (in thousands) | Corporate (in thousands) | Total (in thousands) | |:---|:---|:---|:---|:---|\ | Loans held for investment in consolidated trusts, at amortized cost | $1,563,223 | — | — | $1,563,223 | | Debt securities of consolidated trusts held by third parties | $1,570,862 | — | — | $1,570,862 | | Unconsolidated VIEs: Farmer Mac Guaranteed Securities (Carrying value) | — | $33,778 | — | $33,778 | | Unconsolidated VIEs: Investment securities (Carrying value) | — | — | $1,115,618 | $1,115,618 | | Off-Balance Sheet: Unconsolidated VIEs: Farmer Mac Guaranteed Securities (Maximum exposure to loss) | $121,064 | $398,710 | — | $519,774 | Basic and Diluted EPS for Three and Six Months Ended June 30, 2019 and 2018 | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | |:---|:---|:---|:---|:---|\ | Basic EPS | $2.65 | $2.47 | $4.70 | $4.59 | | Diluted EPS | $2.63 | $2.45 | $4.66 | $4.55 | - The adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, did not materially affect Farmer Mac's financial position, results of operations, or cash flows[51] - Farmer Mac is currently evaluating the impact of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which will require recognition of all expected credit losses, not just incurred losses, starting January 1, 2020[52] 2. INVESTMENT SECURITIES This note provides a detailed breakdown of Farmer Mac's investment securities portfolio, categorized by available-for-sale and held-to-maturity, including amortized cost, unrealized gains and losses, fair value, and contractual maturities Investment Securities as of June 30, 2019 | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | |:---|:---|:---|\ | Available-for-sale | $2,920,159 | $2,922,504 | | Held-to-maturity | $45,032 | $45,761 | | Total Investment Securities | $2,965,191 | $2,968,265 | Unrealized Losses on Available-for-Sale Investment Securities as of June 30, 2019 | Category | Fair Value (less than 12 months) (in thousands) | Unrealized Loss (less than 12 months) (in thousands) | Fair Value (more than 12 months) (in thousands) | Unrealized Loss (more than 12 months) (in thousands) | |:---|:---|:---|:---|:---|\ | Floating rate auction-rate certificates backed by Government guaranteed student loans | — | — | $19,208 | $(492) | | Floating rate asset-backed securities | $8,978 | $(65) | $16,824 | $(128) | | Floating rate Government/GSE guaranteed mortgage-backed securities | $376,791 | $(1,270) | $281,180 | $(1,949) | | Fixed rate U.S. Treasuries | $79,700 | $(9) | — | — | | Total | $465,469 | $(1,344) | $317,212 | $(2,569) | - Unrealized losses are primarily due to widening market spreads and increased interest rates, but are not considered other-than-temporary impairments as Farmer Mac does not intend to sell these securities before recovery of amortized cost[61][63] 3. FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES This note details Farmer Mac's on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities, including their amortized cost, fair value, unrealized gains and losses, and maturity profiles, highlighting the U.S. government backing for USDA Guarantees Farmer Mac Guaranteed Securities and USDA Securities as of June 30, 2019 | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | |:---|:---|:---|\ | Held-to-maturity: AgVantage | $1,545,397 | $1,557,807 | | Held-to-maturity: Farmer Mac Guaranteed USDA Securities | $33,778 | $34,402 | | Held-to-maturity: USDA Securities | $2,128,378 | $2,132,665 | | Available-for-sale: AgVantage | $6,923,315 | $7,035,668 | | Trading: USDA Securities | $9,388 | $9,201 | - The credit exposure for Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States[72] - Unrealized losses on these securities are primarily due to higher interest rates and are not considered other-than-temporary impairments, as Farmer Mac does not intend to sell them before recovery of amortized cost[71][73] 4. FINANCIAL DERIVATIVES This note details Farmer Mac's financial derivative transactions, primarily interest rate swaps used for risk management, summarizing fair values, notional amounts, and their impact on the consolidated statements of operations Financial Derivatives Summary as of June 30, 2019 | Category | Notional Amount (in thousands) | Fair Value Assets (in thousands) | Fair Value Liabilities (in thousands) | |:---|:---|:---|:---|\ | Fair value hedges: Interest rate swaps | $6,831,009 | $5,249 | $(10,548) | | Cash flow hedges: Interest rate swaps | $373,000 | $887 | $(1,100) | | No hedge designation: Interest rate swaps | $3,407,847 | $294 | $(15,469) | | No hedge designation: Basis swaps | $2,545,500 | $1,132 | $(162) | | No hedge designation: Treasury futures | $29,100 | — | $(188) | | Total financial derivatives | $13,186,456 | $7,560 | $(27,429) | - Farmer Mac expects to reclassify $0.3 million after tax from accumulated other comprehensive income to earnings over the next twelve