Farmer Mac Reports Second Quarter 2021 Results

WASHINGTON, Aug. 5, 2021 /PRNewswire/ -- The Federal Agricultural Mortgage Corporation (Farmer Mac; NYSE: AGM and AGM.A), the nation's secondary market provider that increases the availability and affordability of credit for the benefit of rural America, today announced its results for the fiscal quarter ended June 30, 2021.

Second Quarter 2021 Highlights

• Added $1.5 billion of gross business volume, resulting in net growth of $334.6 million;
• Net interest income grew $6.8 million year-over-year to $55.1 million;
• Net effective spread, a non-GAAP measure, increased 22% from the prior-year period to $56.6 million and a high 1.01% of the overall portfolio, primarily due to portfolio growth and a continued shift in portfolio composition to higher spread loan purchase products;
• Net income attributable to common stockholders was $25.4 million, or $2.35 per diluted common share;
• Core earnings, a non-GAAP measure, grew 14% from the prior-year period to $30.0 million, or $2.77 per diluted common share;
• Second quarter 2021 efficiency ratio of 26%;
• Return on Equity improved to 18%, compared to 16% for the first quarter 2021;
• Total allowance for credit losses reflected $1.0 million release driven by improving credit metrics and economic forecasts; and
• Issued $125.0 million of Tier 1 capital through the public offering of 4.875% Series G non-cumulative preferred stock.

"Second quarter was another strong quarter for Farmer Mac," said President & Chief Executive Officer Brad Nordholm.  "We generated record core earnings results, with an all-time high net effective spread. We maintained strong credit quality, saw continued volume demand and executed on critical initiatives that are consistent with our multi-year strategic plan.  We expect the positive trends in the first half of the year to continue, as we build on the momentum we've established as we create greater value for our customers, communities, and shareholders over time.  While the emergence of the Delta variant creates some level of near-term uncertainty, we are confident that our current infrastructure, strong capital position, and commitment to our customers will continue to support us, as it has over the last 17 months, in navigating the ongoing pandemic."

Second Quarter 2021 Results

Business Volume

Our outstanding business volume was $22.2 billion as of June 30, 2021, a net increase of $0.3 billion from March 31, 2021 after taking into account all new business, maturities, and paydowns on existing assets. The net increase was primarily attributable to a net increase of  $426.8 million in the Farm & Ranch line of business, partially offset by net decreases of $60.2 million in the USDA Guarantees line of business, $24.4 million in the Rural Utilities line of business, and $7.6 million in the Institutional Credit line of business.

The $426.8 million net increase in our Farm & Ranch line of business is due to a $394.8 million net increase in outstanding loan purchase volume and a $128.6 million net increase in loans underlying long-term standby purchase commitments ("LTSPCs"), which was partially offset by a net decrease of $96.5 million in loans held in consolidated trusts. Our net growth of 17.5% in the Farm & Ranch on-balance sheet portfolio over the twelve months ended June 30, 2021 is significantly higher than the 6.0% net growth of the overall agricultural mortgage loan market over the twelve months ended March 31, 2021 (based on our analysis of bank and Farm Credit System call report data).

The $7.6 million net decrease in the Institutional Credit line of business reflects $476.2 million of maturities, partially offset by $468.6 million in gross volume. This net decrease was due to a net volume decrease in our smaller fund counterparties, partially offset by a modest net increase among our three largest counterparties.  The net growth from our large counterparties was driven by the purchase of four new AgVantage securities in the rural utilities industry with an aggregate purchase price of $375.0 million.

The $24.4 million net decrease in the Rural Utilities line of business was due to $63.5 million in paydowns in loans and LTSPCs, partially offset by $39.1 million in gross new loan volume. The net volume decrease is due to increased market competitiveness that has lowered spreads in this line of business.

The $60.2 million net decrease in the USDA Guarantees line of business reflected $160.6 million in paydowns, partially offset by $100.4 million in gross new volume. The net volume decrease is reflective of the low interest rate environment that has increased the competitiveness and lowered the spreads in this line of business.

Spreads

Net interest income for second quarter 2021 was $55.1 million, a $6.8 million increase compared to $48.3 million in the prior-year period, primarily due to a $4.3 million increase related to new business volume, a $1.8 million decrease in funding costs, and a $0.7 million increase in the fair value of derivatives designated in fair value hedge accounting relationships (designated financial derivatives).  Net interest yield was 0.94% in second quarter 2021 compared to 0.87% in the prior-year period.

Net effective spread, a non-GAAP measure, for second quarter 2021 was $56.6 million, a $10.1 million increase from $46.5 million in the prior-year period.  This increase was primarily attributable to a $5.1 million decrease in non-GAAP funding costs, an increase of $4.3 million from new business volume, and a $0.7 million increase in cash collections on non-accrual loans.  In percentage terms, net effective spread was 1.01% for second quarter 2021, as compared to 0.89% in second quarter 2020.  The increase of 0.12% was primarily attributable to a decrease in non-GAAP funding costs and net volume growth.

