Federal Agricultural Mortgage (AGM) - 2023 Q3 - Quarterly Report

PART I Item 1. Financial Statements Presents Farmer Mac's unaudited consolidated financial statements and detailed notes for periods ended September 30, 2023, and December 31, 2022 Consolidated Balance Sheets Summarizes Farmer Mac's financial position, including assets, liabilities, and equity, as of September 30, 2023, and December 31, 2022 Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Assets: | | | | | | Total Assets | $28,311,381 | $27,333,110 | $978,271 | 3.58% | | Cash and cash equivalents | $782,318 | $861,002 | $(78,684) | -9.14% | | Total Investment Securities | $4,924,253 | $4,628,268 | $295,985 | 6.39% | | Total Farmer Mac Guaranteed Securities | $9,216,111 | $8,628,380 | $587,731 | 6.81% | | Total USDA Securities | $2,323,657 | $2,411,601 | $(87,944) | -3.65% | | Total loans, net of allowance | $10,537,173 | $10,205,466 | $331,707 | 3.25% | | Liabilities & Equity: | | | | | | Total Liabilities | $26,926,114 | $26,061,152 | $864,962 | 3.32% | | Notes payable | $25,123,545 | $24,469,113 | $654,432 | 2.67% | | Total Equity | $1,385,267 | $1,271,958 | $113,309 | 8.91% | | Total Liabilities and Equity | $28,311,381 | $27,333,110 | $978,271 | 3.58% | Consolidated Statements of Operations Details Farmer Mac's financial performance, including interest income, expense, net interest income, and net income for specified periods Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Total interest income | $381,811 | $193,790 | $188,021 | 97.02% | | Total interest expense | $294,168 | $125,937 | $168,231 | 133.58% | | Net interest income | $87,643 | $67,853 | $19,790 | 29.17% | | Net income | $58,137 | $41,418 | $16,719 | 40.37% | | Net income attributable to common stockholders | $51,345 | $34,627 | $16,718 | 48.28% | | Basic earnings per common share | $4.74 | $3.21 | $1.53 | 47.66% | | Diluted earnings per common share | $4.69 | $3.18 | $1.51 | 47.48% | | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------- | :------- | | Total interest income | $1,040,915 | $449,121 | $591,794 | 131.77% | | Total interest expense | $795,537 | $251,816 | $543,721 | 215.92% | | Net interest income | $245,378 | $197,305 | $48,073 | 24.37% | | Net income | $152,384 | $134,726 | $17,658 | 13.11% | | Net income attributable to common stockholders | $132,010 | $114,352 | $17,658 | 15.44% | | Basic earnings per common share | $12.20 | $10.61 | $1.59 | 14.98% | | Diluted earnings per common share | $12.08 | $10.51 | $1.57 | 14.94% | Consolidated Statements of Comprehensive Income Presents Farmer Mac's comprehensive income, including net income and other comprehensive income/loss, for specified periods Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Net income | $58,137 | $41,418 | $16,719 | 40.37% | | Other comprehensive (loss)/income net of tax | $(1,488) | $(14,105) | $12,617 | -89.45% | | Comprehensive income | $56,649 | $27,313 | $29,336 | 107.48% | | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------------ | :-------------------------------------- | :-------------------------------------- | :-------------------- | :------- | | Net income | $152,384 | $134,726 | $17,658 | 13.11% | | Other comprehensive (loss)/income net of tax | $15,004 | $(67,442) | $82,446 | -122.25% | | Comprehensive income | $167,388 | $67,284 | $100,104 | 148.79% | Consolidated Statements of Equity Outlines changes in Farmer Mac's equity, retained earnings, and accumulated other comprehensive loss for specified periods Consolidated Statements of Equity (in thousands) | Metric | As of Sep 30, 2023 (in thousands) | As of Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | :------- | | Total Equity | $1,385,267 | $1,271,958 | $113,309 | 8.91% | | Retained Earnings | $794,814 | $698,530 | $96,284 | 13.78% | | Accumulated Other Comprehensive Loss, net of tax | $(35,839) | $(50,843) | $15,004 | -29.51% | - The increase in total equity was primarily due to net income and other comprehensive income, partially offset by cash dividends paid on preferred and common stock. For the nine months ended September 30, 2023, net income contributed $152,384 thousand, and other comprehensive income (net of tax) contributed $15,004 thousand[19][20] Consolidated Statements of Cash Flows Summarizes Farmer Mac's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2023, and 2022 Consolidated Statements of Cash Flows (in thousands) | Metric | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | :-------------------- | :------- | | Net cash provided by operating activities | $542,648 | $706,258 | $(163,610) | -23.17% | | Net cash used in investing activities | $(1,280,405) | $(2,050,891) | $770,486 | -37.57% | | Net cash provided by financing activities | $659,073 | $1,304,082 | $(645,009) | -49.46% | | Net change in cash and cash equivalents | $(78,684) | $(40,551) | $(38,133) | 94.04% | | Cash and cash equivalents at end of period | $782,318 | $868,234 | $(85,916) | -9.89% | Notes to Consolidated Financial Statements