months related to cash flow hedges[85] Net Income/(Expense) Recognized on Derivatives (Three Months Ended June 30, 2019) | Category | Net Interest Income (in thousands) | Non-Interest Income (in thousands) | Total (in thousands) | |:---|:---|:---|:---|\ | Income/(expense) related to interest settlements on fair value hedging relationships | $23,153 | — | $23,153 | | Gains/(losses) on fair value hedging relationships | $(1,428) | — | $(1,428) | | Expense related to interest settlements on cash flow hedging relationships | $(2,236) | — | $(2,236) | | Gains on financial derivatives not designated in hedge relationships | — | $8,913 | $8,913 | 5. LOANS AND ALLOWANCE FOR LOSSES This note details Farmer Mac's loan portfolio, including composition, allowance for loan losses, and credit quality indicators, showing an increase in total loans and a modest increase in the total allowance for losses, with substandard assets rising in specific commodity sub-groups Loan Balances as of June 30, 2019 | Category | Unsecuritized (in thousands) | Consolidated Trusts (in thousands) | Total (in thousands) | |:---|:---|:---|:---|\ | Farm & Ranch | $3,191,035 | $1,563,223 | $4,754,258 | | Rural Utilities | $1,527,150 | — | $1,527,150 | | Total loans, net of allowance | $4,754,224 | $1,561,781 | $6,316,005 | | Allowance for loan losses | $(5,822) | $(1,442) | $(7,264) | Changes in Total Allowance for Losses (Three and Six Months Ended June 30, 2019) | Metric | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | |:---|:---|:---|\ | Beginning Balance | $8,791 | $9,184 | | Provision for/(release of) losses | $420 | $27 | | Charge-offs | $(67) | $(67) | | Ending Balance | $9,144 | $9,144 | - Substandard assets increased by $10.0 million in the first half of 2019 to $242.7 million (3.3% of Farm & Ranch portfolio), mainly due to downgrades in cattle and calves, dairy, and cotton commodity sub-groups[225][342] - 90-day delinquencies were $28.0 million (0.38% of Farm & Ranch portfolio) as of June 30, 2019, showing a seasonal decrease from March 31, 2019, but a slight increase from December 31, 2018[226][332] 6. GUARANTEES AND LONG-TERM STANDBY PURCHASE COMMITMENTS This note outlines Farmer Mac's off-balance sheet obligations, including Farmer Mac Guaranteed Securities and Long-Term Standby Purchase Commitments (LTSPCs), detailing maximum potential future payments and associated liabilities Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities (in thousands) | Category | June 30, 2019 | December 31, 2018 | |:---|:---|:---|\ | Farm & Ranch: Guaranteed Securities | $121,064 | $135,862 | | USDA Guarantees: Farmer Mac Guaranteed USDA Securities | $398,710 | $367,684 | | Institutional Credit: AgVantage Securities | $9,225 | $9,898 | | Institutional Credit: Revolving floating rate AgVantage facility | $300,000 | $300,000 | | Total | $828,999 | $813,444 | - The maximum principal amount of potential undiscounted future payments under LTSPCs was $3.0 billion as of June 30, 2019, down from $3.2 billion at December 31, 2018[155] - The liability for guarantee and commitment obligations approximated $2.5 million for Farmer Mac Guaranteed Securities and $34.7 million for LTSPCs as of June 30, 2019[153][156] 7. EQUITY This note details Farmer Mac's equity activities, including preferred and common stock transactions, and capital requirements, highlighting the issuance of Series D Preferred Stock, redemption of Series B Preferred Stock, common stock dividends, and compliance with statutory capital requirements - On May 13, 2019, Farmer Mac issued 4.0 million shares of 5.700% Non-Cumulative Preferred Stock, Series D, totaling $100.0 million[157] - On June 12, 2019, Farmer Mac redeemed all $75.0 million of its 6.875% Non-Cumulative Preferred Stock, Series B, resulting in a $2.0 million loss on retirement[158] - Farmer Mac paid a quarterly common stock dividend of $0.70 per share for Q1 and Q2 2019, an increase from $0.58 per share in 2018[159] Capital Requirements as of June 30, 2019 | Metric | Amount (in millions) | |:---|:---|\ | Minimum Capital Requirement | $595.0 | | Core Capital Level | $786.6 | | Capital Above Minimum | $191.6 | 8. FAIR VALUE DISCLOSURES This note provides disclosures on assets and liabilities measured at fair value, categorizing them into a three-level hierarchy based on input observability, highlighting that a significant portion of Farmer Mac's financial instruments are valued using significant unobservable inputs (Level 3) - As of June 30, 2019, financial instruments valued at $7.1 billion were estimated using significant unobservable inputs (Level 3), representing 34% of total assets and 71% of financial instruments measured at fair value[165] Assets and Liabilities Measured at Fair Value (Recurring) as of June 30, 2019 (in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | |:---|:---|:---|:---|:---|\ | Investment