Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The objective of this section of the report is to provide a discussion and analysis, from management’s
perspective, of the material information necessary to assess Farmer Mac's financial condition and results
of operations for the quarter ended June 30, 2022. Financial information included in this report is
consolidated to include the accounts of Farmer Mac and its two subsidiaries – Farmer Mac Mortgage
Securities Corporation and Farmer Mac II LLC. This discussion and analysis of financial condition and
results of operations should be read together with: (1) the interim unaudited consolidated financial
statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac's Annual Report
on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 28, 2022
(the "2021 Annual Report").
FORWARD-LOOKING STATEMENTS
In this report, the words "Farmer Mac," "we," "our," and "us" refer to the Federal Agricultural Mortgage Corporation unless otherwise stated or unless the context otherwise requires.
Some statements made in this report, such as in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 about management's current expectations for Farmer Mac's future financial results, business prospects, and business developments. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. These statements typically include terms such as "anticipates," "believes," "continues," "estimates," "expects," "forecasts," "intends," "outlook," "plans," "potential," "project," "target," and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will," and "would." This report includes forward-looking statements addressing Farmer Mac's:
• prospects for earnings;
• prospects for growth in business volume;
• assessment of the effect of the COVID-19 pandemic on our business, financial results, financial condition, and business plans and strategies;
• trends in net interest income and net effective spread;
• trends in portfolio credit quality, delinquencies, substandard assets, credit losses, and provisions for losses;
• assessment of economic and market trends;
• trends in expenses;
• trends in investment securities;
• prospects for asset impairments and allowance for losses;
• changes in capital position;
• future dividend payments; and
• other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve assumptions, 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
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forward-looking statements, including the factors discussed under "Risk Factors" in Part I, Item 1A of Farmer Mac's 2021 Annual Report, as well as uncertainties about:
• 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, supply chain disruptions, increases in input costs, labor availability, volatility in commodity prices, and the effects of the conflict between Russia and Ukraine;
• 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 effects of the Federal Reserve’s efforts to achieve monetary policy normalization and slow inflation;
• other factors that could hinder agricultural mortgage lending or borrower repayment capacity, including the effects of severe weather and drought, climate change, or fluctuations in agricultural real estate values; and
• the duration, mitigation efforts, spread, severity, and social and economic disruption of the ongoing COVID-19 pandemic and its effects on the business operations of agricultural and rural borrowers, the capital markets, and Farmer Mac's business operations.
Considering these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report. Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements to reflect new information or any future events or circumstances, except as otherwise required by applicable law. The information in this report is not necessarily indicative of future results.
Overview
Farmer Mac is a mission-focused, purpose-driven company determined to improve the economic opportunity in rural America by increasing the availability and affordability of credit. As the nation’s secondary market for agricultural and rural infrastructure loans, we provide a broad array of financial solutions to lenders that support flexible low-cost financing to farmers, ranchers, agribusinesses, renewable energy projects, rural utilities, and other related rural businesses and enterprises. Farmer Mac also serves as a critical investment tool for entities such as states, counties, municipalities, pension funds, banks, public trust funds, and credit unions. Farmer Mac offers those entities a variety of investment opportunities that may diversify their investment portfolios and provide the opportunity to earn a competitive return on their investment dollars.
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Farmer Mac’s performance during second quarter 2022, described in more detail below, reflects the success of our continued focus on pursuing new channels and innovative ways to further our mission to help build a strong and vital rural America. Despite ongoing macroeconomic concerns and potential headwinds such as deteriorating macroeconomic conditions, inflation, rising interest rates, the continuing COVID-19 pandemic, and war in Ukraine, Farmer Mac delivered solid financial results. These financial results in the first half of 2022 reflected a variety of factors, including: (1) the resilience of the farm economy, as producers have benefited from healthy farm incomes and liquidity from relatively high commodity prices resulting from heightened demand, with revenues rising faster than the costs of inputs; (2) an increase in Farmer Mac's outstanding business volume at higher spreads while credit quality improved; (3) Farmer Mac's disciplined approach to interest rate risk management that helps to protect earnings from the effects of interest rate volatility; and (4) Farmer Mac's effective funding strategies that resulted in advantageous funding during the first half of 2022. The discussion below of Farmer Mac's financial information includes "non-GAAP measures," which are measures of financial performance not presented in accordance with generally accepted accounting principles in the United States ("GAAP"). For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
Net Income and Core Earnings
The following table shows our net income attributable to common stockholders and core earnings for the periods presented. Core earnings and core earnings per share are non-GAAP measures that differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding the effects of fair value fluctuations and specified infrequent or unusual transactions.
Table 1
For the Three Months Ended
June 30, 2022 March 31, 2022 June 30, 2021
(in thousands)
Net income attributable to common stockholders $ 39,104 $ 41,046 $ 25,444
Core earnings 30,748 25,761 29,986
The $1.9 million sequential decrease in net income attributable to common stockholders was due to a $10.0 million after-tax decrease in the fair value of undesignated financial derivatives. This factor was partially offset by a $5.9 million after-tax increase in net interest income, an increase in our release of credit losses of $1.2 million after tax, and a $1.1 million after-tax decrease in operating expenses.
The $13.7 million year-over-year increase in net income attributable to common stockholders was due to a $11.3 million after-tax increase in net interest income, a $5.1 million after-tax increase in the fair value of undesignated financial derivatives, and an increase in our release of credit losses of $0.4 million after tax. These factors were partially offset by a $2.5 million after-tax increase in operating expenses and a $0.9 million increase in preferred stock dividends.
The $5.0 million sequential increase in core earnings was due to a $2.5 million after-tax increase in net effective spread, an increase in our release of credit losses of $1.2 million after tax, and a $1.1 million after-tax decrease in operating expenses.
The $0.8 million year-over-year increase in core earnings was due to a $3.5 million after-tax increase in net effective spread and an increase in our release of credit losses of $0.4 million after tax. These factors
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were partially offset by a $2.5 million after-tax increase in operating expenses and a $0.9 million increase in preferred stock dividends.
For more information about net income attributable to common stockholders, the composition of core earnings, and a reconciliation of net income attributable to common stockholders to core earnings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
Net Interest Income and Net Effective Spread
The following table shows our net interest income and net effective spread in both dollars and percentage yield or spread for the periods presented. Farmer Mac uses net effective spread, a non-GAAP measure, as an alternative to net interest income because management believes it is a useful metric that reflects the economics of the net spread between all the assets owned by Farmer Mac and all related funding, including any associated derivatives, some of which may not be included in net interest income.
Table 2
For the Three Months Ended
June 30, 2022 March 31, 2022 June 30, 2021
(in thousands)
Net interest income $ 69,402 $ 61,875 $ 55,129
Net interest yield % 1.09 % 1.00 % 0.94 %
Net effective spread $ 60,946 $ 57,839 $ 56,551
Net effective spread % 0.99 % 0.97 % 1.01 %
The $7.5 million sequential increase in net interest income was primarily due to a $3.7 million increase in the fair value of designated financial derivatives, a $2.1 million increase related to net new business volume and a $1.7 million decrease in funding costs. In percentage terms, the sequential 0.09% increase was primarily attributable to an increase of 0.06% in net fair value changes from financial derivatives designated in hedge accounting relationships (designated financial derivatives) and a decrease of 0.02% in funding costs.
The $14.3 million year-over-year increase in net interest income was primarily due to a $7.8 million increase in the fair value of designated financial derivatives, a $4.3 million increase from net new business volume, and a $2.5 million decrease in funding costs. In percentage terms, the year-over-year 0.15% increase was primarily attributable to an increase of 0.12% in net fair value changes from designated financial derivatives and a decrease of 0.05% in funding costs.
The $3.1 million sequential increase in net effective spread in dollars was primarily due to an increase of $2.2 million from net new business volume, a $0.2 million decrease in non-GAAP funding costs, and a $0.7 million increase in cash-basis interest income. In percentage terms, the sequential increase of 0.02% was primarily attributable to a decrease of 0.02% in non-GAAP funding costs.
The $4.4 million year-over-year increase in net effective spread in dollars was primarily due to a $4.8 million increase from net new business volume, a $0.9 million increase in net coupon yields related to the acquisition of loan servicing rights, and a $0.4 million increase in cash-basis interest income. These
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factors were partially offset by a $1.4 million increase in non-GAAP funding costs. In percentage terms, the year-over-year decrease of 0.02% was primarily attributable to an increase of 0.02% in non-GAAP funding costs.
For more information about Farmer Mac's use of net effective spread as a financial measure, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures." For a reconciliation of net interest income to net effective spread, see Table 11 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."
Business Volume
Our outstanding business volume was $24.5 billion as of June 30, 2022, a net increase of $0.2 billion from March 31, 2022 after taking into account all new business, maturities, sales, and paydowns on existing assets. The net increase was primarily attributable to net increases of $0.2 billion in the Rural Infrastructure Finance line of business and $43.0 million in the Agricultural Finance line of business.
For more information about Farmer Mac's business volume, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume."
Capital
Table 3
As of
June 30, 2022 December 31, 2021
(in thousands)
Core capital $ 1,261,832 $ 1,200,560
Capital in excess of minimum capital level required 506,290 486,810
The increase in capital in excess of the minimum capital level required was primarily due to an increase in retained earnings.
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Credit Quality
The following table presents Agricultural Finance on-balance sheet loan purchase and off-balance sheet LTSPCs and Farmer Mac Guaranteed Securities substandard assets, in dollars and as a percentage of the respective portfolio as of June 30, 2022, March 31, 2022, and December 31, 2021:
Table 4
On-Balance Sheet Off-Balance Sheet
Substandard Assets % of Portfolio Substandard Assets % of Portfolio
(dollars in thousands)
June 30, 2022 $ 169,310 2.4 % $ 44,362 1.5 %
March 31, 2022 181,303 2.6 % 34,516 1.2 %
December 31, 2021 185,758 2.7 % 60,922 2.1 %
Increase/(decrease) from prior quarter-ending $ (11,993) (0.2) % $ 9,846 0.3 %
Increase/(decrease) from prior year-ending $ (16,448) (0.3) % $ (16,560) (0.6) %
The decrease of $12.0 million in on-balance sheet substandard assets during second quarter was primarily driven by credit upgrades during the quarter in crops, livestock, and agricultural storage and processing, partially offset by credit downgrades in permanent plantings and part-time farms. The on-balance sheet Agricultural Finance mortgage loan portfolio grew by $266.6 million, which, when coupled with credit upgrades, caused the percentage of substandard assets to decrease. The $9.8 million increase in substandard assets in our off-balance sheet LTSPC and Farmer Mac Guaranteed Securities portfolios during second quarter was primarily due to credit downgrades in permanent plantings, crops, and part-time farms, partially offset by credit upgrades in livestock.
There were no substandard assets in the Rural Infrastructure Finance portfolio as of June 30, 2022 and one loan classified as substandard in that portfolio as of December 31, 2021.
For an analysis of current loan-to-value ratios across substandard and other internally assigned risk ratings, see Table 27 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Loans and Guarantees."
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The following table presents 90-day delinquencies for on-balance sheet Agricultural Finance mortgage loan purchases and off-balance sheet LTSPCs and Farmer Mac Guaranteed Securities, in dollars and as a percentage of the respective balance sheet category as of June 30, 2022, March 31, 2022, and December 31, 2021:
Table 5
On-Balance Sheet Off-Balance Sheet
90-Day
Delinquencies % of Portfolio 90-Day
Delinquencies % of Portfolio
(dollars in thousands)
June 30, 2022 $ 18,751 0.26 % $ 1,872 0.06 %
March 31, 2022 53,960 0.78 % 1,887 0.06 %
December 31, 2021 43,710 0.64 % 3,597 0.12 %
Increase/(decrease) from prior quarter-ending $ (35,209) (0.52) % $ (15) — %
Increase/(decrease) from prior year-ending $ (24,959) (0.38) % $ (1,725) (0.06) %
On-balance sheet Agricultural Finance loans 90 or more days delinquent decreased in all commodity groups, except part-time farms. Off-balance sheet Agricultural Finance LTSPCs and Farmer Mac Guaranteed Securities 90 days or more delinquent decreased in crops and permanent plantings, partially offset by increases in part-time farms. The top ten borrower exposures over 90 days delinquent in either the on- or off-balance sheet Agricultural Finance portfolio represented over half of the aggregate 90-day delinquencies as of June 30, 2022.
As of both June 30, 2022 and December 31, 2021, there were no 90-day delinquencies in Farmer Mac's portfolio of Rural Infrastructure Finance loan purchases and loans underlying LTSPCs.
For more information about Farmer Mac's credit metrics, including 90-day delinquencies, the total allowance for losses, and substandard assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Loans and Guarantees."
COVID-19 Pandemic
Farmer Mac has operated successfully throughout the COVID-19 pandemic with most employees still working remotely. Farmer Mac has adopted a "Presence with Purpose" work arrangement, a flexible, hybrid approach under which employees spend a combination of time working remotely or in one of Farmer Mac's offices depending on the nature of the work and the related business needs. Farmer Mac has maintained uninterrupted access to the debt capital markets and remains a source of capital and liquidity to rural borrowers facing economic or market volatility stemming from the ongoing pandemic. For more information on the effects of the COVID-19 pandemic on Farmer Mac's business, see "Business—Human Capital" in the 2021 Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook" in the 2021 Annual Report and in this report.