Provides detailed explanations of Farmer Mac's accounting policies, financial instruments, loans, guarantees, and business segments 1. Summary of Significant Accounting Policies Outlines Farmer Mac's accounting policies, including consolidation, EPS, comprehensive income, and recently adopted accounting guidance - Farmer Mac consolidates its two subsidiaries (Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC) and Variable Interest Entities (VIEs) where it is the primary beneficiary[25] Basic and Diluted EPS Reconciliation (Three Months Ended September 30) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :--------------------------------------- | :----------- | :----------- | | Net income attributable to common stockholders | $51,345 | $34,627 | | Basic EPS | $4.74 | $3.21 | | Diluted EPS | $4.69 | $3.18 | Basic and Diluted EPS Reconciliation (Nine Months Ended September 30) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :--------------------------------------- | :----------- | :----------- | | Net income attributable to common stockholders | $132,010 | $114,352 | | Basic EPS | $12.20 | $10.61 | | Diluted EPS | $12.08 | $10.51 | - The adoption of ASU 2022-02 (Financial Instruments-Credit Losses) and ASU 2022-01 (Fair Value Hedging - Portfolio Layer Method) did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows[36] 2. Investment Securities Details Farmer Mac's available-for-sale and held-to-maturity investment securities, including fair value and unrealized gains/losses Total Investment Securities (As of September 30, 2023) | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | Unrealized Gains (in thousands) | Unrealized Losses (in thousands) | | :----------------------- | :---------------------------- | :------------------------ | :------------------------------ | :------------------------------- | | Available-for-sale | $5,114,476 | $4,873,414 | $2,088 | $(243,123) | | Held-to-maturity | $45,032 | $45,962 | $930 | $0 | - Unrealized losses on available-for-sale investment securities as of September 30, 2023, totaled $243.1 million, primarily due to widening market spreads and interest rate changes. However, all securities in an unrealized loss position were backed by the U.S. government or a GSE, or had at least an 'AA+' credit rating, and Farmer Mac expects these losses to be recoverable[41] Available-for-Sale Securities by Remaining Contractual Maturity (As of September 30, 2023) | Maturity | Amortized Cost (in thousands) | Fair Value (in thousands) | Weighted Average Yield | | :-------------------------- | :---------------------------- | :------------------------ | :--------------------- | | Due within one year | $589,475 | $584,714 | 1.35% | | Due after one year through five years | $1,171,601 | $1,135,888 | 4.06% | | Due after five years through ten years | $2,534,914 | $2,358,496 | 4.39% | | Due after ten years | $818,486 | $794,316 | 5.61% | | Total | $5,114,476 | $4,873,414 | 4.16% | 3. Farmer Mac Guaranteed Securities and USDA Securities Provides details on Farmer Mac Guaranteed Securities and USDA Securities, including classification, cost, fair value, and unrealized gains/losses Total Farmer Mac Guaranteed Securities and USDA Securities (As of September 30, 2023) | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | Unrealized Gains (in thousands) | Unrealized Losses (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------ | :------------------------------ | :------------------------------- | | Held-to-maturity | $6,479,965 | $6,043,583 | $4,719 | $(440,905) | | Available-for-sale | $5,536,437 | $5,058,697 | $409 | $(477,775) | | Trading | $1,371 | $1,302 | $0 | $(69) | - On July 1, 2023, Farmer Mac transferred $2.7 billion of AgVantage Securities from available-for-sale to held-to-maturity, reflecting its intent and ability to hold them until maturity. This resulted in a cost basis adjustment of $31.9 million in unrealized losses retained in AOCI[45] - The credit exposure related to Farmer Mac's USDA Securities is covered by the full faith and credit guarantee of the United States of America, minimizing credit risk[48] 4. Financial Derivatives Describes Farmer Mac's use of financial derivatives for risk management, detailing their fair value, notional amounts, and hedge designations - Farmer Mac uses financial derivatives (interest rate swaps, Treasury futures) to protect against market price and interest rate movements, not for trading or speculation[54] Financial Derivatives Summary (As of September 30, 2023) | Type | Notional Amount (in thousands) | Fair Value Asset (in thousands) | Fair Value Liability (in thousands) | | :----------------------- | :----------------------------- | :------------------------------ | :-------------------------------- | | Fair value hedges | $21,954,955 | $3,077 | $(190,364) | | Cash flow hedges | $563,000 | $27,510 | $(372) | | No hedge designation | $1,941,908 | $1,389 | $(794) | | Total | $24,460,267 | $28,855 | $(188,362) | - As of September 30, 2023, Farmer