Securities | $1,273,766 | $1,629,530 | $19,208 | $2,922,504 | | Farmer Mac Guaranteed Securities | — | — | $7,035,668 | $7,035,668 | | USDA Securities (Trading) | — | — | $9,201 | $9,201 | | Financial derivatives (Assets) | — | $7,560 | — | $7,560 | | Financial derivatives (Liabilities) | $188 | $27,241 | — | $27,429 | | Total Assets at fair value | $1,273,766 | $1,637,090 | $7,064,077 | $9,974,933 | | Total Liabilities at fair value | $188 | $27,241 | — | $27,429 | - The fair values of loans, Farmer Mac Guaranteed Securities, and USDA Securities are internally modeled using discounted cash flow methods with management's best estimates of prepayment speeds, forward yield curves, and discount rates[190] 9. BUSINESS SEGMENT REPORTING This note presents core earnings and key financial metrics for Farmer Mac's operating segments: Farm & Ranch, USDA Guarantees, Rural Utilities, Institutional Credit, and Corporate, providing a reconciliation to consolidated net income and highlighting each segment's contribution to overall performance Segment Core Earnings (Three Months Ended June 30, 2019) (in thousands) | Segment | Net Interest Income | Non-Interest Income/(Loss) | Non-Interest Expense | Segment Core Earnings/(Losses) | |:---|:---|:---|:---|:---|\ | Farm & Ranch | $15,797 | $4,782 | $(4,429) | $10,357 | | USDA Guarantees | $4,112 | $238 | $(1,345) | $2,362 | | Rural Utilities | $3,936 | $365 | $(816) | $2,801 | | Institutional Credit | $16,385 | $86 | $(2,034) | $12,184 | | Corporate | $2,824 | $582 | $(3,428) | $(4,062) | | Consolidated Net Income Attributable to Common Stockholders | $43,054 | $12,732 | $(12,052) | $28,304 | Segment Core Earnings (Six Months Ended June 30, 2019) (in thousands) | Segment | Net Interest Income | Non-Interest Income/(Loss) | Non-Interest Expense | Segment Core Earnings/(Losses) | |:---|:---|:---|:---|:---|\ | Farm & Ranch | $31,079 | $10,006 | $(9,099) | $21,065 | | USDA Guarantees | $8,554 | $462 | $(2,773) | $4,542 | | Rural Utilities | $3,662 | $735 | $(1,682) | $4,963 | | Institutional Credit | $34,572 | $174 | $(4,193) | $23,483 | | Corporate | $5,786 | $604 | $(7,066) | $(8,190) | | Consolidated Net Income Attributable to Common Stockholders | $83,653 | $16,422 | $(24,813) | $50,178 | - Total on- and off-balance sheet program assets at principal balance increased to $20.7 billion as of June 30, 2019, from $19.5 billion as of June 30, 2018[197][199] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Farmer Mac's financial condition and operating results, including an overview of business performance, non-GAAP measures, detailed analysis of operations, future outlook, balance sheet review, off-balance sheet arrangements, and comprehensive risk management strategies FORWARD-LOOKING STATEMENTS This section identifies forward-looking statements within the report, emphasizing that management's expectations involve assumptions, estimates, and inherent risks and uncertainties that could cause actual results to differ materially from projections - Forward-looking statements cover prospects for earnings, business volume growth, trends in net interest income, credit quality, expenses, investment securities, asset impairments, capital position, and future dividend payments[203] - Key risks and uncertainties include debt and equity financing availability, legislative/regulatory developments, fair value fluctuations, secondary market development, agricultural indebtedness growth, economic conditions, changes in executive leadership, financial market developments, interest rate changes, basis risk, and commodity price volatility/trade policies[203][205] Overview Farmer Mac's business volume increased by $239.8 million (1.2%) to $20.7 billion in Q2 2019, with growth across all lines, while credit quality modestly decreased, leading to a $0.4 million provision for losses, and net income attributable to common stockholders rose to $28.3 million - Outstanding business volume increased by $239.8 million (1.2%) to $20.7 billion during Q2 2019, with net growth across all four lines of business[208] - Overall credit quality as of June 30, 2019, decreased modestly compared to December 31, 2018, with a $0.4 million provision for net total losses in Q2 2019[208] Net Income and Core Earnings (in millions) | Metric | Q2 2019 | Q1 2019 | Q2 2018 | |:---|:---|:---|:---|\ | Net income attributable to common stockholders | $28.3 | $21.9 | $26.3 | | Non-GAAP core earnings | $23.6 | $22.2 | $19.4 | - Net interest income was $43.1 million in Q2 2019, up from $40.6 million in Q1 2019, but down from $43.9 million in Q2 2018[214] - Net effective spread (non-GAAP) increased to $41.4 million in Q2 2019 from $38.8 million in Q1 2019 and $36.2 million in Q2 2018[218] Use of Non-GAAP Measures Farmer Mac utilizes non-GAAP measures such as 'core earnings,' 'core earnings per share,' and 'net effective spread' to