Use of Non-GAAP Measures
In the accompanying analysis of its financial information, Farmer Mac uses "non-GAAP measures," which are measures of financial performance that are not presented in accordance with GAAP. Specifically, Farmer Mac uses the following non-GAAP measures: "core earnings," "core earnings per share," and "net
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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
The main difference between core earnings and core earnings per share (non-GAAP measures) and net income attributable to common stockholders and earnings per common share (GAAP measures) is that those non-GAAP measures exclude 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. Another difference is that these two non-GAAP measures exclude specified infrequent or unusual transactions that we believe 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 and core earnings per share any losses on retirement of preferred stock. 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, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations."
Net Effective Spread
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. As further explained below, net effective spread differs from net interest income and net interest yield by excluding certain items from net interest income and net interest yield and including certain other items that net interest income and net interest yield do not contain.
Farmer Mac excludes from net effective spread the interest income and interest expense associated with the consolidated trusts and the average balance of the loans underlying these trusts to reflect management's view that the net interest income Farmer Mac earns on the related Farmer Mac Guaranteed Securities owned by third parties is effectively a guarantee fee. Accordingly, the excluded interest income and interest expense associated with consolidated trusts is reclassified to guarantee and commitment fees in determining Farmer Mac's core earnings. Farmer Mac also excludes from net effective spread the fair value changes of financial derivatives and the corresponding assets or liabilities designated in fair value hedge accounting relationships because they are not expected to have an economic effect on Farmer Mac's financial performance, as we expect to hold the financial derivatives and corresponding hedged items to maturity.
Net effective spread also differs from net interest income and net interest yield because it includes 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"). Farmer Mac uses
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interest rate swaps to manage its interest rate risk exposure by synthetically modifying the interest rate reset or maturity characteristics of certain assets and liabilities. The accrual of the contractual amounts due on interest rate swaps designated in hedge accounting relationships is included as an adjustment to the yield or cost of the hedged item and is included in net interest income. For undesignated financial derivatives, Farmer Mac records the income or expense related to the accrual of the contractual amounts due in "Gains/(losses) on financial derivatives" on the consolidated statements of operations. However, the accrual of the contractual amounts due for undesignated financial derivatives are included in Farmer Mac's calculation of net effective spread.
Net effective spread also differs from net interest income and net interest yield because it includes the net effects of terminations or net settlements on financial derivatives, which consist of: (1) the net effects of cash settlements on agency forward contracts on the debt of other GSEs and U.S. Treasury security futures that we use as short-term economic hedges on the issuance of debt; and (2) the net effects of initial cash payments that Farmer Mac receives upon the inception of certain swaps. The inclusion of these items in net effective spread is intended to reflect our view of the complete net spread between an asset and all of its related funding, including any associated derivatives, whether or not they are designated in a hedge accounting relationship.
For a reconciliation of net interest income and net interest yield to net effective spread, see Table 11 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."
Results of Operations
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:
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Table 6
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
For the Three Months Ended
June 30, 2022 June 30, 2021
(in thousands, except per share amounts)
Net income attributable to common stockholders $ 39,104 $ 25,444
Less reconciling items:
Gains/(losses) on undesignated financial derivatives due to fair value changes (see Table 14) 2,473 (3,721)
Gains/(losses) on hedging activities due to fair value changes 5,916 (2,097)
Unrealized losses on trading securities (285) (61)
Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value (62) 20
Net effects of terminations or net settlements on financial derivatives 2,536 109
Income tax effect related to reconciling items (2,222) 1,208
Sub-total 8,356 (4,542)
Core earnings $ 30,748 $ 29,986
Composition of Core Earnings:
Revenues:
Net effective spread (1)
$ 60,946 $ 56,551
Guarantee and commitment fees (2)
4,709 4,334
Other (3)
307 301
Total revenues 65,962 61,186
Credit related expense (GAAP):
Release of losses (1,535) (983)
Total credit related expense (1,535) (983)
Operating expenses (GAAP):
Compensation and employee benefits 11,715 9,779
General and administrative 7,520 6,349
Regulatory fees 813 750
Total operating expenses 20,048 16,878
Net earnings 47,449 45,291
Income tax expense (4)
9,909 9,463
Preferred stock dividends (GAAP) 6,792 5,842
Core earnings $ 30,748 $ 29,986
Core earnings per share:
Basic $ 2.85 $ 2.79
Diluted $ 2.83 $ 2.77
Weighted-average shares:
Basic 10,796 10,763
Diluted 10,864 10,838
(1) Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 11 for a reconciliation of net interest income to net effective spread.
(2) Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(3) Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4) Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.
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Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
For the Six Months Ended
June 30, 2022 June 30, 2021
(in thousands, except per share amounts)
Net income attributable to common stockholders $ 80,150 $ 53,402
Less reconciling items:
Gains/(losses) on undesignated financial derivatives due to fair value changes (see Table 14) 4,171 (2,026)
Gains/(losses) on hedging activities due to fair value changes 7,940 (2,368)
Unrealized losses on trading securities (191) (75)
Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value (42) 36
Net effects of terminations or net settlements on financial derivatives 18,048 1,274
Income tax effect related to reconciling items (6,285) 664
Sub-total 23,641 (2,495)
Core earnings $ 56,509 $ 55,897
Composition of Core Earnings:
Revenues:
Net effective spread (1)
$ 118,785 $ 110,410
Guarantee and commitment fees (2)
9,266 8,574
Other (3)
821 752
Total revenues 128,872 119,736
Credit related expense (GAAP):
Release of losses (1,589) (1,014)
Total credit related expense (1,589) (1,014)
Operating expenses (GAAP):
Compensation and employee benefits 25,013 21,574
General and administrative 14,798 12,685
Regulatory fees 1,625 1,500
Total operating expenses 41,436 35,759
Net earnings 89,025 84,991
Income tax expense (4)
18,933 17,983
Preferred stock dividends (GAAP) 13,583 11,111
Core earnings $ 56,509 $ 55,897
Core earnings per share:
Basic $ 5.24 $ 5.20
Diluted $ 5.20 $ 5.16
Weighted-average shares:
Basic 10,782 10,751
Diluted 10,876 10,829
(1) Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 11 for a reconciliation of net interest income to net effective spread.
(2) Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(3) Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4) Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.