Earnings

Farmer Mac's net income attributable to common stockholders for second quarter 2021 were $25.4 million ($2.35 per diluted common share), compared to $31.7 million ($2.94 per diluted common share) in the prior-year period.  The $6.2 million year-over-year decrease in net income attributable to common stockholders was due to a $7.6 million after-tax decrease in the fair value of undesignated financial derivatives due to fluctuations in long-term interest rates, a $2.2 million after-tax increase in operating expenses, and a $1.9 million increase in preferred stock dividends. These factors were partially offset by a $5.4 million after-tax increase in net interest income. 

Farmer Mac enters into financial derivatives transactions to hedge interest rate risks inherent in its business and carries its financial derivatives at fair value in its consolidated financial statements. As these fluctuations are not expected to have a cumulative impact on Farmer Mac's earnings, Farmer Mac uses non-GAAP core earnings as a useful alternative measure to understand the business.

Farmer Mac's non-GAAP core earnings for second quarter 2021 were $30.0 million ($2.77 per diluted common share), compared to $26.3 million ($2.45 per diluted common share) in second quarter 2020.  The $3.6 million year-over-year increase in core earnings was primarily due to a $8.0 million after-tax increase in net effective spread. This increase was partially offset by a $2.2 million after-tax increase in operating expenses and a $1.9 million increase in preferred stock dividends.

Credit

As of June 30, 2021, the total allowance for losses was $16.6 million, which reflects a $1.0 million release from March 31, 2021.   The release was primarily due to ratings upgrades and improving economic conditions, specifically, expectations for unemployment and agricultural commodity prices.  Across all of Farmer Mac's lines of business, allowance for losses represented 0.07% of total outstanding business volume as of June 30, 2021.

As of June 30, 2021, Farmer Mac's 90-day delinquencies were $63.1 million (0.70% of the Farm & Ranch portfolio), compared to $72.3 million (0.84% of the Farm & Ranch portfolio) as of March 31, 2021.  The decrease in 90-day delinquencies from first quarter was primarily driven by two commodity groups – permanent plantings and livestock. Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.28% of total outstanding business volume as of June 30, 2021, compared to 0.33% as of March 31, 2021.

Capital

As of June 30, 2021, Farmer Mac's core capital level was $1.2 billion, which was $482.6 million above the minimum capital level required by our statutory charter.  This compares to $1.0 billion as of March 31, 2021, which was $348.1 million above the minimum capital requirement.  The increase in capital in excess of the minimum capital level required was primarily due to the issuance of the Series G Preferred Stock and an increase in retained earnings.  Farmer Mac's Tier 1 capital ratio was 15.3% as of June 30, 2021.

Preferred Stock

In May 2021, Farmer Mac issued 5.0 million shares of 4.875% non-cumulative perpetual Series G preferred stock, par value $25.00 per share. Farmer Mac incurred direct costs of $3.7 million related to the issuance of the Series G preferred stock. The dividend rate on the Series G preferred stock will remain at a non-cumulative, fixed rate of 4.875% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series G preferred stock remains outstanding. The Series G preferred stock has no maturity date, but Farmer Mac has the option to redeem the preferred stock on any dividend payment date on and after July 17, 2026.

Share Repurchase Program

In March 2021, Farmer Mac's board of directors reinstated the share repurchase program on its previous terms (with a remaining authorization of up to $9.8 million in stock repurchases) and extended the expiration date of the program to March 2023. Farmer Mac did not repurchase any shares of its Class C non-voting common stock during the first half of 2021.

Earnings Conference Call Information

The conference call to discuss Farmer Mac's second quarter 2021 financial results will be held beginning at 4:30 p.m. Eastern time on Thursday, August 5, and can be accessed by telephone or live webcast as follows:

Telephone (Domestic): (888) 645-4404
Telephone (International): (862) 298-0702
Webcast: https://www.farmermac.com/investors/events-presentations/   

When dialing in to the call, please ask for the "Farmer Mac Earnings Conference Call." The call can be heard live and will also be available for replay on Farmer Mac's website for two weeks following the conclusion of the call.

More complete information about Farmer Mac's performance for second quarter 2021 is in Farmer Mac's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, filed today with the SEC.

Use of Non-GAAP Measures

In the accompanying analysis of its financial information, Farmer Mac uses the following non-GAAP measures: "core earnings," "core earnings per share," and "net effective spread." Farmer Mac uses these non-GAAP measures to measure corporate economic performance and develop financial plans because, in management's view, they are useful alternative measures in understanding Farmer Mac's economic performance, transaction economics, and business trends. The non-GAAP financial measures that Farmer Mac uses may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of these non-GAAP measures is intended to be supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.