provide a clearer understanding of its economic performance, transaction economics, and business trends by excluding fair value fluctuations and infrequent transactions - Core earnings and core earnings per share exclude fair value fluctuations and specified infrequent or unusual transactions to better reflect core business performance[231][232] - Net effective spread measures the net spread between interest-earning assets and related funding costs, excluding amortization of premiums/discounts on fair-valued assets, interest from consolidated trusts, and fair value changes of financial derivatives in hedge relationships[233][234] - Net effective spread includes income/expense from undesignated financial derivatives and net effects of terminations/settlements on financial derivatives to capture the complete economic spread[235][237] Results of Operations Farmer Mac's net income attributable to common stockholders increased to $28.3 million in Q2 2019 and $50.2 million in H1 2019, while non-GAAP core earnings also rose to $23.6 million and $45.9 million, respectively, driven by increased net effective spread and gains on financial derivatives Net Income and Core Earnings (in thousands, except per share) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | |:---|:---|:---|:---|:---|\ | Net income attributable to common stockholders | $28,304 | $26,340 | $50,178 | $48,864 | | Diluted EPS (GAAP) | $2.63 | $2.45 | $4.66 | $4.55 | | Core earnings (non-GAAP) | $23,642 | $19,360 | $45,863 | $41,207 | | Diluted EPS (non-GAAP) | $2.20 | $1.80 | $4.26 | $3.84 | - The sequential increase in net income was primarily due to a $7.3 million after-tax increase in fair value of undesignated financial derivatives and a $1.9 million after-tax increase in net interest income, partially offset by preferred stock related costs[212] - The year-over-year increase in core earnings was primarily due to a $4.1 million after-tax increase in net effective spread and a $0.5 million after-tax decrease in operating expenses[213] Net Interest Income Net interest income for Q2 2019 was $43.1 million, a sequential increase of $2.5 million but a year-over-year decrease of $0.8 million, while the six-month period saw a $3.5 million decrease year-over-year, though non-GAAP net effective spread increased Net Interest Income and Yield (Six Months Ended June 30, 2019 and 2018) | Metric | H1 2019 (Dollars in thousands) | H1 2019 (Yield) | H1 2018 (Dollars in thousands) | H1 2018 (Yield) | |:---|:---|:---|:---|:---|\ | Net interest income/yield | $83,653 | 0.87% | $87,162 | 0.97% | | Net effective spread (non-GAAP) | $80,156 | 0.90% | $73,263 | 0.88% | - The $2.5 million sequential increase in net interest income was due to $1.2 million from net business volume growth and $1.3 million from fair value changes in derivatives and hedged items[215] - The $0.8 million year-over-year decrease in Q2 net interest income was primarily due to a $3.3 million decrease in fair value changes from derivatives and hedged items and a $2.3 million decrease in LIBOR-indexed assets, partially offset by $2.6 million from new business volume and the absence of a $2.0 million premium amortization[216] Provision for and Release of Allowance for Loan Losses and Reserve for Losses Farmer Mac recorded a $0.4 million provision for total losses in Q2 2019, primarily due to increased Farm & Ranch loan volume and slightly lower credit quality, with a net provision of $27,000 for the six months ended June 30, 2019 Total Allowance for Losses (in thousands) | Metric | Q2 2019 | H1 2019 | |:---|:---|:---|\ | Beginning Balance | $8,791 | $9,184 | | Provision for/(release of) losses | $420 | $27 | | Charge-offs | $(67) | $(67) | | Ending Balance | $9,144 | $9,144 | - The Q2 2019 provision for allowance for loan losses was driven by net volume growth in on-balance sheet Farm & Ranch loans and a slight decrease in portfolio credit quality[269] - Specific allowances of $3.8 million were recorded for undercollateralized assets, and the general allowance was $5.3 million as of June 30, 2019[270] Guarantee and Commitment Fees Guarantee and commitment fees were $3.4 million for Q2 2019 and $6.9 million for H1 2019, slightly down from the prior year, but increased to $5.3 million and $10.7 million respectively when adjusted for core earnings Guarantee and Commitment Fees (in thousands) | Period | GAAP Fees | Core Earnings Adjusted Fees | |:---|:---|:---|\ | Three Months Ended June 30, 2019 | $3,403 | $5,276 | | Three Months Ended June 30, 2018 | $3,481 | $5,171 | | Six Months Ended June 30, 2019 | $6,916 | $10,695 | | Six Months Ended June 30, 2018 | $6,980 | $10,254 | - The core earnings presentation reclassifies interest income and expense from consolidated trusts to guarantee and commitment fees, aligning with management's view of these as effective guarantee fees[273] Gains/(losses) on