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Table 7
Reconciliation of GAAP Basic Earnings Per Share to Core Earnings - Basic Earnings Per Share
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands, except per share amounts)
GAAP - Basic EPS $ 3.62 $ 2.36 $ 7.43 $ 4.96
Less reconciling items:
Gains/(losses) on undesignated financial derivatives due to fair value changes (see Table 14) 0.23 (0.35) 0.39 (0.19)
Gains/(losses) on hedging activities due to fair value changes 0.55 (0.19) 0.74 (0.22)
Unrealized losses on trading securities (0.03) (0.01) (0.02) (0.01)
Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value (0.01) — — —
Net effects of terminations or net settlements on financial derivatives 0.24 0.01 1.67 0.12
Income tax effect related to reconciling items (0.21) 0.11 (0.59) 0.06
Sub-total 0.77 (0.43) 2.19 (0.24)
Core Earnings - Basic EPS $ 2.85 $ 2.79 $ 5.24 $ 5.20
Shares used in per share calculation (GAAP and Core Earnings) 10,796 10,763 10,782 10,751
Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings - Diluted Earnings Per Share
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands, except per share amounts)
GAAP - Diluted EPS $ 3.60 $ 2.35 $ 7.37 $ 4.93
Less reconciling items:
Gains/(losses) on undesignated financial derivatives due to fair value changes (see Table 14) 0.23 (0.34) 0.38 (0.18)
Gains/(losses) on hedging activities due to fair value changes 0.55 (0.19) 0.73 (0.22)
Unrealized losses on trading securities (0.03) (0.01) (0.02) (0.01)
Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value (0.01) — — —
Net effects of terminations or net settlements on financial derivatives 0.23 0.01 1.66 0.12
Income tax effect related to reconciling items (0.20) 0.11 (0.58) 0.06
Sub-total 0.77 (0.42) 2.17 (0.23)
Core Earnings - Diluted EPS $ 2.83 $ 2.77 $ 5.20 $ 5.16
Shares used in per share calculation (GAAP and Core Earnings) 10,864 10,838 10,876 10,829
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The non-GAAP reconciling items between net income attributable to common stockholders and core earnings are:
1. Gains/(losses) on financial derivatives due to fair value changes are presented by two reconciling items in Table 6 above: (a) Gains/(losses) on undesignated financial derivatives due to fair value changes; and (b) Gains/(losses) on hedging activities due to fair value changes. The table below calculates the non-GAAP reconciling item for gains/(losses) on hedging activities due to fair value changes:
Table 8
Non-GAAP Reconciling Items for Gains/(Losses) on Hedging Activities due to Fair Value Changes
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands)
Gains/(losses) due to fair value changes (see Table 4.2) $ 6,037 $ (1,725) $ 8,403 $ (1,379)
Initial cash payment (received) at inception of swap (121) (372) (463) (989)
Gains/(losses) on hedging activities due to fair value changes $ 5,916 $ (2,097) $ 7,940 $ (2,368)
2. Unrealized gains/(losses) on trading securities. The unrealized gains/(losses) on trading securities are reported on Farmer Mac's consolidated statements of operations, which represent changes during the period in fair values for trading assets remaining on Farmer Mac's balance sheet as of the end of the reporting period.
3. The net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value. The amount of this non-GAAP reconciling item is the recorded amount of premium, discount, or deferred gain amortization during the reporting period on those assets for which the premium, discount, or deferred gain was based on the application of an accounting principle (e.g., consolidation of variable interest entities) rather than on a cash transaction (e.g., a purchase price premium or discount).
4. The net effects of terminations or net settlements on financial derivatives. These terminations or net settlements relate to:
• Forward contracts on the debt of other GSEs and futures contracts on U.S. Treasury securities. These contracts are used as a short-term economic hedge of the issuance of debt. For GAAP purposes, realized gains or losses on settlements of these contracts are reported in the consolidated statements of operations in the period in which they occur. For core earnings purposes, these realized gains or losses are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
• Initial cash payments received by Farmer Mac upon the inception of certain swaps. When there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. For GAAP purposes, changes in fair value of the swaps are recognized in "Gains/(losses) on financial derivatives," while the economically offsetting discount on the associated hedged debt is amortized over the term of the debt as an adjustment to its yield. For purposes of core earnings, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 25 years.
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The following sections provide more detail about specific components of Farmer Mac's results of operations.
Net Interest Income . The following table provides information about interest-earning assets and funding for the six months ended June 30, 2022 and 2021. The average balance of non-accruing loans is included in the average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the related income is accounted for on a cash basis. Therefore, as the average balance of non-accruing loans and the income received increases or decreases, the net interest income and yield will fluctuate accordingly. The average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities. The interest income and expense associated with these trusts are shown in the net effect of consolidated trusts.
Table 9
For the Six Months Ended
June 30, 2022 June 30, 2021
Average
Balance Income/
Expense Average
Rate Average
Balance Income/
Expense Average
Rate
(dollars in thousands)
Interest-earning assets:
Cash and investments $ 5,045,219 $ 16,916 0.67 % $ 4,827,210 $ 9,986 0.41 %
Loans, Farmer Mac Guaranteed Securities and USDA Securities (1)
19,242,681 224,243 2.33 % 17,477,294 183,584 2.10 %
Total interest-earning assets 24,287,900 241,159 1.99 % 22,304,504 193,570 1.74 %
Funding:
Notes payable due within one year 2,675,834 5,951 0.44 % 4,243,254 2,520 0.12 %
Notes payable due after one year (2)
20,501,101 106,132 1.04 % 17,331,371 85,217 0.98 %
Total interest-bearing liabilities (3)
23,176,935 112,083 0.97 % 21,574,625 87,737 0.81 %
Net non-interest-bearing funding 1,110,965 — 729,879 —
Total funding 24,287,900 112,083 0.92 % 22,304,504 87,737 0.79 %
Net interest income/yield prior to consolidation of certain trusts 24,287,900 129,076 1.06 % 22,304,504 105,833 0.95 %
Net effect of consolidated trusts (4)
866,438 2,201 0.51 % 1,130,069 2,547 0.45 %
Net interest income/yield $ 25,154,338 $ 131,277 1.04 % $ 23,434,573 $ 108,380 0.93 %
(1) Excludes interest income of $16.0 million and $20.9 million in first half of 2022 and 2021, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(2) Includes current portion of long-term notes.
(3) Excludes interest expense of $13.8 million and $18.4 million in first half of 2022 and 2021, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(4) Includes the effect of consolidated trusts with beneficial interests owned by third parties.