Core earnings and core earnings per share principally differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding the effects of fair value fluctuations. These fluctuations are not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is expected.

Core earnings and core earnings per share also differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business.  For example, we have excluded from core earnings losses on retirement of preferred stock and the re-measurement of the deferred tax asset.

Farmer Mac uses net effective spread to measure the net spread Farmer Mac earns between its interest-earning assets and the related net funding costs of these assets. Net effective spread differs from net interest income and net interest yield because it excludes: (1) the amortization of premiums and discounts on assets consolidated at fair value that are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets; (2) interest income and interest expense related to consolidated trusts with beneficial interests owned by third parties, which are presented on Farmer Mac's consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost"; and (3) the fair value changes of financial derivatives and the corresponding assets or liabilities designated in a fair value hedge accounting relationship. 

Net effective spread also principally differs from net interest income and net interest yield because it includes: (1) the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedge accounting relationships ("undesignated financial derivatives"); and (2) the net effects of terminations or net settlements on financial derivatives.  More information about Farmer Mac's use of non-GAAP measures is available in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2020, filed February 25, 2021 with the SEC.

For a reconciliation of Farmer Mac's net income attributable to common stockholders to core earnings and of earnings per common share to core earnings per share, and net interest income and net interest yield to net effective spread, see "Reconciliations" below.

Forward-Looking Statements

Management's expectations for Farmer Mac's future necessarily involve assumptions and estimates and the evaluation of risks and uncertainties. Various factors or events, both known and unknown, could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the forward-looking statements in this release, including uncertainties about:

• the duration, spread, and severity of the COVID-19 pandemic and its effects on the business operations of agricultural and rural borrowers, the capital markets, and Farmer Mac's business operations;
• the actions taken to address the COVID-19 pandemic, including government actions to mitigate the economic impact of the pandemic, how quickly and to what extent normal economic and operating conditions can resume, the possibility of future disruptions to economic recovery caused by any further outbreaks, regulatory measures or voluntary actions to limit the spread of COVID-19, and the duration and efficacy of any restrictions that may be imposed;
• the availability to Farmer Mac of debt and equity financing and, if available, the reasonableness of rates and terms;
• legislative or regulatory developments that could affect Farmer Mac, its sources of business, or agricultural or rural infrastructure industries;
• fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
• the level of lender interest in Farmer Mac's products and the secondary market provided by Farmer Mac;
• the general rate of growth in agricultural mortgage and rural utilities indebtedness;
• the effect of economic conditions and geopolitics on agricultural mortgage or rural utilities lending, borrower repayment capacity, or collateral values, including fluctuations in interest rates, changes in U.S. trade policies, fluctuations in export demand for U.S. agricultural products, and volatility in commodity prices;
• the degree to which Farmer Mac is exposed to interest rate risk resulting from fluctuations in Farmer Mac's borrowing costs relative to market indexes;
• developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving government-sponsored enterprises, including Farmer Mac;
• the effect of any changes in Farmer Mac's executive leadership; and
• other factors that could hinder agricultural mortgage lending or borrower repayment capacity, including the effects of severe weather or fluctuations in agricultural real estate values.

Other risk factors are discussed in "Risk Factors" in Part I, Item 1A in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 25, 2021. Considering these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this release. The forward-looking statements contained in this release represent management's expectations as of the date of this release. Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements included in this release to reflect new information or any future events or circumstances, except as otherwise required by applicable law. The information in this release is not necessarily indicative of future results.

About Farmer Mac
Farmer Mac is a vital part of the agricultural credit markets and was created to increase access to and reduce the cost of credit for the benefit of American agricultural and rural communities. As the nation's secondary market for agricultural credit, we provide financial solutions to a broad spectrum of the agricultural community, including agricultural lenders, agribusinesses, and other institutions that can benefit from access to flexible, low-cost financing and risk management tools. Farmer Mac's customers benefit from our low cost of funds, low overhead costs, and high operational efficiency.  More information about Farmer Mac (including the Annual Report on Form 10-K referenced above) is available on Farmer Mac's website at www.farmermac.com.

Reconciliations

Reconciliations of Farmer Mac's net income attributable to common stockholders to core earnings and core earnings per share are presented in the following tables along with information about the composition of core earnings for the periods indicated: 

The following table presents a reconciliation of net interest income and net yield to net effective spread for the periods indicated:

The following table presents core earnings for Farmer Mac's reportable operating segments and a reconciliation to consolidated net income for the three months ended June 30, 2021:

Supplemental Information

The following table sets forth information about outstanding volume in each of Farmer Mac's four lines of business as of the dates indicated:

The following table presents the quarterly net effective spread by segment:

The following table presents quarterly core earnings reconciled to net income attributable to common stockholders: