Federal Agricultural Mortgage (AGM) - 2019 Q3 - Quarterly Report

PART I Item 1. Financial Statements Presents Farmer Mac's unaudited consolidated financial statements and detailed notes for Q3 2019, covering balance sheets, operations, comprehensive income, equity, and cash flows Consolidated Balance Sheets Farmer Mac's financial position (Sep 2019 vs Dec 2018) shows significant asset and liability growth, with stable equity Consolidated Balance Sheet Summary | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :------------------------------- | | Total Assets | $21,315,234 | $18,694,328 | | Total Liabilities | $20,564,975 | $17,941,771 | | Total Equity | $750,259 | $752,557 | | Loans, net of allowance | $6,517,220 | $5,515,052 | | Total notes payable | $18,826,622 | $16,243,697 | Consolidated Statements of Operations Net income attributable to common stockholders decreased significantly quarter-over-quarter and year-over-year due to fair value changes in financial derivatives and increased operating expenses Net Income Attributable to Common Stockholders | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :--------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $14,406 | $26,474 | $64,584 | $75,338 | | Basic EPS | $1.34 | $2.48 | $6.04 | $7.07 | | Diluted EPS | $1.33 | $2.46 | $5.99 | $7.01 | Net Interest Income | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $40,112 | $45,058 | $123,765 | $132,220 | Non-interest (loss)/income | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $(3,432) | $4,439 | $12,990 | $11,058 | Consolidated Statements of Comprehensive Income The company reported a comprehensive loss for Q3 2019, primarily due to significant net unrealized losses on available-for-sale securities and cash flow hedges Comprehensive (loss)/income attributable to Farmer Mac | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :--------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $(12,348) | $20,360 | $9,068 | $98,113 | Net unrealized (losses)/gains on available-for-sale securities (before tax) | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $(24,925) | $(13,546) | $(50,272) | $8,678 | Net unrealized (losses)/gains on cash flow hedges (before tax) | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $(6,736) | $3,181 | $(22,373) | $12,038 | Consolidated Statements of Equity Details changes in equity, including net income, other comprehensive losses, preferred and common stock dividends, and stock issuance/redemption Total Equity | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Dec 31, 2018 | $752,557 | | Sep 30, 2019 | $750,259 | - Issuance of Series D preferred stock: $96,659 thousand (Q2 2019)[21] - Redemption of Series B preferred stock: $(73,044) thousand (Q2 2019)[21] Accumulated Other Comprehensive Income | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Dec 31, 2018 | $24,956 | | Sep 30, 2019 | $(43,024) | Retained Earnings | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Dec 31, 2018 | $393,351 | | Sep 30, 2019 | $435,479 | Consolidated Statements of Cash Flows Net cash used in operating and investing activities increased significantly, while net cash provided by financing activities saw a substantial increase, leading to an overall net increase in cash and cash equivalents Net cash (used in)/provided by operating activities | Period | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | | Amount (in thousands) | $(138,076) | $252,225 | Net cash used in investing activities | Period | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | | Amount (in thousands) | $(2,062,969) | $(233,520) | Net cash provided by financing activities | Period | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | | Amount (in thousands) | $2,363,730 | $115,425 | Cash and cash equivalents at end of period | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Sep 30, 2019 | $587,941 | | Sep 30, 2018 | $436,152 | Notes to Consolidated Financial Statements Provides detailed disclosures for financial statements, including accounting policies, financial instrument breakdowns, and segment reporting 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines Farmer Mac's accounting principles, including consolidation, EPS, comprehensive income, and recently adopted/issued accounting guidance Principles of Consolidation Farmer Mac consolidates subsidiaries and VIEs where it is the primary beneficiary, with tables detailing consolidated and unconsolidated VIEs by line of business Consolidated VIEs (Sep 30, 2019) | Item | Farm & Ranch (in thousands) | USDA Guarantees (in thousands) | Rural Utilities (in thousands) | Institutional Credit (in thousands) | Corporate (in thousands) | Total (in thousands) | | :-------------------------------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | :---------------------------------- | :----------------------- | :------------------- | | Loans held