The $22.9 million year-over-year increase in net interest income was primarily due to a $9.8 million increase in the fair value of derivatives designated in fair value hedge accounting relationships (designated financial derivatives), a $7.3 million decrease in funding costs, a $5.9 million increase from net new business volume, and a $1.2 million increase in cash-basis interest income. In percentage terms, the year-over-year 0.11% increase was primarily attributable to an increase of 0.08% in net fair value changes from designated financial derivatives and a decrease of 0.06% in funding costs.
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The following table sets forth information about changes in the components of Farmer Mac's net interest income prior to consolidation of certain trusts for the periods indicated. For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate), and changes in rate (change in rate multiplied by old volume), and then allocated based on the relative size of rate and volume changes from the prior period.
Table 10
For the Six Months Ended June 30, 2022 Compared to Same Period in 2021
Increase/(Decrease) Due to
Rate Volume Total
(in thousands)
Income from interest-earning assets:
Cash and investments $ 6,460 $ 470 $ 6,930
Loans, Farmer Mac Guaranteed Securities and USDA Securities 21,141 19,518 40,659
Total 27,601 19,988 47,589
Expense from other interest-bearing liabilities 17,482 6,864 24,346
Change in net interest income prior to consolidation of certain trusts (1)
$ 10,119 $ 13,124 $ 23,243
(1) Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.
The following table presents a reconciliation of net interest income and net interest yield to net effective spread. Net effective spread is measured by: including (1) expenses related to undesignated financial derivatives, which consists of income or expense related to contractual amounts due on financial derivatives not designated in hedge relationships (the income or expense related to financial derivatives designated in hedge accounting relationships is already included in net interest income), and (2) the amortization of losses due to terminations or net settlements of financial derivatives; and excluding (3) the amortization of premiums and discounts on assets consolidated at fair value, (4) the net effects of consolidated trusts with beneficial interests owned by third parties, and (5) the fair value changes of financial derivatives and corresponding financial assets or liabilities in fair value hedge relationships. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for more information about net effective spread.
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Table 11
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Dollars Yield Dollars Yield Dollars Yield Dollars Yield
(dollars in thousands)
Net interest income/yield $ 69,402 1.09 % $ 55,129 0.94 % $ 131,277 1.04 % $ 108,380 0.93 %
Net effects of consolidated trusts (1,183) 0.02 % (1,337) 0.02 % (2,201) 0.02 % (2,547) 0.02 %
Expense related to undesignated financial derivatives (2,026) (0.03) % 970 0.02 % (3,020) (0.02) % 3,038 0.03 %
Amortization of premiums/discounts on assets consolidated at fair value 65 — % (13) — % 49 — % (20) — %
Amortization of losses due to terminations or net settlements on financial derivatives 725 0.01 % 77 — % 1,083 0.01 % 180 — %
Fair value changes on fair value hedge relationships (6,037) (0.10) % 1,725 0.03 % (8,403) (0.07) % 1,379 0.01 %
Net effective spread $ 60,946 0.99 % $ 56,551 1.01 % $ 118,785 0.98 % $ 110,410 0.99 %
The $8.4 million year-over-year increase in net effective spread in dollars was primarily due to an increase of $9.0 million from net new business volume, a $3.1 million decrease in funding costs, a $1.7 million increase in net coupon yields related to the acquisition of loan servicing rights, and a $1.2 million increase in cash-basis interest income. In percentage terms, net effective spread decreased by 0.01% as a result of decreased spreads on net new business volume.
See Note 10 to the consolidated financial statements for more information about net interest income and net effective spread from Farmer Mac's individual business segments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Information" for quarterly net effective spread by line of business.
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Provision for and Release of Allowance for Losses and Reserve for Losses . The following table summarizes the components of Farmer Mac's total allowance for losses for the three and six months ended June 30, 2022 and 2021:
Table 12
As of June 30, 2022 As of June 30, 2021
Allowance
for
Losses Reserve
for Losses Total
Allowance
for Losses Allowance
for
Losses Reserve
for Losses Total
Allowance
for Losses
(in thousands)
For the Three Months Ended
Beginning balance $ 14,464 $ 1,840 $ 16,304 $ 15,211 $ 2,333 $ 17,544
Release of losses (1,372) (163) (1,535) (761) (222) (983)
Charge-offs — — — — — —
Ending balance $ 13,092 $ 1,677 $ 14,769 $ 14,450 $ 2,111 $ 16,561
For the Six Months Ended
Beginning balance $ 14,492 $ 1,950 $ 16,442 $ 14,298 $ 3,277 $ 17,575
(Release of)/provision for losses (1,316) (273) (1,589) 152 (1,166) (1,014)
Charge-offs (84) — (84) — — —
Ending balance $ 13,092 $ 1,677 $ 14,769 $ 14,450 $ 2,111 $ 16,561
See Notes 5 and 6 to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Loans and Guarantees."
During the three and six months ended June 30, 2022, we recorded a $1.5 million and $1.6 million release from the allowance for losses, respectively, primarily as a result of updated credit loss model forecast assumptions and improvements in risk ratings. These factors were partially offset by increased loan volume and a risk rating downgrade of one agricultural storage and processing loan.
Guarantee and Commitment Fees . The following table presents guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, for the three and six months ended June 30, 2022 and 2021:
Table 13
For the Three Months Ended For the Six Months Ended
Change Change
June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ %
(dollars in thousands)
Contractual guarantee fees $ 3,560 $ 2,997 $ 563 19 % $ 7,062 $ 6,027 $ 1,035 17 %
Guarantee obligation amortization 1,596 1,518 78 5 % 3,791 4,227 (436) (10) %
Guarantee asset fair value changes (1,943) (1,518) (425) 28 % (3,945) (4,227) 282 (7) %
Guarantee fee income $ 3,213 $ 2,997 $ 216 7 % $ 6,908 $ 6,027 $ 881 15 %
Guarantee and commitment fees increased for the three and six months ended June 30, 2022 compared to 2021, which was due to increases in the average outstanding balance of LTSPCs and off-balance sheet
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Farmer Mac Guaranteed Securities during second quarter 2022. As adjusted for the core earnings presentation, guarantee and commitment fees were $4.7 million and $9.3 million for the three and six months ended June 30, 2022, respectively, compared to $4.3 million and $8.6 million for the three and six months ended June 30, 2021, respectively.
In Farmer Mac's presentation of core earnings, guarantee and commitment fees include interest income and interest expense related to consolidated trusts owned by third parties to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on those consolidated Farmer Mac Guaranteed Securities. Additionally, Farmer Mac has excluded guarantee asset fair value changes, because these fluctuations are not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations if Farmer Mac fulfills its guarantee obligation throughout the term of the guaranteed securities, as is expected.