Mac expects to reclassify $16.6 million (after-tax) from accumulated other comprehensive income to earnings over the next twelve months related to cash flow hedges[58] - Of Farmer Mac's $24.5 billion notional amount of interest rate swaps outstanding as of September 30, 2023, $19.5 billion were cleared through the Chicago Mercantile Exchange (CME), reducing exposure to individual counterparties[69] 5. Loans Details Farmer Mac's loan portfolio, categorized by type, allowance for losses, delinquency status, and credit quality indicators Loans Held for Investment (As of September 30, 2023) | Category | Unsecuritized (in thousands) | In Consolidated Trusts (in thousands) | Total (in thousands) | | :-------------------------- | :--------------------------- | :---------------------------------- | :------------------- | | Agricultural Finance loans | $6,211,595 | $1,422,854 | $7,634,449 | | Rural Infrastructure Finance loans | $3,342,713 | $0 | $3,342,713 | | Total unpaid principal balance | $9,554,308 | $1,422,854 | $10,977,162 | | Allowance for losses | $(16,162) | $(452) | $(16,614) | Allowance for Losses (As of September 30, 2023) | Category | Allowance for Losses (in thousands) | | :-------------------------- | :-------------------------------- | | Agricultural Finance loans | $7,588 | | Rural Infrastructure Finance loans | $9,026 | | Total | $16,614 | - The $3.6 million net provision to the allowance for the Rural Infrastructure Finance portfolio during Q3 2023 was primarily due to a single telecommunications loan downgraded to substandard. The $3.7 million net release from the allowance for the Agricultural Finance mortgage loan portfolio was primarily due to the full payoff of a single collateral-dependent storage and processing loan[75] Delinquency Status of Loans (As of September 30, 2023) | Category | Current (in thousands) | 30-59 Days Past Due (in thousands) | 60-89 Days Past Due (in thousands) | 90 Days and Greater Past Due (in thousands) | Nonaccrual Loans (in thousands) | Total Loans (in thousands) | | :-------------------------- | :--------------------- | :--------------------------------- | :--------------------------------- | :------------------------------------ | :------------------------------ | :------------------------- | | Agricultural Finance loans | $7,542,871 | $15,652 | $5,321 | $6,739 | $63,866 | $7,634,449 | | Rural Infrastructure Finance loans | $3,342,713 | $0 | $0 | $0 | $0 | $3,342,713 | | Total | $10,885,584 | $15,652 | $5,321 | $6,739 | $63,866 | $10,977,162 | 6. Guarantees and Commitments Details Farmer Mac's off-balance sheet guarantees and commitments, including exposure, obligations, and reserve for losses Outstanding Off-Balance Sheet Farmer Mac Guaranteed Securities | Category | As of Sep 30, 2023 (in thousands) | As of Dec 31, 2022 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Agricultural Finance | $455,681 | $500,953 | | Rural Infrastructure Finance | $1,098 | $1,169 | | Total | $456,779 | $502,122 | Guarantee and Commitment Obligation & LTSPCs | Metric | As of Sep 30, 2023 (in thousands) | As of Dec 31, 2022 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Guarantee and commitment obligation | $6,053 | $6,461 | | LTSPCs Guarantee and commitment obligation | $41,554 | $40,121 | | LTSPCs Maximum principal amount | $3,613,934 | $3,423,155 | Reserve for Losses (LTSPCs and Farmer Mac Guaranteed Securities) | Category | As of Sep 30, 2023 (in thousands) | As of Dec 31, 2022 (in thousands) | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Agricultural Finance | $1,412 | $819 | | Rural Infrastructure Finance | $248 | $614 | | Total | $1,660 | $1,433 | - The provision for the reserve for losses in the Agricultural Finance LTSPC portfolio during the nine months ended September 30, 2023, was primarily due to an updated estimate of expected losses based on additional available loss-given-default industry data. Conversely, the Rural Infrastructure Finance LTSPC portfolio saw a release from the reserve for losses due to similar updated estimates[94] 7. Notes Payable Provides details on Farmer Mac's borrowings, including discount notes and medium-term notes, their rates, maturity, and callable debt Notes Payable (As of September 30, 2023) | Category | Amount Outstanding (in thousands) | Weighted-Average Rate | | :-------------------------- | :-------------------------------- | :-------------------- | | Due within one year: | | | | Discount notes | $1,535,856 | 5.30% | | Medium-term notes | $947,466 | 4.75% | | Current portion of medium-term notes | $5,472,893 | 2.49% | | Total due within one year | $7,956,215 | 3.30% | | Due after one year: | | | | Medium-term notes | $17,646,272 | 2.90% | | Total principal net of discounts | $25,602,487 | 3.03% | Debt Callable in 2023 by Maturity (As of September 30, 2023) | Maturity | Amount (in thousands) | Weighted-Average Rate | | :--------- | :-------------------- | :-------------------- | | 2024 | $816,830 | 3.66% | | 2025 | $664,046 | 2.33% | | 2026 | $1,012,989 | 1.57% | | 2027 | $560,204 | 2.27% | | Thereafter | $1,161,379 | 2.51% | | Total | $4,215,448 | 2.45% | - Farmer Mac has statutory authority to borrow up to $1.5 billion from the U.S. Treasury to fulfill guarantee obligations but had not used this authority as of September 30, 2023[106] 8. Equity Covers Farmer Mac's common stock, dividend payments, share repurchase program, and capital requirements, highlighting strong capital position - Farmer Mac paid a quarterly dividend of $1.10 per share on all classes of common stock during each quarter of 2023, an increase from $0.95 per share in 2022[108] - The share repurchase program for Class C non-voting common stock was renewed in February 2023, authorizing up to $9.8 million in repurchases with an expiration date of February 2025. No repurchases were made in Q3 2023[109][110] Capital Position | Metric | As of Sep 30, 2023 (in thousands) | As of Dec 31, 2022 (in thousands) | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Minimum capital requirement | $840,100 | $805,900 | | Core capital level | $1,421,106 | $1,322,801 | | Capital in excess of minimum capital level | $581,053 | $516,882 | 9. Fair Value Disclosures Provides fair value measurements for assets and liabilities, categorized by hierarchy, detailing valuation techniques and unobservable inputs Assets and Liabilities Measured at Fair Value (As of September 30, 2023) | Category | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | Assets: | | | | | | Total Available-for-sale Investment Securities | $1,002,458 | $3,851,923 | $19,033 | $4,873,414 | | Total Farmer Mac Guaranteed Securities | $0 | $0 | $5,058,697 | $5,058,697 | | Total USDA Securities | $0 | $0 | $1,302 | $1,302 | | Financial derivatives | $81 | $28,774 | $0 | $28,855 | | Guarantee Asset | $0 | $0 | $5,963 | $5,963 | | Total Assets at fair value | $1,002,539 | $3,880,697 | $5,084,995 | $9,968,231 | | Liabilities: | | | | | | Financial derivatives | $12 | $188,350 | $0 | $188,362 | | Total Liabilities at fair value | $12 | $188,350 | $0 | $188,362 | - Level 3 assets represent 18% of total assets and 50% of financial instruments measured at fair value as of September 30, 2023[115] Significant Unobservable Inputs for Level 3 Assets (As of September 30, 2023) | Financial Instrument | Valuation Technique | Unobservable Input | Range (Weighted Average) | | :---------------------------------------------------- | :------------------ | :----------------- | :----------------------- | | AgVantage Farmer Mac Guaranteed Securities | Discounted cash flow | Discount rate | 5.4% - 6.0% (5.7%) | | Farmer Mac Guaranteed Securities | Discounted cash flow | Discount rate | 8.5% | | | | CPR | 3% | | USDA Securities | Discounted cash flow | Discount rate | 5.9% - 6.1% (6.0%) | | | | CPR | 11% - 11% (11%) | | Guarantee Asset | Discounted cash flow | Discount rate | 8.5% | | | | CPR | 3% | - Fair values for loans, Farmer Mac Guaranteed Securities, and USDA Securities are internally modeled using discounted projected cash flows, with key assumptions including prepayment speeds, forward yield curves, and discount rates. These are classified as Level 3[129] 10. Business Segment Reporting Presents Farmer Mac's core earnings by business segment, reconciling segment core earnings to consolidated net income Segment Core Earnings (Three Months Ended September 30, 2023) | Segment | Segment Core Earnings (in thousands) | | :-------------------------- | :--------------------------------- | | Farm & Ranch | $30,054 | | Corporate AgFinance | $9,497 | | Rural Utilities | $2,468 | | Renewable Energy | $875 | | Funding | $27,189 | | Investments | $424 | | Corporate | $(25,319) | | Reconciling Adjustments | $6,157 | | Consolidated Net Income | $51,345 | Segment Core Earnings (Nine Months Ended September 30, 2023) | Segment | Segment Core Earnings (in thousands) | | :-------------------------- | :--------------------------------- | | Farm & Ranch | $90,288 | | Corporate AgFinance | $17,469 | | Rural Utilities | $14,404 | | Renewable Energy | $2,480 | | Funding | $77,935 | | Investments | $477 | | Corporate | $(76,819) | | Reconciling Adjustments | $5,776 | | Consolidated Net Income | $132,010 | - Core earnings differ from GAAP net income by excluding the effects of fair value fluctuations and specified infrequent or unusual transactions, providing a useful alternative measure for understanding economic performance[136][139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on Farmer Mac's financial condition, operations, risk management, liquidity, and capital for Q3 2023 Forward-Looking Statements Identifies forward-looking statements and cautions that actual results may differ due to market conditions, regulatory changes, and economic trends - Forward-looking statements address Farmer Mac's prospects for earnings, business volume growth, trends in net interest income and spread, credit quality, economic and market trends, expenses, investment securities, asset impairments, capital