financial derivatives Gains on financial derivatives significantly increased to $8.9 million for Q2 2019 and $8.5 million for H1 2019, compared to $2.5 million and a loss of $1.3 million in the prior year periods, primarily driven by changes in long-term interest rates Gains/(losses) on Financial Derivatives (in thousands) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | |:---|:---|:---|:---|:---|\ | Gains due to fair value changes | $10,485 | $6,709 | $12,725 | $4,429 | | Accrual of contractual payments | $(1,557) | $(3,998) | $(4,101) | $(6,299) | | (Losses)/gains due to terminations or net settlements | $(15) | $(177) | $(71) | $554 | | Total Gains/(losses) on financial derivatives | $8,913 | $2,534 | $8,553 | $(1,316) | - The significant increase in gains is primarily attributed to fluctuations in long-term interest rates affecting the fair value of derivatives[274] Other Income Other income for Q2 2019 was $0.4 million and $0.8 million for H1 2019, primarily consisting of late fees on Farm & Ranch loans, comparable to prior year periods Other Income (in thousands) | Period | 2019 | 2018 | |:---|:---|:---|\ | Three Months Ended June 30 | $355 | $320 | | Six Months Ended June 30 | $848 | $894 | - Late fees on Farm & Ranch loans constituted $0.2 million for Q2 2019 and $0.6 million for H1 2019[278] Compensation and Employee Benefits Compensation and employee benefits were $6.8 million for Q2 2019 and $14.4 million for H1 2019, with the six-month increase due to an overall increase in headcount and related employee health insurance costs Compensation and Employee Benefits (in thousands) | Period | 2019 | 2018 | |:---|:---|:---|\ | Three Months Ended June 30 | $6,770 | $6,936 | | Six Months Ended June 30 | $14,376 | $13,590 | - The increase in H1 2019 compensation and employee benefits was driven by an overall increase in headcount and associated health insurance costs[278] General and Administrative Expenses General and administrative (G&A) expenses decreased to $4.7 million for Q2 2019 and $9.3 million for H1 2019, primarily due to lower executive hiring expenses, servicing advances, and reduced legal fees General and Administrative Expenses (in thousands) | Period | 2019 | 2018 | |:---|:---|:---|\ | Three Months Ended June 30 | $4,689 | $5,202 | | Six Months Ended June 30 | $9,285 | $9,528 | - Q2 2019 G&A decrease was mainly due to $0.3 million decreases in executive hiring expenses and servicing advances[279] - H1 2019 G&A decrease was primarily due to a $0.4 million reduction in legal fees[279] Regulatory Fees Regulatory fees paid to the Farm Credit Administration (FCA) increased slightly to $0.7 million for Q2 2019 and $1.4 million for H1 2019, with FCA estimating total fees for FY2019 to be $2.75 million Regulatory Fees (in thousands) | Period | 2019 | 2018 | |:---|:---|:---|\ | Three Months Ended June 30 | $687 | $625 | | Six Months Ended June 30 | $1,375 | $1,250 | - FCA's estimated fees for the federal government fiscal year ending September 30, 2019, are $2.75 million ($0.688 million per quarter)[280] Income Tax Expense Income tax expense increased to $9.1 million for Q2 2019 and $15.7 million for H1 2019, with the effective federal tax rate for H1 2019 at approximately 21.0%, higher than H1 2018 due to prior year tax benefits Income Tax Expense (in thousands) | Period | 2019 | 2018 | |:---|:---|:---|\ | Three Months Ended June 30 | $9,111 | $7,332 | | Six Months Ended June 30 | $15,733 | $13,770 | - The effective federal tax rate for H1 2019 was approximately 21.0%, compared to 20.0% for H1 2018 due to prior year tax benefits from stock compensation[281] Business Volume Farmer Mac's outstanding business volume grew by $239.8 million to $20.7 billion in Q2 2019, with net growth across all four lines of business, driven by new loan purchases and AgVantage securities, despite a slowdown in the overall agricultural mortgage market - Outstanding business volume reached $20.7 billion as of June 30, 2019, a net increase of $239.8 million from March 31, 2019[283] Net Growth in Business Volume by Line of Business (Q2 2019) (in millions) | Line of Business | Net Growth | |:---|:---|\ | Rural Utilities | $80.9 | | Farm & Ranch | $75.8 | | Institutional Credit | $46.5 | | USDA Guarantees | $36.6 | - Farm & Ranch loan purchases grew 8.6% over the twelve months ended June 30, 2019, outperforming the overall agricultural mortgage market's 4.7% growth[284] Total Farmer Mac Guaranteed Securities Issuances (in thousands) | Period | 2019 | 2018 | |:---|:---|:---|\ | Three Months Ended June 30 | $709,090 | $890,291 | | Six Months Ended June 30 | $1,651,215 | $1,834,829 | Outlook Farmer Mac anticipates continued growth opportunities across its business lines, driven by lenders seeking capital management solutions, new counterparties, and industry consolidation, despite agricultural industry challenges from declining