For more information about net income attributable to common stockholders, the composition of core earnings, and a reconciliation of net income attributable to common stockholders to core earnings, see Table 6 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
Gains/(losses) on financial derivatives . The components of gains and losses on financial derivatives for the three and six months ended June 30, 2022 and 2021 are summarized in the following table:
Table 14
For the Three Months Ended For the Six Months Ended
Change Change
June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ %
(dollars in thousands)
Gains/(losses) due to fair value changes $ 2,473 $ (3,721) $ 6,194 (166) % $ 4,171 $ (2,026) $ 6,197 (306) %
Accrual of contractual payments (2,026) 970 (2,996) (309) % (3,020) 3,038 (6,058) (199) %
Gains/(losses) due to terminations or net settlements 2,971 (315) 3,286 (1,043) % 18,341 215 18,126 8,431 %
Gains/(losses) on financial derivatives $ 3,418 $ (3,066) $ 6,484 (211) % $ 19,492 $ 1,227 $ 18,265 1,489 %
These changes in fair value are primarily the result of fluctuations in long-term interest rates. The accrual of periodic cash settlements for interest paid or received from Farmer Mac's interest rate swaps that are undesignated financial derivatives is shown as expense related to financial derivatives. Payments or receipts to terminate undesignated derivative positions or net cash settled forward sales contracts on the debt of other GSEs and undesignated U.S. Treasury security futures and initial cash payments received upon the inception of certain undesignated swaps are included in "Gains/(losses) due to terminations or net settlements" in the table above. For undesignated swaps, when there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. Changes in the fair value of these swaps are recognized immediately in "Gains/(losses) on financial derivatives," while the offsetting discount on the hedged debt is amortized over the term of the debt as an
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adjustment to its yield. The amounts of initial cash payments received by Farmer Mac vary depending on the number of the aforementioned type of swaps it executes during a quarter.
Other Income . The following table presents other income for the three and six months ended June 30, 2022 and 2021:
Table 15
For the Three Months Ended For the Six Months Ended
Change Change
June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ %
(dollars in thousands)
Late fees $ 291 $ 252 $ 39 15 % $ 645 $ 539 $ 106 20 %
Servicing fees 252 — 252 N/A 532 — 532 N/A
Mortgage servicing rights amortization (136) — (136) N/A (266) — (266) N/A
Other 72 183 (111) (61) % 243 479 (236) (49) %
Total other income $ 479 $ 435 $ 44 10 % $ 1,154 $ 1,018 $ 136 13 %
The increase in other income for the three and six months ended June 30, 2022 compared to 2021 is primarily due to an increase in servicing fees, partially offset by a decrease in loan rate modification fees.
Operating Expenses . The components of operating expenses for the three and six months ended June 30, 2022 and 2021 are summarized in the following table:
Table 16
For the Three Months Ended For the Six Months Ended
Change Change
June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ %
(dollars in thousands)
Compensation and employee benefits $ 11,715 $ 9,779 $ 1,936 20 % $ 25,013 $ 21,574 $ 3,439 16 %
General and administrative 7,520 6,349 1,171 18 % 14,798 12,685 2,113 17 %
Regulatory fees 813 750 63 8 % 1,625 1,500 125 8 %
Total Operating Expenses $ 20,048 $ 16,878 $ 3,170 19 % $ 41,436 $ 35,759 $ 5,677 16 %
Compensation and Employee Benefits . The increase in compensation and employee benefits expenses for 2022 compared to 2021 was due to increased headcount and increased stock compensation.
General and Administrative Expenses (G&A) . The increase in G&A expenses for 2022 compared to 2021 was primarily due to increased spending on software licenses and information technology and other consultants to support growth and strategic initiatives. We entered into a transition services agreement in connection with the strategic acquisition of loan servicing rights in third quarter 2021. Under that agreement, we have agreed to pay $1.25 million to the seller of the servicing rights in installments through December 31, 2022 for continuing transition assistance.
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Income Tax Expense . The following table presents income tax expense and the effective income tax rate for the three and six months ended June 30, 2022 and 2021:
Table 17
For the Three Months Ended For the Six Months Ended
Change Change
June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ %
(dollars in thousands)
Income tax expense $ 12,132 $ 8,252 $ 3,880 47 % $ 25,217 $ 17,319 $ 7,898 46 %
Effective tax rate 20.9 % 20.9 % — % 21.2 % 21.2 % — %
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Business Volume .
The following table sets forth the net growth or decrease in Farmer Mac's lines of business for the three and six months ended June 30, 2022 and 2021:
Table 18
Net New Business Volume
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
On or Off
Balance Sheet Net Growth/(Decrease) Net Growth/(Decrease) Net Growth/(Decrease) Net Growth/(Decrease)
(in thousands)
Agricultural Finance:
Farm & Ranch:
Loans On-balance sheet $ 278,741 $ 341,678 $ 439,237 $ 596,906
Loans held in consolidated trusts:
Beneficial interests owned by third-party investors On-balance sheet (53,259) (96,532) (113,682) (209,052)
IO-FMGS (1)
On-balance sheet (358) — (736) —
USDA Securities On-balance sheet (11,400) (45,940) (16,399) (31,163)
AgVantage Securities On-balance sheet (160,000) (175,000) 270,000 (375,000)
LTSPCs and unfunded commitments Off-balance sheet (15,863) 132,080 (24,687) 61,292
Farmer Mac Guaranteed Securities Off-balance sheet (20,904) (20,412) (54,778) (41,951)
Loans serviced for others Off-balance sheet (553) — (1,595) —
Total Farm & Ranch $ 16,404 $ 135,874 $ 497,360 $ 1,032
Corporate AgFinance:
Loans On-balance sheet $ 41,151 $ 53,092 $ 26,314 $ 36,913
AgVantage Securities On-balance sheet (22,294) (39,508) (14,496) (39,186)
Unfunded Loan Commitments Off-balance sheet 7,694 2,679 17,659 2,217
Total Corporate AgFinance $ 26,551 $ 16,263 $ 29,477 $ (56)
Total Agricultural Finance $ 42,955 $ 152,137 $ 526,837 $ 976
Rural Infrastructure Finance:
Rural Utilities:
Loans On-balance sheet $ 172,089 $ (2,714) $ 329,321 $ (25,887)
AgVantage Securities On-balance sheet (23,477) 206,903 (46,858) 308,900
LTSPCs and Unfunded Loan Commitments Off-balance sheet 17,005 (20,434) (5,627) (30,474)
Farmer Mac Guaranteed Securities Off-balance sheet — — — —
Total Rural Utilities $ 165,617 $ 183,755 $ 276,836 $ 252,539
Renewable Energy:
Loans On-balance sheet $ 34,053 $ 2,179 $ 39,536 $ 12,043
Unfunded Loan Commitments Off-balance sheet (6,644) (3,441) 21,719 7,508
Total Renewable Energy $ 27,409 $ (1,262) $ 61,255 $ 19,551
Total Rural Infrastructure Finance $ 193,026 $ 182,493 $ 338,091 $ 272,090
Total $ 235,981 $ 334,630 $ 864,928 $ 273,066
(1) An interest-only Farmer Mac Guaranteed Security retained as part of a structured securitization.
