Federal Agricultural Mortgage (AGM) - 2019 Q4 - Annual Report

Forward-Looking Statements Overview This section highlights that the report contains forward-looking statements regarding Farmer Mac's future financial results, business prospects, and developments, with actual results potentially differing materially due to various known and unknown factors - Forward-looking statements in this report cover prospects for earnings, business volume growth, net interest income and spread trends, portfolio credit quality, expenses, investment securities, asset impairments, allowance for losses, capital position, and future dividend payments[12] - Key factors that could cause actual results to differ materially include availability of debt and equity financing, legislative/regulatory developments, fluctuations in asset fair value, lender interest in Farmer Mac's products, growth in agricultural/rural utilities indebtedness, economic/geopolitical conditions (e.g., interest rates, trade policies, commodity prices), interest rate risk exposure, financial market developments, changes in executive leadership, and other agricultural/rural utilities lending factors (e.g., weather, real estate values)[13] PART I Item 1. Business Farmer Mac is a federally chartered corporation providing a secondary market for rural American loans, enhancing credit availability and competitive financing, with total outstanding business volume reaching $21.1 billion as of December 31, 2019 - Farmer Mac's secondary market activities include purchasing eligible loans, purchasing general obligation securities guaranteed by Farmer Mac (AgVantage), issuing Farmer Mac Guaranteed Securities, and providing long-term standby purchase commitments (LTSPCs)[17] - Farmer Mac's two main revenue sources are interest income earned on balance sheet assets (net of funding costs and derivatives) and guarantee/commitment fees for outstanding guaranteed securities and LTSPCs[19] General Business Overview Farmer Mac is a stockholder-owned, federally chartered corporation established to provide a secondary market for loans in rural America, aiming to increase credit availability and competitive interest rates for agricultural and rural sectors - Farmer Mac's secondary market activities include purchasing eligible loans, purchasing AgVantage securities (general obligation securities guaranteed by Farmer Mac and secured by eligible loans), issuing Farmer Mac Guaranteed Securities, and providing long-term standby purchase commitments (LTSPCs)[15][17] - Farmer Mac is a government-sponsored enterprise (GSE) and an institution of the Farm Credit System (FCS), but its debts are not guaranteed by the full faith and credit of the United States, nor is it liable for other FCS institutions' debts[18][19] - Primary revenue sources are net interest income on assets and guarantee/commitment fees. Farmer Mac funds asset purchases by issuing debt obligations in public capital markets, with $2.2 billion in discount notes and $16.9 billion in medium-term notes outstanding as of December 31, 2019[19][20] Secondary Market Function Farmer Mac's secondary market enhances lenders' ability to offer competitive financing to rural and agricultural borrowers by increasing liquidity, lending capacity, and providing stable funding - Farmer Mac's secondary market increases lenders' liquidity and lending capacity, provides stable funding, and can lower regulatory capital requirements and reduce concentration exposure for lenders through LTSPCs and guaranteed securities[22] - Farmer Mac engages with current and prospective lenders through individual meetings, road shows, and conferences, and provides wholesale funding for institutional investors in agricultural assets, leveraging technology for business development[23] Farmer Mac's Lines of Business Farmer Mac operates through four lines of business: Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit, with total outstanding business volume across all lines reaching $21.1 billion as of December 31, 2019 - Farmer Mac's four lines of business are Farm & Ranch (mortgage loans on agricultural real estate), USDA Guarantees (USDA-guaranteed agricultural and rural development loans), Rural Utilities (loans for electrification and telecommunications by cooperatives), and Institutional Credit (guarantees and purchases of general obligations of lenders secured by pools of eligible