for investment in consolidated trusts | $1,526,718 | — | — | — | — | $1,526,718 | | Debt securities of consolidated trusts held by third parties | $1,532,401 | — | — | — | — | $1,532,401 | Unconsolidated VIEs (Sep 30, 2019) - Maximum exposure to loss | Item | Farm & Ranch (in thousands) | USDA Guarantees (in thousands) | Rural Utilities (in thousands) | Institutional Credit (in thousands) | Corporate (in thousands) | Total (in thousands) | | :-------------------------------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | :---------------------------------- | :----------------------- | :------------------- | | Farmer Mac Guaranteed Securities | — | $32,645 | — | — | — | $32,645 | | Investment securities | — | — | — | — | $1,114,220 | $1,114,220 | | Off-Balance Sheet Farmer Mac Guaranteed Securities | $115,306 | $404,052 | — | — | — | $519,358 | (a) Earnings Per Common Share Details the calculation of basic and diluted earnings per common share (EPS) for the three and nine months ended September 30, 2019 and 2018 Basic and Diluted EPS | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Basic EPS | $1.34 | $2.48 | $6.04 | $7.07 | | Diluted EPS | $1.33 | $2.46 | $5.99 | $7.01 | (b) Comprehensive Income Explains comprehensive income as all changes in stockholders' equity not from investments by or distributions to stockholders, comprising net income and OCI Net comprehensive (loss)/income (3 months ended Sep 30) | Component | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | | Available-for-Sale Securities | $(19,691) | $(10,702) | | Held-to-Maturity Securities | $(5,169) | $(1,220) | | Cash Flow Hedges | $(5,321) | $2,513 | | Total | $(30,181) | $(9,409) | Net comprehensive (loss)/income (9 months ended Sep 30) | Component | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | | Available-for-Sale Securities | $(39,715) | $6,856 | | Held-to-Maturity Securities | $(10,591) | $(3,477) | | Cash Flow Hedges | $(17,674) | $9,510 | | Total | $(67,980) | $12,889 | (c) New Accounting Standards Discusses recently adopted and not-yet-adopted accounting guidance, noting no material effect from recent adoptions and ongoing evaluation for future standards - ASU 2016-02 (Leases) adopted Jan 1, 2019, no material effect[53] - ASU 2018-15 (Cloud Computing) adopted July 1, 2019, no material effect[53] - ASU 2016-13 (Credit Losses) effective Jan 1, 2020, not expected to have a material effect on financial condition, results of operations, or cash flows[54] - ASU 2017-08 (Premium Amortization) effective Jan 1, 2020, not expected to have a material effect[54] - ASU 2018-13 (Fair Value Measurement) effective Jan 1, 2020, not expected to have a material effect[55] (d) Reclassifications States that certain prior period information was reclassified to conform to the current period's presentation - Prior period information was reclassified to conform to current period presentation[57] 2. INVESTMENT SECURITIES Total investment securities increased to $3.16 billion as of September 30, 2019, with unrealized losses deemed recoverable Total Investment Securities | Date | Amortized Cost (in thousands) | Fair Value (in thousands) | | :---------------------- | :---------------------------- | :------------------------ | | Sep 30, 2019 | $3,156,378 | $3,157,163 | | Dec 31, 2018 | $2,267,952 | $2,263,446 | Unrealized Losses on Available-for-Sale Securities (Sep 30, 2019) | Category | Fair Value (in thousands) | Loss (in thousands) | | :-------------------------------------------------------------------- | :------------------------ | :------------------ | | Floating rate auction-rate certificates backed by Government guaranteed student loans | $19,208 | $(492) | | Floating rate asset-backed securities | $24,569 | $(175) | | Floating rate Government/GSE guaranteed mortgage-backed securities | $1,622,238 | $(3,500) | | Fixed rate U.S. Treasuries | $1,445,265 | $(82) | | Total | $3,111,632 | $(4,249) | - Unrealized losses are considered recoverable, and no other-than-temporary impairment was recognized[65][67] 3. FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES Details Farmer Mac's on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities, with unrealized losses primarily due to interest rate changes but not considered impaired Total Held-to-Maturity Securities (Sep 30, 2019) | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | | :-------------------------------------------------- | :---------------------------- | :------------------------ | | AgVantage | $1,419,800 | $1,435,159 | | Farmer Mac Guaranteed USDA Securities | $32,816 | $33,385 | | USDA Securities | $2,164,064 | $2,183,074 | | Total | $3,616,680 | $3,651,618 | Available-for-Sale AgVantage Securities (Sep 30, 2019) | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | | :---------------------- | :---------------------------- | :------------------------ | | AgVantage | $7,008,885 | $7,182,541 | - Unrealized losses are primarily due to interest rate changes and are not considered other-than-temporarily impaired[75][77] - Credit exposure related to USDA Guarantees is covered by the full faith and credit of the United States[76] 4. FINANCIAL DERIVATIVES Farmer Mac uses financial derivatives for risk protection, with a total notional amount of $13.8 billion and a net asset fair value of $5.6 million as of September 30, 2019 Total Financial Derivatives (Sep 30, 2019) | Item | Notional Amount (in thousands) | Fair Value Asset (in thousands) | Fair Value Liability (in thousands) | | :-------------------------------------------------- | :----------------------------- | :------------------------------ | :---------------------------------- | | Fair value hedges (Interest rate swaps) | $6,801,188 | $3,605 | $(10,124) | | Cash flow hedges (Interest rate swaps) | $428,000 | $1,338 | $(2,989) | | No hedge designation (Interest rate swaps, Basis swaps, Treasury futures) | $6,560,265 | $646 | $(17,459) | | Credit valuation adjustment | — | — | $55 | | Total | $13,799,053 | $5,589 | $(30,542) | - Expected reclassification from AOCI to earnings: $0.8 million after tax over the next twelve months[89] Net income/(expense) recognized in consolidated statements of operations related to derivatives (3 months ended Sep 30, 2019) | Item | Net Interest Income (in thousands) | Non-Interest Income (in thousands) | Total (in thousands) | | :-------------------------------------------------- | :--------------------------------- | :--------------------------------- | :------------------- | | Income/(expense) related to interest settlements on fair value hedging relationships | $25,236 | — | $25,236 | | (Losses)/gains on fair value hedging relationships | $(4,490) | — | $(4,490) | | Expense related to interest settlements on cash flow hedging relationships | $(2,410) | — | $(2,410) | | Losses on financial derivatives not designated in hedge relationships | — | $(7,360) | $(7,360) | 5. LOANS AND ALLOWANCE FOR LOSSES Total loans, net of allowance, increased to $6.52 billion as of September 30, 2019, with the allowance for loan losses increasing due to decreased portfolio credit quality Total Loans, net of allowance | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Sep 30, 2019 | $6,517,220 | | Dec 31, 2018 | $5,515,052 | Allowance for Loan Losses | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Beginning Balance | $7,264 | $6,789 | $7,017 | $6,796 | | Provision for/(release of) losses | $760 | $99 | $1,074 | $92 | | Ending Balance | $8,024 | $6,871 | $8,024 | $6,871 | - Provision for loan losses in Q3 2019 was due to decreased portfolio credit quality, mainly from idiosyncratic factors of a few large loans[127] Total Impaired Loans (Recorded Investment) | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Sep 30, 2019 | $221,412 | | Dec 31, 2018 | $155,312 | - Recorded investment of loans on nonaccrual status (Sep 30, 2019): $92,287 thousand[140] 90-Day Delinquencies (Farm & Ranch) | Date | Amount (in thousands) | Percentage of Portfolio | | :---------------------- | :---------------------- | :------------------------ | | Sep 30, 2019 | $59,691 | 0.81% | | Dec 31, 2018 | $26,881 | 0.37% | 6. GUARANTEES AND LONG-TERM STANDBY PURCHASE COMMITMENTS Details Farmer Mac's off-balance sheet obligations, with maximum potential undiscounted future payments of $828.6 million for Farmer Mac Guaranteed Securities and $3.1 billion for LTSPCs as of September 30, 2019 Maximum principal amount of potential undiscounted future payments for off-balance sheet Farmer Mac Guaranteed Securities | Date | Amount (in thousands) | | :---------------------- | :---------------------- | | Sep 30, 2019 | $828,583 | | Dec 31, 2018 | $813,444 | - Maximum principal amount of potential undiscounted future payments for LTSPCs: approximately $3.1 billion as of September 30, 2019, compared to approximately $3.2 billion as of December 31, 2018[161] - Guarantee and commitment obligation liability: $37.4 million (Sep 30, 2019) and $38.7 million (Dec 31, 2018)[11] 7. EQUITY Discusses changes in Farmer Mac's equity, including preferred and common stock activities and capital requirements, with core capital $184.9 million above the minimum as of September 30, 2019 - Series D Preferred Stock: Issued 4.0 million shares at $25 par value, totaling $100.0 million[163] - Series B Preferred Stock: Redeemed all $75.0 million outstanding shares, resulting in a $2.0 million loss on retirement[164] - Common Stock Dividends: Increased to $0.70 per share (2019) from $0.58 per share (2018)[165] - Core Capital Level: $793.3 million (Sep 30, 2019), $184.9 million above minimum requirement[169] - Tier 1 Capital Ratio: 13.2% (Sep 30, 2019), decreased from 13.4% (Dec 31, 2018) due to growth in risk-weighted assets[412] 8. FAIR VALUE DISCLOSURES Discloses assets and