Farmer Mac's outstanding business volume was $24.5 billion as of June 30, 2022, a net increase of $0.2 billion from March 31, 2022 after taking into account all new business, maturities, sales, and paydowns on existing assets.
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The $16.4 million net increase in Farm & Ranch during second quarter 2022 resulted from $1.4 billion of new purchases, commitments, and guarantees, mostly offset by $1.4 billion of scheduled maturities and repayments. Farmer Mac purchased a total of $432.6 million in loans, which was primarily driven by improved borrower economics as well as a competitive, albeit an increasing interest rate environment resulting in demand for intermediate and long-term financing solutions. The $432.6 million in gross Farm & Ranch loan purchases was partially offset by $153.8 million in scheduled maturities and repayments.
Farmer Mac also purchased a total of $0.8 billion in Farm & Ranch AgVantage Securities during second quarter 2022, which primarily reflected the refinancing of maturing securities as well as financial counterparties seeking to add longer term AgVantage securities to manage their asset-liability maturity profile given recent increases in credit spreads and interest rates. The $0.8 billion in gross purchases was more than offset by $1.0 billion in scheduled maturities. Approximately $0.3 billion of the total $0.8 billion in gross purchases reflected purchases that refinanced maturing AgVantage securities and were issued at short-term tenors, which may create some volatility in AgVantage volumes throughout the year.
The $26.6 million net increase in Corporate AgFinance during second quarter 2022 resulted from $107.9 million of new loan purchases, which was offset by $81.4 million of scheduled maturities, repayments, and sales. Farmer Mac purchased a total of $85.4 million in loans, which was offset by $44.3 million in scheduled maturities, repayments, and sales. This net increase in loans was primarily due to Farmer Mac's continued focus to support loans to larger and more complex agribusinesses focused on food and fiber processing, and other supply chain production.
The $165.6 million net increase in Rural Utilities during second quarter 2022 resulted from $326.9 million of new purchases, commitments, and guarantees, which was partially offset by $161.3 million of scheduled maturities and repayments. Farmer Mac purchased a total of $196.5 million in Rural Utilities loans; electric distribution and generation and transmission comprised $161.5 million and telecommunication comprised $35.0 million, which was fueled by a competitive but increasing interest rate environment resulting in demand for long-term financing solutions for planned maintenance and capital expenditures. The $196.5 million in loan purchases was partially offset by $24.4 million in scheduled maturities and repayments.
The $27.4 million net increase in Renewable Energy during second quarter 2022 primarily reflects $35.3 million in loan purchases, partially offset by $7.9 million in repayments.
Farmer Mac's 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, scheduled maturities, and paydowns on existing assets.
The $135.9 million net increase in Farm & Ranch during second quarter 2021 resulted from $0.9 billion of new purchases and guarantees, partially offset by $0.8 billion of scheduled maturities and repayments.
The $16.3 million net increase in Corporate AgFinance during second quarter 2021 resulted from $160.0 million of new purchases, partially offset by $143.7 million of scheduled maturities and repayments.
The $183.8 million net increase in Rural Utilities during second quarter 2021 resulted from $410.7 million of new purchases and guarantees, which was partially offset by $226.9 million of scheduled maturities and repayments.
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The level and composition of Farmer Mac’s outstanding business volume is based on the relationship between new business, loan sales, scheduled maturities, and repayments on existing assets from year to year. This relationship in turn depends on a variety of factors both internal and external to Farmer Mac. The external factors include general market forces, competition, and our counterparties’ liquidity needs, access to alternative funding, desired products, and assessment of strategic factors. The internal factors include our assessment of profitability, mission fulfillment, credit risk, and customer relationships. For more information about potential growth opportunities in Farmer Mac's lines of business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook" in this report.
The following table sets forth information about the Farmer Mac Guaranteed Securities issued during the periods indicated:
Table 19
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(dollars in thousands)
AgVantage securities $ 905,796 $ 468,616 $ 2,847,156 $ 911,528
Loans securitized and held in consolidated trusts with beneficial interests owned by third parties — — 25,928 49,133
Total Farmer Mac Guaranteed Securities Issuances $ 905,796 $ 468,616 $ 2,930,937 $ 960,661
Farmer Mac either retains the loans it purchases or securitizes them and retains or sells Farmer Mac Guaranteed Securities backed by those loans.
During the three and six months ended June 30, 2022 and 2021, Farmer Mac realized no gains or losses from the securitization of loans that it holds in consolidated trusts. Farmer Mac consolidates these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on the consolidated balance sheets.
During the three and six months ended June 30, 2022 and 2021, Farmer Mac realized no gains or losses from the issuance of Farmer Mac Guaranteed USDA Securities or AgVantage Securities.
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The following table sets forth information about outstanding volume in each of Farmer Mac's lines of business as of the dates indicated:
Table 20
Outstanding Business Volume
On or Off
Balance Sheet As of June 30, 2022 As of December 31, 2021
(in thousands)
Agricultural Finance:
Farm & Ranch:
Loans On-balance sheet $ 5,214,307 $ 4,775,070
Loans held in consolidated trusts:
Beneficial interests owned by third-party investors On-balance sheet 834,941 948,623
IO-FMGS (1)
On-balance sheet 11,561 12,297
USDA Securities On-balance sheet 2,429,407 2,445,806
AgVantage Securities On-balance sheet 4,995,000 4,725,000
LTSPCs and unfunded commitments Off-balance sheet 2,562,467 2,587,154
Farmer Mac Guaranteed Securities Off-balance sheet 523,580 578,358
Loans serviced for others Off-balance sheet 20,736 22,331
Total Farm & Ranch $ 16,591,999 $ 16,094,639
Corporate AgFinance:
Loans On-balance sheet $ 1,149,614 $ 1,123,300
AgVantage Securities On-balance sheet 352,968 367,464
Unfunded Loan Commitments Off-balance sheet 64,729 47,070
Total Corporate AgFinance $ 1,567,311 $ 1,537,834
Total Agricultural Finance $ 18,159,310 $ 17,632,473
Rural Infrastructure Finance:
Rural Utilities:
Loans On-balance sheet $ 2,631,694 $ 2,302,373
AgVantage Securities On-balance sheet 2,986,404 3,033,262
LTSPCs and Unfunded Loan Commitments Off-balance sheet 551,210 556,837
Farmer Mac Guaranteed Securities Off-balance sheet 2,755 2,755
Total Rural Utilities $ 6,172,063 $ 5,895,227
Renewable Energy:
Loans On-balance sheet $ 126,299 $ 86,763
Unfunded Loan Commitments Off-balance sheet 21,719 —
Total Renewable Energy $ 148,018 $ 86,763
Total Rural Infrastructure Finance $ 6,320,081 $ 5,981,990
Total $ 24,479,391 $ 23,614,463
(1) An interest-only Farmer Mac Guaranteed Security retained as part of a structured securitization.