position, and future dividend payments[149] - Key uncertainties that could cause actual results to differ include the availability and terms of debt and equity financing, legislative/regulatory developments, fluctuations in asset fair value, lender interest in products, growth in agricultural/rural infrastructure indebtedness, economic conditions (inflation, interest rates, trade policies, supply chain, commodity prices), financial market developments, Federal Reserve monetary policy, and other factors affecting lending or repayment capacity (weather, climate change, real estate values)[150] Overview Highlights Farmer Mac's mission, increased net income, strong liquidity, and capital, and $2.3 billion in liquidity provided to rural lenders in Q3 2023 - Farmer Mac's mission is to drive economic opportunity by increasing financing accessibility for American agriculture and rural infrastructure, serving as the nation's secondary market for these loans[152] - During Q3 2023, Farmer Mac increased net income and core earnings, maintained strong liquidity and capital well above regulatory requirements, and provided $2.3 billion in liquidity and lending capacity to rural America[153] - Performance in Q3 2023 was driven by the resilience of the farm economy, increased business volume at higher spreads, disciplined interest rate risk management, and effective capital strategies[155] Net Income Attributable to Common Stockholders and Core Earnings (in thousands) | Metric | Sep 30, 2023 | Jun 30, 2023 | Sep 30, 2022 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Net income attributable to common stockholders | $51,345 | $40,421 | $34,627 | | Core earnings | $45,188 | $42,162 | $33,392 | - Net income attributable to common stockholders increased $16.7 million year-over-year, driven by higher net interest income, guarantee fees, and fair value of undesignated financial derivatives, partially offset by increased operating expenses[158] Net Interest Income and Net Effective Spread (in thousands) | Metric | Sep 30, 2023 | Jun 30, 2023 | Sep 30, 2022 | | :-------------------- | :----------- | :----------- | :----------- | | Net interest income | $87,643 | $78,677 | $67,853 | | Net interest yield % | 1.22% | 1.12% | 1.04% | | Net effective spread | $83,424 | $81,832 | $65,641 | | Net effective spread % | 1.20% | 1.20% | 1.03% | - Outstanding business volume reached $27.7 billion as of September 30, 2023, a net increase of $0.9 billion from June 30, 2023, primarily from Rural Infrastructure Finance and Agricultural Finance[166] Capital Position (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------------- | :----------- | :----------- | | Core capital | $1,421,106 | $1,322,801 | | Capital in excess of minimum capital level | $581,053 | $516,882 | - On-balance sheet substandard assets decreased by $6.4 million in Q3 2023, primarily due to the payoff of an agricultural storage and processing loan. Off-balance sheet substandard assets decreased by $8.1 million due to credit upgrades[169] Use of Non-GAAP Measures Defines and explains Farmer Mac's non-GAAP measures: core earnings, core EPS, and net effective spread, used for economic performance assessment - Farmer Mac uses non-GAAP measures like 'core earnings,' 'core earnings per share,' and 'net effective spread' to understand economic performance, transaction economics, and business trends, as they exclude fair value fluctuations and specified infrequent or unusual transactions[173][175] - Net effective spread differs from net interest income by excluding interest income/expense from consolidated trusts (reclassified as guarantee fees) and fair value changes of financial derivatives in hedge relationships. It includes accruals of contractual amounts on undesignated financial derivatives and net effects of terminations/settlements on financial derivatives[177][178][180] Results of Operations Analyzes Farmer Mac's financial performance, including net interest income, provision for losses, fees, expenses, and business volume growth Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $51,345 | $34,627 | | Less reconciling items (sub-total) | $6,157 | $1,235 | | Core earnings | $45,188 | $33,392 | Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings (Nine Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to common stockholders | $132,010 | $114,352 | | Less reconciling items (sub-total) | $5,776 | $24,451 | | Core earnings | $126,234 | $89,901 | - The $48.1 million year-over-year increase in net interest income for the nine months ended September 30, 2023, was primarily due to a $40.3 million decrease in funding costs and a $17.0 million increase from net new business volume, partially offset by a $7.7 million decrease in fair value of designated derivatives[193] Net Interest Income/Yield to Net Effective Spread (Nine Months Ended September 30) | Metric | Sep 30, 2023 (Dollars in thousands) | Sep 30, 2023 (Yield %) | Sep 30, 2022 (Dollars in thousands) | Sep 30, 2022 (Yield %) | | :------------------------------------ | :---------------------------------- | :--------------------- | :---------------------------------- | :--------------------- | | Net interest income/yield | $245,378 | 1.16% | $197,305 | 1.03% | | Net effective spread | $242,429 | 1.18% | $184,426 | 1.00% | - During the three months ended September 30, 2023, Farmer Mac recorded a $0.2 million release from the allowance for losses, primarily due to a collateral-dependent agricultural storage and processing loan payoff, partially offset by a rural infrastructure loan downgrade[200] Guarantee and Commitment Fee Income (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Guarantee and commitment fee income | $5,520 | $2,644 | $2,876 | 109% | | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Guarantee and commitment fee income | $12,942 | $9,551 | $3,391 | 36% | Operating Expenses (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Compensation and employee benefits | $14,103 | $11,648 | $2,455 | 21% | | General and administrative | $9,100 | $6,919 | $2,181 | 32% | | Regulatory fees | $831 | $812 | $19 | 2% | | Total Operating Expenses | $24,034 | $19,379 | $4,655 | 24% | | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Compensation and employee benefits | $43,391 | $36,661 | $6,730 | 18% | | General and administrative | $26,047 | $21,717 | $4,330 | 20% | | Regulatory fees | $2,497 | $2,437 | $60 | 2% | | Total Operating Expenses | $71,935 | $60,815 | $11,120 | 18% | - The increase in compensation and employee benefits was largely due to increased headcount, while the rise in General and Administrative expenses was primarily due to increased spending on software licenses, IT, and other consultants to support growth and strategic initiatives[209][210] Net New Business Volume (Three Months Ended September 30) | Line of Business | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Farm & Ranch | $345,332 | $607,348 | | Corporate AgFinance | $60,550 | $67,475 | | Rural Utilities | $506,403 | $124,200 | | Renewable Energy | $2,674 | $48,224 | | Total | $914,959 | $847,247 | - Farmer Mac's outstanding business volume was $27.7 billion as of September 30, 2023, a net increase of $0.9 billion from June 30, 2023. This increase was primarily driven by a $0.5 billion net increase in Rural Infrastructure Finance and a $0.4 billion net increase in Agricultural Finance[166][214] Outstanding Business Volume (in thousands) | Line of Business | As of Sep 30, 2023 | As of Dec 31, 2022 | | :-------------------------- | :----------------- | :----------------- | | Agricultural Finance | $20,203,141 | $19,332,299 | | Rural Infrastructure Finance | $7,448,870 | $6,589,783 | | Total | $27,652,011 | $25,922,082 | Outlook Anticipates profitable growth from liquidity needs, customer base expansion, larger transactions, and rural infrastructure, with rising operating expenses - Farmer Mac expects positive momentum in wholesale volume refinancing activity in Q4 2023, with most maturing AgVantage Securities expected to be refinanced[235] - Opportunities for profitable growth are foreseen due to lenders managing liquidity/capital, an expanding and diversifying customer base, growing relationships with larger lenders, and deepening business in Rural Infrastructure Finance (broadband, renewable energy)[236] - Farmer Mac is insulated from bank liquidity concerns as it is not a depository institution and relies on debt capital markets, which could provide a funding advantage in competitive lending environments[237] - The agricultural economy experienced favorable conditions in Q3 2023 with mixed commodity prices and easing input price inflation, though overall farm incomes are expected to trend lower in 2023 after reaching new highs in 2022[242][244] - Rural infrastructure industry prospects are varied; electric cooperatives expect continued capital expenditures, while telecommunications infrastructure investment is robust due to federally funded programs. Renewable energy generation is expected to grow significantly, driven by falling costs and policy tailwinds like the Inflation Reduction Act[253][254] - Farmer Mac is monitoring legislative and regulatory changes, including the reauthorization of the farm bill (seeking charter enhancements), a final rule on cyber risk management (effective Jan 1, 2025), and a proposed rulemaking on Farmer Mac's regulatory capital framework by May 2024[256] Balance Sheet Review Summarizes Farmer Mac's balance sheet changes, with asset and liability increases driven by new business volume, and equity growth from retained earnings Balance Sheet Summary (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Total assets | $28,311,381 | $27,333,110 | $978,271 | 4% | | Total liabilities | $26,926,114 | $26,061,152 | $864,962 | 3% | | Total equity | $1,385,267 | $1,271,958 | $113,309 | 9% | - The increase in total assets was primarily attributable to new Farmer Mac Guaranteed Securities volume, new loan volume (including those held in consolidated