liabilities measured at fair value, with $7.2 billion (34% of total assets) valued using significant unobservable inputs (Level 3) as of September 30, 2019 Financial instruments measured as Level 3 | Date | Amount (in thousands) | % of Total Assets | % of Financial Instruments at Fair Value | | :---------------------- | :---------------------- | :---------------- | :--------------------------------------- | | Sep 30, 2019 | $7,210,692 | 34% | 70% | | Dec 31, 2018 | $6,003,211 | 32% | 73% | Total Assets at Fair Value (Sep 30, 2019) | Item | Amount (in thousands) | | :---------------------- | :---------------------- | | Total Assets at fair value | $10,308,705 | Total Liabilities at Fair Value (Sep 30, 2019) | Item | Amount (in thousands) | | :---------------------- | :---------------------- | | Total Liabilities at fair value | $30,542 | Key Level 3 Assets (Sep 30, 2019) | Asset | Fair Value (in thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | | :-------------------------------------------------------------------- | :------------------------ | :------------------ | :----------------- | :----------------------- | | Floating rate auction-rate certificates backed by Government guaranteed student loans | $19,208 | Indicative bids | Range of broker quotes | 97.5% - 97.5% (97.5%) | | AgVantage | $7,182,541 | Discounted cash flow | Discount rate | 2.2% - 3.8% (2.6%) | | USDA Securities | $8,943 | Discounted cash flow | Discount rate | 2.4% - 3.3% (3.3%) | | | | | CPR | 11% - 21% (20%) | 9. BUSINESS SEGMENT REPORTING Presents core earnings and reconciliation to consolidated net income by operating segment, with Farm & Ranch and Institutional Credit as largest contributors for the nine months ended September 30, 2019 Segment Core Earnings (9 months ended Sep 30, 2019) | Segment | Amount (in thousands) | | :---------------------- | :---------------------- | | Farm & Ranch | $30,868 | | USDA Guarantees | $7,030 | | Rural Utilities | $8,087 | | Institutional Credit | $35,820 | | Corporate | $(12,547) | | Reconciling Adjustments | $(4,674) | | Total | $64,584 | - Total on- and off-balance sheet program assets at principal balance (Sep 30, 2019): $20,932,359 thousand[204] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on Farmer Mac's financial performance, condition, and future outlook, discussing net income, core earnings, net interest income, business volume, capital, credit quality, and risk management strategies, while highlighting non-GAAP measures for economic performance understanding Forward-Looking Statements Identifies forward-looking statements covering earnings, business volume, credit quality, expenses, investments, capital, and dividends, cautioning that actual results may differ due to various factors - Forward-looking statements cover: earnings, business volume growth, net interest income and net effective spread trends, portfolio credit quality, delinquencies, substandard assets, credit losses, provisions for losses, expenses, investment securities, asset impairments, allowance for losses, capital position, and future dividend payments[209] - Factors that could cause actual results to differ include: availability of debt/equity financing, legislative/regulatory developments, fair value fluctuations, secondary market development, agricultural/rural utilities indebtedness growth, economic conditions (interest rates, trade policies, export demand), basis risk, financial market developments, executive leadership changes, and other negative factors (commodity prices, weather, real estate values)[209][211] Overview Provides a high-level summary of Farmer Mac's Q3 2019 financial performance, noting decreased net income due to fair value changes and increased operating expenses, while non-GAAP core earnings remained stable or increased, driven by net effective spread - Net Income Attributable to Common Stockholders (Q3 2019): $14.4 million, down from $28.3 million (Q2 2019) and $26.5 million (Q3 2018)[215] - Sequential Decrease in Net Income: Primarily due to $12.9 million after-tax decrease in fair value of undesignated financial derivatives, $2.3 million after-tax decrease in net interest income, and $1.1 million after-tax increase in operating expenses[215] - Year-over-Year Decrease in Net Income: Primarily due to $6.3 million after-tax decrease in fair value of undesignated financial derivatives, $3.9 million after-tax decrease in net interest income, $1.4 million after-tax increase in operating expenses, and $0.5 million after-tax provision for total loan losses[216] - Non-GAAP Core Earnings (Q3 2019): $23.4 million, compared to $23.6 million (Q2 2019) and $22.4 million (Q3 2018)[216] - Net Effective Spread (Q3 2019): $42.5 million (0.90%), up from $41.4 million (Q2 2019) and $39.1 million (Q3 2018)[221] - Outstanding Business Volume (Sep 30, 2019): $20.9 billion, a net increase of $185.6 million from June 30, 2019, and $1.2 billion from Dec 31, 2018[225] - Core Capital Level (Sep 30, 2019): $793.3 million, $184.9 million above minimum[226] - Allowance for Losses (Sep 30, 2019): $9.8 million (0.13% of Farm & Ranch portfolio), up from $9.1 million (Q2 2019)[227] - Substandard Assets (Sep 30, 2019): $290.5 million (3.9% of Farm & Ranch portfolio), up from $232.7 million (Dec 31, 2018)[228] - 90-Day Delinquencies (Sep 30, 2019): $59.7 million (0.81% of Farm & Ranch portfolio), up from $26.9 million (Dec 31, 2018)[229] Use of Non-GAAP Measures Explains Farmer Mac's use of non-GAAP financial measures to provide a clearer understanding of its economic performance, transaction economics, and business trends - Non-GAAP measures used: "core earnings," "core earnings per share," and "net effective spread"[232] - Core earnings and core EPS exclude: - Effects of fair value fluctuations (not expected to have cumulative net impact if held to maturity)[234] - Specified infrequent or unusual transactions not indicative of future operating results[235] - Net effective spread differs from net interest income by: - Excluding amortization of premiums/discounts on assets consolidated at fair value[236] - Excluding interest income/expense related to consolidated trusts (reclassified as guarantee/commitment fees)[239] - Excluding fair value changes of financial derivatives and corresponding hedged items[240] - Including accrual of income/expense on undesignated financial derivatives[241] - Including net effects of terminations or net settlements on financial derivatives[241] Results of Operations Detailed analysis of Farmer Mac's financial results, showing decreased net income but increased core earnings, with improved net effective spread and business volume growth Net Income Attributable to Common Stockholders | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :--------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $14,406 | $26,474 | $64,584 | $75,338 | | Diluted EPS | $1.33 | $2.46 | $5.99 | $7.01 | Non-GAAP Core Earnings | Period | Sep 30, 2019 (3 months) | Sep 30, 2018 (3 months) | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :--------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Amount (in thousands) | $23,395 | $22,381 | $69,258 | $63,588 | | Diluted EPS | $2.17 | $2.08 | $6.43 | $5.92 | - Net Interest Income (9 months ended Sep 30): Decreased by $8.5 million YoY, primarily due to $14.4 million decrease in net fair value changes from fair value hedge accounting relationships and $4.7 million increase in funding and liquidity costs, partially offset by $8.0 million increase in interest income from new business volume[263] - Net Effective Spread (9 months ended Sep 30): Increased by $10.3 million YoY, primarily due to $9.4 million increase from new business volume[268] - Provision for Allowance for Loan Losses (9 months ended Sep 30, 2019): $1.1 million, due to decreased credit quality[274] (Losses)/gains on financial derivatives | Period | Sep 30, 2019 (9 months) | Sep 30, 2018 (9 months) | | :---------------------- | :---------------------- | | Amount (in thousands) | $1,193 | $(688) | - Compensation and Employee Benefits (9 months ended Sep 30, 2019): $22.0 million, up from $20.4 million in 2018, due to increased headcount and health insurance costs[281] - General and Administrative Expenses (9 months ended Sep 30, 2019): $14.5 million, up from $13.9 million in 2018, due to growth and strategic initiatives[281] - Outstanding Business Volume (Sep 30, 2019): $20.9 billion, a net increase of $185.6 million from June 30, 2019, including a $102.4 million net increase in Farm & Ranch, $76.9 million in Rural Utilities, and $46.4 million in USDA Guarantees, partially offset by a $40.1 million net decrease in Institutional Credit[284][286][287] Outlook Farmer Mac anticipates continued growth, but expects increased operating expenses and challenges from global trade policies and weather, moderated by government support and portfolio diversity - Growth Opportunities: Driven by lenders managing equity capital, new counterparties in rural utilities, expanding customer base, industry consolidation, and increased financing requirements for agricultural producers[302] - Expense Outlook: Annual operating expenses expected to increase by approximately 8% to 9% in 2019 due to investments in human capital, technology, and strategic initiatives[304] - Agricultural Industry Outlook: USDA forecasts net cash income growth of 7.3% in 2019. Farmland values held steady or increased in most regions[308] - Trade Policies: Reciprocal tariffs by China and the U.S. have affected agricultural exports, but government aid (2018 MFP: $8.6 billion, 2019 MFP: up to $14.5 billion) and recent positive trade developments (Canada/Mexico tariff removal, U.S.