loans)[24][25] Outstanding Business Volume by Line of Business (as of December 31) | Line of Business | 2019 (in thousands) | 2018 (in thousands) | |:-----------------|:--------------------|:--------------------| | On-balance sheet: | | | | Farm & Ranch: Loans | $3,675,640 | $3,071,222 | | Loans held in trusts: Beneficial interests owned by third party investors | 1,600,917 | 1,517,101 | | USDA Guarantees: USDA Securities | 2,199,072 | 2,120,553 | | Farmer Mac Guaranteed USDA Securities | 31,887 | 27,383 | | Rural Utilities: Loans | 1,671,293 | 938,843 | | Institutional Credit: AgVantage securities | 8,432,679 | 8,072,919 | | Total on-balance sheet | $17,611,488 | $15,748,021 | | Off-balance sheet: | | | | Farm & Ranch: LTSPCs | $2,393,071 | $2,509,787 | | Guaranteed Securities | 107,322 | 135,862 | | USDA Guarantees: Farmer Mac Guaranteed USDA Securities | 389,216 | 367,684 | | Rural Utilities: LTSPCs | 609,278 | 653,272 | | Institutional Credit: AgVantage securities | 7,567 | 9,898 | | Revolving floating rate AgVantage facility | — | 300,000 | | Total off-balance sheet | $3,506,454 | $3,976,503 | | Total | $21,117,942 | $19,724,524 | - Farm & Ranch loans must be secured by first liens on agricultural real estate, meet specific borrower and collateral eligibility criteria, and adhere to Farmer Mac's underwriting standards, including a maximum loan-to-value (LTV) ratio of 80%[31][41] - USDA Guarantees involve USDA-guaranteed portions of loans, which are exempt from Farmer Mac's standard credit underwriting and collateral standards due to the USDA guarantee[47] - Rural Utilities loans are for electric or telephone facilities by cooperative lenders to REA-eligible borrowers, requiring Farmer Mac's credit underwriting standards, with the majority of business in electric facilities[51][52] - Institutional Credit involves AgVantage securities, which are general obligations of lenders secured by pools of eligible loans from other lines of business, with Farmer Mac assessing issuer creditworthiness and requiring collateralization (e.g., 103% to 125% for Farm & Ranch-backed AgVantage securities)[58][59][62] Competition While Farmer Mac is the only Congressionally-chartered secondary market for its specific loan types, it faces indirect competition from various financial institutions and government programs - Farmer Mac competes indirectly with commercial and investment banks, insurance companies, other FCS institutions, financial funds, and government programs that purchase, retain, securitize, or finance eligible assets[65] - Farmer Mac's competitive position is affected by the overall supply of capital, competitors' ability to price average, and its ability to obtain competitive funding in debt markets, which is crucial for offering savings to customers[67][68] Capital and Corporate Governance Farmer Mac's charter defines its capital and corporate governance, including three classes of common stock and a 15-person board of directors, with compliance required for minimum, critical, and risk-based capital standards - Farmer Mac has Class A (voting, restricted to non-FCS financial institutions), Class B (voting, restricted to FCS institutions), and Class C (non-voting, freely transferable) common stock, with Class A and B stockholders each electing five directors, and the U.S. President appointing the remaining five[69][70][71][73][74] - Dividend and liquidation rights are the same for all common stock classes, but preferred stockholders have priority, balancing Farmer Mac's mission with stockholder returns[75][76] - Farmer Mac's charter establishes minimum, critical, and risk-based capital standards, requiring compliance with the higher of minimum or risk-based capital, with its core capital at $815.4 million as of December 31, 2019, exceeding the minimum requirement of $618.8 million[80][212] Employees and Property As of December 31, 2019, Farmer Mac employed 103 people, primarily at its Washington, D.C. headquarters, with additional offices in Johnston, Iowa, and Fresno, California, and believes its current office spaces are adequate - Farmer Mac had 103 employees as of December 31, 2019, primarily located at its main office in Washington, D.C., with additional offices in Johnston, Iowa, and Fresno, California[82] - The principal office sublease ends August 30, 2024; the Iowa office lease ends June 30, 2023; and the California office lease ends February 28, 2021