net cash income and trade disputes, with regulatory changes expected to further support growth - Growth opportunities are expected from lenders managing equity capital, new rural utilities counterparties, expanding customer base, and consolidation in agricultural finance[300] - Operating expenses are projected to increase by approximately 8% to 9% in 2019 relative to 2018, driven by investments in human capital, technology, and business infrastructure[302] - The USDA forecasts a 4.7% rebound in net cash income for 2019, despite declines since 2013, and farmland values have generally held steady[306] - The Farm Bill's acreage exception for loan limits will increase to 2,000 acres on June 18, 2020, and the authorized limit for USDA guarantees increased to $7.0 billion, potentially boosting business volume[314][315] Balance Sheet Review Farmer Mac's total assets increased by $2.0 billion to $20.7 billion as of June 30, 2019, driven by business volume growth, while total liabilities rose to $20.0 billion due to increased notes payable, and total equity increased to $773.7 million due to preferred stock issuance and retained earnings - Total assets increased by $2.0 billion to $20.7 billion as of June 30, 2019, driven by net growth in outstanding business volume[321] - Total liabilities increased to $20.0 billion as of June 30, 2019, from $17.9 billion at December 31, 2018, primarily due to an increase in total notes payable[322] - Total equity increased by $21.1 million to $773.7 million, a result of the Series D Preferred Stock issuance ($100.0 million) and increased retained earnings ($35.2 million), partially offset by Series B Preferred Stock redemption ($75.0 million) and a decrease in accumulated other comprehensive income ($37.8 million)[322] Off-Balance Sheet Arrangements Farmer Mac offers off-balance sheet credit enhancement alternatives, including Farmer Mac Guaranteed Securities and Long-Term Standby Purchase Commitments (LTSPCs), to approved lenders, which provide liquidity and lending capacity while creating off-balance sheet obligations - Off-balance sheet arrangements include Farmer Mac Guaranteed Securities (across all lines of business) and LTSPCs (Farm & Ranch, Rural Utilities)[324] - These arrangements create off-balance sheet obligations for Farmer Mac, with consolidation occurring when Farmer Mac is the primary beneficiary of securitization trusts[324] Risk Management Farmer Mac employs comprehensive risk management strategies to address credit risk, interest rate risk, and other investment risks, detailing credit exposure, monitoring credit quality indicators, and managing interest rate risk through asset/liability matching and financial derivatives, while also addressing basis risk and LIBOR discontinuation Credit Risk – Loans and Guarantees Farmer Mac's direct credit exposure for Farm & Ranch loans and guarantees was $7.3 billion, and for Rural Utilities loans and LTSPCs was $2.1 billion, with USDA Guarantees carrying little to no credit risk due to U.S. government backing, and while delinquencies and substandard assets increased slightly, they remain below historical averages - Direct credit exposure: $7.3 billion for Farm & Ranch, $2.1 billion for Rural Utilities[325][326] - USDA Guarantees have little to no credit risk due to U.S. government backing[328] - Weighted-average original loan-to-value ratio for Farm & Ranch loans was 51% as of June 30, 2019, with a current loan-to-value ratio of 45%[331][332] Farm & Ranch 90-Day Delinquencies | Date | Farm & Ranch Line of Business (in thousands) | 90-Day Delinquencies (in thousands) | Percentage | |:---|:---|:---|:---|\ | June 30, 2019 | $7,291,352 | $28,045 | 0.38% | | December 31, 2018 | $7,233,971 | $26,881 | 0.37% | - Substandard assets increased by $10.0 million to $242.7 million (3.3% of Farm & Ranch portfolio) as of June 30, 2019, primarily in cattle and calves, dairy, and cotton sub-groups[342] Credit Risk – Institutional Farmer Mac manages institutional credit risk from AgVantage securities issuers, approved lenders/servicers, and interest rate swap counterparties through creditworthiness standards, collateralization requirements, financial covenants, and collateralization provisions in swap agreements - Institutional credit risk is managed by requiring AgVantage counterparties to meet creditworthiness standards and maintain specified collateralization levels (e.g., 100% to 125%)[356][360] - Farmer Mac manages interest rate swap counterparty risk through collateralization provisions in swap agreements, requiring full collateralization for cleared and new non-cleared swaps[361] - As of June 30, 2019, Farmer Mac had $44,000 of uncollateralized net exposures to two counterparties, down from $1.4 million to three counterparties at December 31, 2018[388] Credit Risk – Other Investments Farmer Mac manages credit risk in its $0.4 