-Japan agreement, WTO ruling against EU) are mitigating impacts[309][310][313] - Weather Conditions (H1 2019): Difficult planting conditions for corn and soybeans in the Midwest, but federal crop insurance programs are expected to offset short-term profitability pressure[314] - Credit Quality: 90-day delinquencies and credit losses remain low, but substandard assets have increased since 2015. Portfolio diversity and collateralization are expected to moderate losses[315] - 2018 Farm Bill Impact: - Acreage exception to loan limit increased from 1,000 to 2,000 acres (effective June 18, 2020), providing unconstrained access to Farmer Mac's secondary market for more farming operations[318] - USDA guarantee limit increased from $3.026 billion to $7.0 billion annually through Sep 2023, and individual loan size limit increased from $1.399 million to $1.75 million, supporting growth in USDA Guarantees[319] Balance Sheet Review Total assets increased to $21.3 billion, driven by business volume and liquidity investments, while total liabilities also rose to $20.6 billion to support asset growth, and total equity slightly decreased to $750.3 million - Total Assets (Sep 30, 2019): $21.3 billion, up from $18.7 billion (Dec 31, 2018), driven by business volume growth and increased liquidity investment portfolio[324] - Cash and Cash Equivalents (Sep 30, 2019): $0.6 billion, up from $0.4 billion (Dec 31, 2018)[324] - Investment Securities (Sep 30, 2019): $3.2 billion, up from $2.3 billion (Dec 31, 2018)[324] - Farmer Mac Guaranteed Securities (Sep 30, 2019): $8.6 billion, up from $8.1 billion (Dec 31, 2018)[325] - Loans, net of allowance (Sep 30, 2019): $6.5 billion, up from $5.5 billion (Dec 31, 2018)[325] - USDA Securities (Sep 30, 2019): $2.2 billion, stable from $2.2 billion (Dec 31, 2018)[325] - Total Liabilities (Sep 30, 2019): $20.6 billion, up from $17.9 billion (Dec 31, 2018), primarily due to increased notes payable[327] - Total Equity (Sep 30, 2019): $750.3 million, slightly down from $752.6 million (Dec 31, 2018), due to preferred stock redemption and OCI losses, partially offset by Series D issuance and net income[327] Off-Balance Sheet Arrangements Farmer Mac uses off-balance sheet arrangements, including Farmer Mac Guaranteed Securities and LTSPCs, to enhance lender liquidity and lending capacity, with consolidation occurring if Farmer Mac is the primary beneficiary of securitization trusts - Off-balance sheet arrangements: Farmer Mac Guaranteed Securities and LTSPCs[328] - Purpose: Increase lender liquidity or lending capacity while retaining cash flow benefits of loans[328] - Consolidation: Trust assets and liabilities are included on Farmer Mac's balance sheet if Farmer Mac is the primary beneficiary[328] Risk Management Details Farmer Mac's comprehensive approach to managing credit risk across its loan and guarantee portfolios, institutional relationships, and investments, as well as interest rate risk Credit Risk – Loans and Guarantees Farmer Mac manages credit risk for Farm & Ranch and Rural Utilities loans through underwriting and collateral standards, with low credit losses in Rural Utilities and USDA Guarantees, despite increased 90-day delinquencies and substandard assets in Farm & Ranch - Direct credit exposure: Farm & Ranch loans ($7.4 billion), Rural Utilities loans ($2.2 billion)[329][330] - Rural Utilities: No delinquencies or credit losses since 2008[330] - USDA Guarantees: Credit exposure covered by full faith and credit of the United States; no credit losses[333] - Weighted-average original loan-to-value ratio (Farm & Ranch): 51% (Sep 30, 2019)[334] - Weighted-average current loan-to-value ratio (Farm & Ranch): 44% (Sep 30, 2019)[335] 90-Day Delinquencies (Farm & Ranch) | Date | Amount (in thousands) | Percentage of Farm & Ranch Portfolio | | :---------------------- | :---------------------- | :----------------------------------- | | Sep 30, 2019 | $59,691 | 0.81% | | Dec 31, 2018 | $26,881 | 0.37% | | Sep 30, 2018 | $37,545 | 0.53% | Substandard Assets (Farm & Ranch) | Date | Amount (in thousands) | Percentage of Farm & Ranch Portfolio | | :---------------------- | :---------------------- | :----------------------------------- | | Sep 30, 2019 | $290,510 | 3.9% | | Dec 31, 2018 | $232,700 (approx.) | 3.2% | - Cumulative Net Credit Losses (Farm & Ranch, as of Sep 30, 2019): $33,339 thousand, with a cumulative loss rate of 0.13%[353] Credit Risk – Institutional Farmer Mac manages institutional credit risk from AgVantage issuers, approved lenders/servicers, and interest rate swap counterparties through creditworthiness standards and collateralization, with no credit losses on AgVantage securities - Institutional credit risk sources: AgVantage issuers, approved lenders/servicers, interest rate swap counterparties[361] - AgVantage securities: No credit losses experienced, not expected in future[333] - Required collateralization for AgVantage: Ranges from 100% to 125% depending on