Federal Agricultural Mortgage (AGM) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Farmer Mac's Q3 2020 unaudited consolidated financial statements show growth in assets, liabilities, and common stockholder net income Consolidated Balance Sheets Total assets increased to $24.0 billion and liabilities to $23.1 billion by Q3 2020, with equity growing to $930.3 million Consolidated Balance Sheet Summary (in thousands) | Account | September 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Assets | $23,998,837 | $21,709,374 | | Total Investment Securities | $3,577,222 | $3,004,875 | | Total loans, net of allowance | $8,105,647 | $6,981,440 | | Total Liabilities | $23,068,492 | $20,910,098 | | Notes payable | $21,589,285 | $19,098,648 | | Total Equity | $930,345 | $799,276 | Consolidated Statements of Operations Q3 2020 net interest income increased to $44.7 million, with common stockholder net income rising to $18.7 million or $1.73 per diluted share Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Nine Months 2020 (in thousands) | Nine Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $44,661 | $40,112 | $134,321 | $123,765 | | Net Income | $25,492 | $17,833 | $73,948 | $77,048 | | Net Income Attributable to Common Stockholders | $18,659 | $14,406 | $59,745 | $64,584 | | Diluted EPS | $1.73 | $1.33 | $5.54 | $5.99 | Consolidated Statements of Comprehensive Income Q3 2020 comprehensive income reached $63.2 million, a positive swing from a $12.3 million loss in Q3 2019, driven by unrealized gains Comprehensive Income Summary (in thousands) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Nine Months 2020 (in thousands) | Nine Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $25,492 | $17,833 | $73,948 | $77,048 | | Other Comprehensive Income/(Loss), net of tax | $37,660 | $(30,181) | $(37,676) | $(67,980) | | Comprehensive Income/(Loss) | $63,152 | $(12,348) | $36,272 | $9,068 | Consolidated Statements of Equity Total equity grew to $930.3 million by Q3 2020, primarily from $73.9 million net income and preferred stock issuances, partially offset by dividends - Key equity changes during the first nine months of 2020 include the issuance of Series E ($77.0 million) and Series F ($116.2 million) preferred stock, and the redemption of Series A ($58.3 million) preferred stock[21] - Common stock dividends of $0.80 per share were paid in each of the first three quarters of 2020, totaling approximately $25.7 million[21] Consolidated Statements of Cash Flows Net cash from financing activities was $2.1 billion for the nine months ended Q3 2020, offsetting $1.6 billion used in investing, leading to a $306.2 million increase in cash Cash Flow Summary (Nine Months Ended, in thousands) | Activity | September 30, 2020 (in thousands) | September 30, 2019 (in thousands) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(225,408) | $(138,076) | | Net Cash Used in Investing Activities | $(1,550,837) | $(2,062,969) | | Net Cash Provided by Financing Activities | $2,082,456 | $2,363,730 | | Net Change in Cash and Cash Equivalents | $306,211 | $162,685 | Notes to Consolidated Financial Statements Detailed explanations of accounting policies and financial data are provided, covering CECL adoption, investment securities, loans, derivatives, and equity changes Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, COVID-19 impacts, non-GAAP measures, business volume, credit quality, and capital management, including outlook and risks Overview Farmer Mac provided $1.3 billion liquidity in Q3 2020, executing $374.5 million in COVID-19 deferments, with core earnings rising to $27.7 million - As of September 30, 2020, the company had executed COVID-19 payment deferments for $374.5 million of unpaid principal balance across its portfolios to provide relief to borrowers[216] Core Earnings vs. Net Income (in thousands) | Metric | Q3 2020 (in thousands) | Q2 2020 (in thousands) | Q3 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Net income attributable to common stockholders | $18,659 | $31,687 | $14,406 | | Core earnings | $27,691 | $26,347 | $23,395 | Net Effective Spread (in thousands) | Metric | Q3 2020 (in thousands) | Q2 2020 (in thousands) | Q3 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Net effective spread | $51,802 | $46,469 | $42,461 | | Net effective spread % | 0.96% | 0.89% | 0.90% | Results of Operations Q3 2020 core earnings increased to $27.7 million from a $9.3 million rise in net effective spread, with business volume decreasing by $52.8 million Reconciliation of Net Income to Core Earnings (Q3 2020, in thousands) | Item | Amount (in thousands) | | :--- | :--- | | Net