billion cash and cash equivalents and $3.0 billion investment securities portfolio through internal policies and FCA regulations, requiring high creditworthiness standards and adhering to concentration limits - Investments must meet high creditworthiness standards, requiring at least one obligor with a very strong capacity to meet financial commitments and generally presenting a very low risk of default[363] - Farmer Mac's internal policy limits total credit exposure to any single entity, issuer, or obligor of securities to 5% of its regulatory capital ($39.8 million as of June 30, 2019), excluding U.S. government agencies or GSEs[364] Interest Rate Risk Farmer Mac is exposed to interest rate risk from timing differences in asset and liability cash flows, particularly due to loan prepayments, which it manages by matching asset purchases with liabilities of similar duration and cash flow characteristics, using a blend of callable and non-callable debt, and employing financial derivatives - Primary strategy for interest rate risk management is to fund asset purchases with liabilities that have similar duration and cash flow characteristics, using discount notes and callable/non-callable medium-term notes[369] - Farmer Mac uses MVE and NES sensitivity analysis, as well as duration gap analysis, to quantify and manage interest rate risk, providing both long-term and short-term views of sensitivity[376][377][378] Interest Rate Sensitivity Analysis (June 30, 2019) | Scenario | Percentage Change in MVE from Base Case | Percentage Change in NES from Base Case | |:---|:---|:---|\ | +100 basis points | 1.4% | (1.6)% | | -100 basis points | (7.0)% | 2.3% | - As of June 30, 2019, Farmer Mac's effective duration gap was negative 1.7 months, widening from negative 0.8 months at December 31, 2018, due to significant interest rate decreases[383] - Farmer Mac is evaluating the potential effect of LIBOR discontinuation, with $5.1 billion in LIBOR-based floating rate assets, $4.1 billion in floating rate debt, and $13.0 billion notional amount of interest rate swaps[396] Liquidity and Capital Resources Farmer Mac maintains strong liquidity and capital resources, primarily through debt issuances, guarantee fees, and loan repayments, regularly accessing capital markets and complying with statutory capital requirements, maintaining a Tier 1 capital ratio of 13.6% as of June 30, 2019 - Primary funding sources include debt issuances, guarantee and commitment fees, net effective spread, loan repayments, and maturities of AgVantage securities[397] - As of June 30, 2019, Farmer Mac had $18.2 billion in outstanding discount and medium-term notes, within its $20.0 billion authorized limit[399] - Farmer Mac maintained an average of 170 days of liquidity during Q2 2019, with 179 days as of June 30, 2019, exceeding the 90-day minimum requirement[400] - As of June 30, 2019, Farmer Mac's Tier 1 capital ratio was 13.6%, in compliance with statutory capital requirements and classified as 'level I' (highest compliance level)[402][403] Regulatory Matters The 2018 Farm Bill introduced provisions affecting Farmer Mac, including an FCA study on financial risks and capital requirements compared to Farm Credit System banks, and an assessment of increasing the acreage exception for loan limits, with the FCA concluding Farmer Mac has a lower risk profile and appropriate capital requirements - FCA's study concluded Farmer Mac has a 'significantly lower risk profile' compared to the Farm Credit System and that its Basel approach for capital requirements is 'appropriate'[407] - The FCA found increasing the acreage exception for Farm & Ranch loan limits from 1,000 to 2,000 acres to be feasible, without safety and soundness concerns, effective June 18, 2020[407] - FCA recommends replacing the acreage rule with exposure concentration limits to address individual borrower risk[410] Other Matters This section covers common and preferred stock dividends, noting Farmer Mac increased its quarterly common stock dividend to $0.70 per share for Q1 and Q2 2019, with preferred stock dividends paid as scheduled and the first Series D Preferred Stock dividend expected in Q3 2019 - Quarterly common stock dividend increased to $0.70 per share for Q1 and Q2 2019, up from $0.58 per share in 2018[411] - Preferred stock dividends were paid on Series A, B, and C, with the first Series D dividend scheduled for Q3 2019[411][412] Supplemental Information This section provides detailed quarterly and annual supplemental information on Farmer Mac's business volume, including new business, repayments, and outstanding balances across all lines of business, and presents quarterly net effective spread and core earnings by segment New Business Volume (Q2 2019) (in thousands) | Category | Gross Volume | Net Growth/(Decrease) | |:---|:---|:---|\ | Loans (Farm & Ranch) | $248,152 | $143,361 | | LTSPCs (Farm & Ranch) | $57,321 | $(67,594) | | USDA Securities | $88,916 | $14,392 | | Farmer Mac Guaranteed USDA Securities | $29,419 | $22,223 | | Loans (Rural Utilities) | $105,000 | $98,049 | | AgVantage securities | $659,447 | $46,483 | | Total | $1,188,255 | $239,822 | Repayments of Assets by Line of Business (Q2 2019) (in thousands) | Category | Scheduled | Unscheduled | Total | |:---|:---|:---|:---|\ | Loans (Farm & Ranch) | $39,879 | $64,912 | $104,791 | | LTSPCs (Farm & Ranch) | $58,779 | $58,979 | $117,758 | | USDA Securities | $38,676 | $43,044 | $81,720 | | AgVantage | $612,964 | — | $612,964 | | Total | $778,099 | $170,334 | $948,433 | Outstanding Business Volume (June 30, 2019) (in thousands) | Line of Business | Amount | |:---|:---|\ | Farm & Ranch (Loans, LTSPCs, Guaranteed Securities) | $7,291,352 | | USDA Guarantees (USDA Securities, Farmer Mac Guaranteed USDA Securities) | $2,521,394 | | Rural Utilities (Loans, LTSPCs) | $2,155,671 | | Institutional Credit (AgVantage) | $8,778,318 | | Total | $20,746,735 | Net Effective Spread by Line of Business (Q2 2019) (in thousands) | Line of Business | Dollars | Yield | |:---|:---|:---|\ | Farm & Ranch | $13,335 | 1.72% | | USDA Guarantees | $4,097 | 0.76% | | Rural Utilities | $3,996 | 1.10% | | Institutional Credit | $17,371 | 0.82% | | Corporate | $2,556 | 0.34% | | Total | $41,355 | 0.91% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Farmer Mac is exposed to market risk, primarily from changes in interest rates, which the company actively manages through various financial transactions, including derivatives, and by continuously monitoring and measuring its exposure - Farmer Mac's primary market risk exposure is to changes in interest rates[430] - Market risk is managed through financial transactions, including derivatives, and by monitoring interest rate exposure[430] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the effectiveness of Farmer Mac's disclosure controls and procedures as of June 30, 2019, and concluded they were effective, with no material changes in internal control over financial reporting during the quarter - Farmer Mac's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2019[431][432] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2019[432] PART II. OTHER INFORMATION Item 1. Legal Proceedings There are no legal proceedings to report for the period Item 1A. Risk Factors There were no material changes to the risk factors previously disclosed in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes from the risk factors previously disclosed in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2018[433] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Farmer Mac, as a federally chartered instrumentality, is exempt from certain Securities Act registration requirements, and during Q2 2019, it issued 50 shares of Class C non-voting common stock to directors and granted 12,182 shares of restricted Class C non-voting common stock to employees as incentive compensation - Farmer Mac issued 50 shares of Class C non-voting common stock to three directors on April 2, 2019, in lieu of cash retainers, valued at $72.43 per share[435] - On April 15, 2019, Farmer Mac granted 12,182 shares of restricted Class C non-voting common stock to 31 employees as incentive compensation, with a grant price of $75.64 per share, vesting on April 15, 2022[436][437] Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities to report for the period Item 4. Mine Safety Disclosures This item is not applicable to Farmer Mac Item 5. Other Information This section lists various exhibits incorporated by reference from prior filings or filed with this report, including organizational documents, specimen certificates for different classes of stock, and certifications from executive officers - Includes amendments to Title VIII of the Farm Credit Act of 1971 and Amended and Restated By-Laws of the Registrant[438] - Specimen Certificates for Class A, B, C common stock and Series A, B, C, D preferred stock are referenced[439] - Certifications of the principal executive officer and principal financial officer for the Quarterly Report on Form 10-Q are filed with this report[439] Item 6. Exhibits This section lists all exhibits, indicating whether they are incorporated by reference from prior filings or filed concurrently with this report - Exhibits are either incorporated by reference to prior filings or filed with the current report[440] SIGNATURES The report is duly signed on behalf of Federal Agricultural Mortgage Corporation by its President and Chief Executive Officer (Principal Executive Officer) and Vice President – Controller (Principal Financial Officer) as of August 1, 2019 - The report is signed by Bradford T. Nordholm, President and Chief Executive Officer, and Gregory N. Ramsey, Vice President – Controller, on August 1, 2019[443]