counterparty[366] - Swap counterparty risk: Managed through collateralization provisions (full collateralization for cleared and post-March 2017 non-cleared swaps) and multiple counterparties[367] - Uncollateralized net exposures to counterparties (Sep 30, 2019): $257 thousand to two counterparties[397] Credit Risk – Other Investments Farmer Mac manages credit risk in its $0.6 billion cash and cash equivalents and $3.2 billion investment securities portfolio through internal policies and FCA regulations, requiring high creditworthiness standards and establishing concentration limits - Investment portfolio: $0.6 billion cash/cash equivalents, $3.2 billion investment securities (Sep 30, 2019)[368] - Creditworthiness standards: - At a minimum, at least one obligor must have a very strong capacity to meet financial commitments for the life of the investment, even under severely adverse or stressful conditions, and generally present a very low risk of default[369] - If the obligor is located outside of the United States, the investment must also be fully guaranteed by a U.S. government agency[369] - Concentration limits: - Single entity/issuer/obligor: 10% of regulatory capital ($80.3 million as of Sep 30, 2019), internal policy limits to 5% ($40.2 million)[370] - Senior non-convertible debt of any one GSE: Internal policy restricts to 100% of regulatory capital[370] Interest Rate Risk Farmer Mac manages interest rate risk from cash flow timing differences and loan prepayments by funding assets with liabilities of similar duration and using financial derivatives, regularly stress testing its portfolio - Primary strategy: Fund asset purchases with liabilities having similar duration and cash flow characteristics[375] - Tools: Issuing discount notes, callable/non-callable medium-term notes, and financial derivatives[375] - Interest Rate Risk Metrics: MVE sensitivity, projected NES, and duration gap analysis[380] - Effective Duration Gap (Sep 30, 2019): Negative 2.2 months, widened from negative 0.8 months (Dec 31, 2018) due to decreasing interest rates[391] MVE Sensitivity (Sep 30, 2019) | Interest Rate Scenario | Percentage Change in MVE | | :--------------------- | :----------------------- | | +100 basis points | 3.0% | | -100 basis points | (8.6)% | NES Sensitivity (Sep 30, 2019) | Interest Rate Scenario | Percentage Change in NES | | :--------------------- | :----------------------- | | +100 basis points | 2.8% | | -100 basis points | (0.5)% | - Total Notional Amount of Interest Rate Swaps (Sep 30, 2019): $13.8 billion[393] - LIBOR Discontinuation Risk: $5.2 billion floating rate assets, $4.2 billion floating rate debt, and $13.6 billion notional amount of interest rate swaps reset based on LIBOR. Evaluating transition to alternative benchmarks like SOFR[404] Liquidity and Capital Resources Farmer Mac maintains strong liquidity from debt issuances, fees, and loan repayments, complying with statutory capital requirements with a core capital level significantly above the minimum and a Tier 1 capital ratio of 13.2% as of September 30, 2019 - Primary sources of funds: Debt issuances, guarantee and commitment fees, net effective spread, loan repayments, and maturities of AgVantage securities[405] - Outstanding Debt (Sep 30, 2019): $2.2 billion discount notes, $7.7 billion medium-term notes (within one year), and $8.9 billion medium-term notes (after one year. Total $18.8 billion outstanding against $20.0 billion authorized[407] - Liquidity: Maintained an average of 186 days of liquidity in Q3 2019, with 199 days as of Sep 30, 2019 (minimum 90 days required)[408] Cash and Investment Securities for Liquidity (Sep 30, 2019) | Category | Amount (in thousands) | | :--------------------------------- | :---------------------- | | Cash and cash equivalents | $587,941 | | Investment securities | $3,156,664 | | Total | $3,744,605 | - Capital Requirements: In compliance with statutory requirements, classified as "level I" (highest compliance)[411] - Tier 1 Capital Ratio (Sep 30, 2019): 13.2%[412] Regulatory Matters Discusses regulatory developments from the 2018 Farm Bill, including FCA's conclusion on Farmer Mac's lower risk profile and appropriate capital approach, and the feasible increase in acreage exception to loan limits - FCA Study on Risk Profile: Concluded Farmer Mac has a "significantly lower risk profile from a total portfolio perspective" compared to the Farm Credit System[416] - FCA Study on Capital Requirements: Concluded Farmer Mac's Basel approach is "appropriate" given its business model and product mix[416] - Acreage Exception Increase: FCA deemed increasing the acreage exception from 1,000 to 2,000 acres feasible, with no safety and soundness concerns. Effective June 18, 2020[416] - FCA Recommendation: Replace the acreage rule with exposure concentration limits[418] Other Matters Covers common and preferred stock dividends, noting