income attributable to common stockholders | $18,659 | | Less Reconciling Items: | | | Losses on undesignated financial derivatives | $(4,149) | | Losses on hedging activities | $(5,245) | | Issuance costs on retirement of preferred stock | $(1,667) | | Other items & tax effect | $2,029 | | Core earnings | $27,691 | Net New Business Volume (Q3 2020, in thousands) | Line of Business | Net Growth/(Decrease) (in thousands) | | :--- | :--- | | Farm & Ranch | $231,499 | | USDA Guarantees | $57,323 | | Rural Utilities | $(6,314) | | Institutional Credit | $(335,328) | | Total | $(52,820) | Outlook Management foresees profitable growth opportunities across all business lines, tempered by significant uncertainties and risks from the COVID-19 pandemic - Key growth drivers include lenders seeking capital relief, deepening relationships with rural utility counterparties, and expansion opportunities from consolidation in the agricultural finance industry[316][317][318] - The COVID-19 pandemic poses risks such as prolonged economic impact on borrowers, stress on commodity exports, and potential disruptions in capital markets, but may also create opportunities as lenders seek secondary market liquidity[320][322][323] - The agricultural sector has been supported by significant government aid, including the Coronavirus Food Assistance Program (CFAP and CFAP 2), which distributed over $17.9 billion as of October 25, 2020[330] Balance Sheet Review Total assets grew 11% to $24.0 billion by Q3 2020, funded by a 13% increase in notes payable, with equity rising 16% to $930.3 million Balance Sheet Changes (in thousands) | Account | Change from 12/31/19 (in thousands) | % Change | | :--- | :--- | :--- | | Total Assets | $2,289,463 | 11% | | Loans, net of allowance | $1,124,207 | 16% | | Notes Payable | $2,490,637 | 13% | | Total Equity | $131,069 | 16% | Risk Management This section details credit, institutional, and interest rate risk management, including $374.5 million in COVID-19 deferments, rising Farm & Ranch delinquencies, and LIBOR transition Farm & Ranch 90-Day Delinquencies | Date | Amount (in thousands) | % of Portfolio | | :--- | :--- | :--- | | Sep 30, 2020 | $88,041 | 1.07% | | Jun 30, 2020 | $68,682 | 0.86% | | Dec 31, 2019 | $60,954 | 0.78% | Farm & Ranch Substandard Assets | Date | Amount (in thousands) | % of Portfolio | | :--- | :--- | :--- | | Sep 30, 2020 | $321,200 | 3.9% | | Jun 30, 2020 | $304,900 | 3.8% | | Dec 31, 2019 | $310,000 | 4.0% | Interest Rate Sensitivity Analysis | Scenario | % Change in MVE (Sep 30, 2020) | % Change in NES (Sep 30, 2020) | | :--- | :--- | :--- | | +100 bps | 6.1% | 3.1% | | -100 bps | (0.5)% | (0.2)% | Liquidity and Capital Resources Farmer Mac maintained 202 days of liquidity in Q3 2020, exceeding regulatory minimums, with its Tier 1 capital ratio rising to 14.3% - The company maintained an average of 202 days of liquidity during Q3 2020, exceeding the 90-day minimum requirement[427] - The Tier 1 capital ratio increased to 14.3% as of September 30, 2020, from 12.9% at year-end 2019, primarily due to preferred stock issuances outpacing risk-weighted asset growth[433] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with detailed management strategies discussed in the MD&A's Risk Management section - The company's primary market risk is interest rate risk, which is managed through various financial transactions and is discussed in detail in the MD&A's Risk Management section[452] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[453] - There were no material changes in internal control over financial reporting during the third quarter of 2020[454] PART II - OTHER INFORMATION Item 1. Legal Proceedings No material legal proceedings were reported during the period - None[456] Item 1A. Risk Factors Updated risk factors emphasize COVID-19 uncertainties and potential Class C common stock volatility from a large shareholder's required divestiture - The full extent of the COVID-19 pandemic's effects on the business remains unknown and could materially and adversely affect operations, financial condition, and capital levels[458] - A significant risk to the Class C stock price is the required divestiture of 600,000 shares by Zions Bancorporation, which could negatively impact its trading price[461] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, 131 shares of Class C common stock were issued to directors at $64.01 per share in lieu of cash retainers - In July 2020, 131 shares of Class C common stock were issued to directors in lieu of cash retainers[465] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, stock certificates, and officer certifications