trusts), and a larger investment portfolio[257] - The increase in total liabilities was primarily due to an increase in total notes payable to fund the acquisition of Farmer Mac Guaranteed Securities and loan volume[258] - The increase in total equity was primarily due to an increase in retained earnings and an increase in accumulated other comprehensive income[258] Risk Management Details Farmer Mac's credit risk for loans/guarantees and interest rate risk, including portfolio analysis, delinquency, and duration matching strategies - Farmer Mac's direct credit exposure to Agricultural Finance mortgage loans was $11.0 billion across 48 states as of September 30, 2023[260] Agricultural Finance Mortgage Loans 90-Day Delinquencies (in thousands) | As of | Mortgage Loans | 90-Day Delinquencies | Percentage | | :----------------- | :--------------- | :------------------- | :--------- | | Sep 30, 2023 | $11,014,678 | $42,443 | 0.39% | | Jun 30, 2023 | $10,826,201 | $45,368 | 0.42% | | Dec 31, 2022 | $10,719,571 | $43,498 | 0.41% | - Agricultural Finance substandard assets were $180.2 million (1.6% of the portfolio) as of September 30, 2023, a decrease from $209.4 million (2.0% of the portfolio) as of December 31, 2022[267] - The weighted-average original loan-to-value ratio for Farm & Ranch mortgage loans and loans underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs was 50% as of September 30, 2023[271] Agricultural Finance Mortgage Loans Cumulative Credit Losses (As of September 30, 2023) | Category | Cumulative Original Loans, Guarantees and LTSPCs (in thousands) | Cumulative Net Credit Losses/(Recoveries) (in thousands) | Cumulative Loss Rate | | :-------------------------- | :---------------------------------------------------- | :------------------------------------------------------- | :------------------- | | By year of origination: | | | | | 2013 and prior | $18,729,043 | $33,785 | 0.18% | | Total | $36,718,225 | $38,483 | 0.10% | | By commodity/collateral type: | | | | | Ag. Storage and Processing | $1,730,020 | $19,984 | 1.16% | | Crops | $16,890,404 | $3,790 | 0.02% | - As of September 30, 2023, there were no delinquencies in Farmer Mac's Rural Infrastructure Finance loan portfolio. One telecommunications loan with an unpaid principal balance of $29.5 million was downgraded to substandard[279] - Farmer Mac manages interest rate risk by funding asset purchases with debt and financial derivatives that have similar duration and convexity characteristics, aiming for stable earnings across various interest rate environments[300] MVE and NES Sensitivity Analysis (Percentage Change from Base Case) | Interest Rate Scenario | MVE (Sep 30, 2023) | MVE (Dec 31, 2022) | NES (Sep 30, 2023) | NES (Dec 31, 2022) | | :--------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | +100 basis points | (4.0)% | (3.7)% | (0.2)% | 0.4% | | -100 basis points | 3.5% | 2.7% | 0.1% | (0.6)% | - As of September 30, 2023, Farmer Mac's duration gap was positive 3.8 months, indicating that the duration of its interest-earning assets was slightly greater than its debt and financial derivatives[312] Liquidity and Capital Resources Outlines Farmer Mac's funding sources, liquidity management, and capital requirements, emphasizing debt market access and regulatory compliance - Farmer Mac's primary funding sources are debt issuances, guarantee/commitment fees, net effective spread, and loan/security repayments. It maintains steady access to debt capital markets[324] - As of September 30, 2023, Farmer Mac had 297 days of liquidity, well above the minimum 90 days required by Liquidity and Investment Regulations[326] Liquidity Assets (in thousands) | Category | As of Sep 30, 2023 | As of Dec 31, 2022 | | :------------------------------------ | :----------------- | :----------------- | | Cash and cash equivalents | $782,318 | $861,002 | | Investment securities (Guaranteed by U.S. Government and its agencies) | $1,348,081 | $1,444,650 | | Investment securities (Guaranteed by GSEs) | $3,551,332 | $3,160,919 | | Investment securities (Asset-backed securities) | $19,033 | $19,027 | | Total | $5,700,764 | $5,485,598 | - Farmer Mac was in compliance with its statutory capital requirements as of September 30, 2023, classified as 'level 1' (highest compliance level). Its Tier 1 capital ratio was 16.0% as of September 30, 2023[328][329] Other Matters States that there are no other matters to report Supplemental Information Provides additional quarterly and annual data on new business volume, asset repayments, outstanding volume, and net effective spread by segment New Business Volume by Quarter (in thousands) | Quarter Ended | Agricultural Finance (Farm & Ranch) | Agricultural Finance (Corporate AgFinance) | Rural Infrastructure Finance (Rural Utilities) | Rural Infrastructure Finance (Renewable Energy) | Total | | :-------------- | :---------------------------------- | :----------------------------------------- | :------------------------------------------- | :--------------------------------------------- | :------ | | Sep 30, 2023 | $1,384,273 | $275,932 | $607,979 | $17,390 | $2,285,574 | | Jun 30, 2023 | $1,574,169 | $218,136 | $294,292 | $71,611 | $2,158,208 | | Mar 31, 2023 | $750,040 | $203,211 | $683,232 | $89,747 | $1,726,230 | | Dec 31, 2022 | $1,114,255 | $165,395 | $140,222 | $43,737 | $1,463,609 | | Sep 30, 2022 | $1,927,209 | $169,932 | $547,117 | $61,653 | $2,705,911 | Repayments of Assets by Quarter (in thousands) | Quarter Ended | Agricultural Finance (Farm & Ranch) | Agricultural Finance (Corporate AgFinance) | Rural Infrastructure Finance (Rural Utilities) | Rural Infrastructure Finance (Renewable Energy) | Total | | :-------------- | :---------------------------------- | :----------------------------------------- | :------------------------------------------- | :--------------------------------------------- | :------ | | Sep 30, 2023 | $1,031,183 | $215,382 | $101,576 | $14,716 | $1,362,857 | | Jun 30, 2023 | $1,146,987 | $137,362 | $572,082 | $52,203 | $1,908,634 | | Mar 31, 2023 | $510,964 | $206,736 | $153,163 | $11,424 | $882,287 | | Dec 31, 2022 | $584,221 | $196,674 | $76,872 | $9,809 | $867,576 | | Sep 30, 2022 | $1,021,343 | $102,457 | $422,917 | $13,429 | $1,560,146 | Outstanding Business Volume by Quarter (in thousands) | As of | Agricultural Finance (Farm & Ranch) | Agricultural Finance (Corporate AgFinance) | Rural Infrastructure Finance (Rural Utilities) | Rural Infrastructure Finance (Renewable Energy) | Total | | :------ | :---------------------------------- | :----------------------------------------- | :------------------------------------------- | :--------------------------------------------- | :------ | | Sep 30, 2023 | $18,461,835 | $1,741,306 | $7,118,295 | $330,575 | $27,652,011 | | Jun 30, 2023 | $18,116,503 | $1,680,756 | $6,611,892 | $327,901 | $26,737,052 | | Mar 31, 2023 | $17,685,961 | $1,599,982 | $6,889,682 | $308,493 | $26,484,118 | | Dec 31, 2022 | $17,728,792 | $1,603,507 | $6,359,613 | $230,170 | $25,922,082 | | Sep 30, 2022 | $17,199,347 | $1,634,786 | $6,296,263 | $196,242 | $25,326,638 | Net Effective Spread by Segment (Three Months Ended September 30, 2023) | Segment | Dollars (in thousands) | Yield % | | :-------------------------- | :--------------------- | :------ | | Farm & Ranch | $32,718 | 0.97% | | Corporate AgFinance | $8,250 | 2.05% | | Rural Utilities | $6,362 | 0.39% | | Renewable Energy | $1,150 | 1.46% | | Funding | $34,412 | 0.49% | | Investments | $532 | 0.04% | | Net Effective Spread | $83,424 | 1.20% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Addresses Farmer Mac's market risk exposure, primarily from interest rate changes, managed through financial transactions and monitoring - Farmer Mac is exposed to market risk from changes in interest rates and manages this risk through financial transactions, including derivatives, and by monitoring its exposure[340] Item 4. Controls and Procedures Confirms effectiveness of disclosure controls and procedures and absence of material changes in internal control over financial reporting - Farmer Mac's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023, by management, including the CEO and CFO[343] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2023[344] PART II Item 1. Legal Proceedings States that there are no legal proceedings to report Item 1A. Risk Factors Directs readers to detailed risk factor information in the 'Forward-Looking Statements' section and the 2022 Annual Report - Information about risk factors is referenced in the 'Forward-Looking Statements' section of this report and in Farmer Mac's 2022 Annual Report[348] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities Reports on unregistered sales of Class C common stock to directors and time-vested restricted stock units to employees - Farmer Mac issued 451 shares of Class C non-voting common stock to directors in July 2023, based on the closing price of $143.74 per share on June 30, 2023[349] - On September 29, 2023, Farmer Mac granted 2,979 time-vested restricted stock units (RSUs) of Class C non-voting common stock to 77 employees, vesting in three equal installments on March 31, 2024, 2025, and 2026[350] Item 3. Defaults Upon Senior Securities States that there are no defaults upon senior securities to report Item 4. Mine Safety Disclosures States that mine safety disclosures are not applicable to Farmer Mac Item 5. Other Information Reports no directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarterly period ended September 30, 2023[354] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including organizational documents, stock certificates, and officer certifications - Exhibits include organizational documents (Title VIII of the Farm Credit Act, By-Laws), specimen certificates for Class A, B, C common stock and Preferred Stock Series C, D, E, F, G, certifications of principal executive and financial officers (31.1, 31.2, 32), and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[356]