an increase in common stock dividends to $0.70 per share in 2019 and preferred stock dividends paid on Series A, C, and D - Common Stock Dividends: $0.70 per share (2019), up from $0.58 per share (2018)[419] - Preferred Stock Dividends (Q3 2019): Paid on Series A ($0.3672/share), Series C ($0.3750/share), and Series D ($0.35625/share)[420] - Series B Preferred Stock: Redeemed in Q2 2019[420] Supplemental Information Provides quarterly and annual data on new business volume, repayments, outstanding business volume by line of business, and net effective spread by segment, showing overall outstanding business volume growth New Business Volume (Q3 2019) | Item | Amount (in thousands) | | :-------------------------------------------------- | :---------------------- | | Loans | $309,805 | | LTSPCs | $125,022 | | USDA Securities | $113,664 | | Rural Utilities Loans | $117,279 | | AgVantage securities | $402,611 | | Total | $1,068,381 | Total Repayments (Q3 2019) | Item | Amount (in thousands) | | :--------------------------------- | :---------------------- | | Scheduled | $633,005 | | Unscheduled | $249,752 | | Total | $882,757 | Outstanding Business Volume (Sep 30, 2019) | Item | Amount (in thousands) | | :--------------------------------- | :---------------------- | | Farm & Ranch | $7,393,728 | | USDA Guarantees | $2,567,763 | | Rural Utilities | $2,232,602 | | Institutional Credit | $8,738,266 | | Total | $20,932,359 | On-Balance Sheet Outstanding Business Volume (Sep 30, 2019) | Item | Amount (in thousands) | | :--------------------------------- | :---------------------- | | Fixed Rate | $9,642,802 | | 5- to 10-Year ARMs & Resets | $2,850,000 | | 1-Month to 3-Year ARMs | $4,549,689 | | Total Held in Portfolio | $17,042,491 | Net Effective Spread by Segment (Q3 2019) | Segment | Dollars (in thousands) | Yield | | :---------------------- | :--------------------- | :------ | | Farm & Ranch | $13,181 | 1.66% | | USDA Guarantees | $4,314 | 0.79% | | Rural Utilities | $4,502 | 1.16% | | Institutional Credit | $17,807 | 0.84% | | Corporate | $2,657 | 0.30% | | Total | $42,461 | 0.90% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Farmer Mac is exposed to market risk from interest rate changes, which it manages through financial transactions, including derivatives, and by monitoring its exposure - Market Risk Exposure: Primarily from changes in interest rates[437] - Management Strategy: Financial transactions (including derivatives), monitoring and measuring exposure[437] Item 4. Controls and Procedures Management evaluated the effectiveness of Farmer Mac's disclosure controls and procedures as of September 30, 2019, concluding they were effective, with no material changes in internal control over financial reporting during the quarter - Disclosure Controls and Procedures: Evaluated as effective as of September 30, 2019[438][439] - Internal Control Over Financial Reporting: No material changes during Q3 2019[439] PART II Item 1. Legal Proceedings States that there are no legal proceedings to report - Legal Proceedings: None[440] Item 1A. Risk Factors States that there were 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 - Risk Factors: No material changes from the 2018 Annual Report on Form 10-K[440] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details unregistered sales of Class C non-voting common stock during Q3 2019, issued to directors who elected to receive stock in lieu of cash retainers - Exemption: Farmer Mac's securities are exempt from registration under Section 3(a)(2) of the Securities Act of 1933[442] - Class C Non-Voting Common Stock: 261 shares issued to directors in Q3 2019 in lieu of cash retainers, based on a price of $72.66 per share[442] Item 3. Defaults Upon Senior Securities States that there were no defaults upon senior securities - Defaults Upon Senior Securities: None[443] Item 4. Mine Safety Disclosures States that this item is not applicable - Mine Safety Disclosures: Not applicable[443] Item 5. Other Information States that there is no other information to report under this item - Other Information: None[443] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including charter documents, by-laws, specimen certificates for various stock classes, and certifications required by the Sarbanes-Oxley Act - Exhibits include: Charter documents, by-laws, specimen certificates for Class A, B, C common stock and Series A, B, C, D preferred stock, Loan Participation Servicing Agreement, and certifications (31.1, 31.2, 32)[445] Signatures Signatures Contains the signatures of the President and Chief Executive Officer and the Vice President – Controller of Federal Agricultural Mortgage Corporation, certifying the filing of the report on November 6, 2019 - Signatories: Bradford T. Nordholm (President and CEO), Gregory N. Ramsey (VP – Controller)[448] - Filing Date: November 6, 2019[448]