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The following table summarizes by maturity date the scheduled principal amortization of loans held, loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of June 30, 2022:
Table 21
Schedule of Principal Amortization as of June 30, 2022
Loans Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs USDA Securities and Farmer Mac Guaranteed USDA Securities Total
(in thousands)
2022 $ 213,051 $ 129,844 $ 53,834 $ 396,729
2023 391,789 261,746 115,532 769,067
2024 397,798 204,562 112,518 714,878
2025 423,474 207,730 116,799 748,003
2026 460,363 241,698 119,567 821,628
Thereafter 8,070,380 2,456,569 2,132,713 12,659,662
Total $ 9,956,855 $ 3,502,149 $ 2,650,963 $ 16,109,967
Of Farmer Mac's $24.5 billion outstanding principal balance of business volume as of June 30, 2022, $8.3 billion were AgVantage securities included in the Agricultural Finance and Rural Infrastructure Finance lines of business. Unlike business volume in the form of purchased loans, USDA Securities, and loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most AgVantage securities do not require periodic payments of principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due. The following table summarizes by maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as of June 30, 2022:
Table 22
AgVantage Balances by Year of Maturity
As of
June 30, 2022
(in thousands)
2022 $ 1,373,579
2023 1,489,463
2024 949,848
2025 561,025
2026 975,660
Thereafter (1)
2,987,552
Total $ 8,337,127
(1) Includes various maturities ranging from 2027 to 2044.
The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 4.9 years as of June 30, 2022.
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Outlook
Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools as a secondary market that helps meet the financing needs of rural America. The pace and trajectory of Farmer Mac's growth will depend on the capital and liquidity needs of the lending institutions in servicing agriculture and rural infrastructure businesses and the overall financial health of borrowers in the sectors we serve. Farmer Mac foresees opportunities for profitable growth across our lines of business driven by several key factors:
• As agricultural and rural infrastructure lenders seek to manage equity capital and return on equity capital requirements or reduce exposure due to lending or concentration limits, Farmer Mac can provide relief for those institutions through loan and portfolio purchases, participations, guarantees, LTSPCs, or wholesale funding.
• As a result of business and product development efforts and continued interest in the agricultural asset class from institutional investors and nontraditional agricultural real estate lenders, Farmer Mac's customer base and product set continue to expand and diversify, which may generate more demand for Farmer Mac's products from new sources.
• Farmer Mac's growing relationships with larger regional and national lenders, as well as consolidation within the agricultural lending industry, continue to provide opportunities that could influence Farmer Mac's loan demand and increase the average transaction size within Farmer Mac's lines of business.
• Future growth opportunities in Farmer Mac's Rural Infrastructure Finance line of business may evolve by deepening business relationships with eligible counterparties, financing broadband-related capital expenditures and rural telecommunications facilities, growing opportunities for renewable energy project finance, and exploring new types of loan products. These opportunities may be limited by sector growth, credit quality, and the competitiveness of Farmer Mac's products.
• Expansion and acquisition opportunities for agricultural producers resulting from high agricultural incomes and rising costs have increased financing requirements for mergers and acquisitions, consolidation, and vertical integration across many sectors of the agricultural industry, which may also generate demand for Farmer Mac's loan products.
• Investments necessary to support consumer demand could increase the need for financing within the food and agriculture supply chain, which may increase the need for incremental capital support from the secondary market.
• Market interest rates have increased significantly since the lows experienced in 2021, and rates are slightly above Farmer Mac's 15-year historical averages. New loan origination and sales volumes tend to correlate inversely with changes in interest rates. However, prepayment rates also generally correlate inversely with changes in interest rates, with higher interest rates typically slowing the pace of portfolio loan repayments. Future changes to monetary policy and the overall level and pace of the increase in interest rates could continue to impact the pace and timing of Agricultural Finance mortgage loan purchase demand and repayments.
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The war in Ukraine continues to increase volatility for commodity prices and agricultural production costs for farmers and ranchers, who were already challenged by a strong inflationary environment. While agricultural commodity prices have thus far outpaced the significant increase in input costs, the impact on global commodity markets from the Ukraine conflict creates further uncertainty for farmers and ranchers in terms of global production, prices, and costs for the remainder of 2022 and 2023. Heightened market volatility is likely to persist until there is more certainty around the timing, pace, and conclusion of the conflict in Ukraine.
In addition to continued uncertainty from supply-side disruptions, market interest rates increased rapidly in the first half of 2022, driven by the Federal Reserve’s accelerated efforts to achieve monetary policy normalization and decelerate inflation. A higher interest rate environment could slow the pace of farm mortgage refinancing. While lower refinances could result in lower levels of new loan purchases in Farm & Ranch and USDA Guarantees products, it could also result in lower portfolio prepayment speeds, as was Farmer Mac’s experience between 2014 and 2018. Loan prepayment speeds in the first half of 2022 fell to pre-pandemic levels, and they are likely to inversely correlate with interest rates. Farmer Mac offers a range of interest rates, tenors, and resetting options for loan products, allowing flexibility for originators and borrowers in all interest rate environments.
The U.S. economy continued to slow in the second quarter of 2022 after a rapid expansion in 2021. Higher consumer price inflation, particularly for food and energy, combined with a rising interest rate environment has curtailed economists’ outlook for the U.S. economy in 2022 and into 2023. And while employment and retail spending data indicate continued but slower growth, the probability of a U.S. or global recession is increasing. Farmer Mac believes that its portfolio is sufficiently balanced to withstand the market volatility that arises with an economic recession, as the agricultural, food, and infrastructure industries tend to not be directly correlated with the general economy. Farmer Mac believes these sectors are generally well positioned to withstand an economic downturn due to ample consumer demand and government support.
Operating Expense . Farmer Mac continues to expand its investments in human capital, technology, and business infrastructure to increase capacity and efficiency as it seeks to accommodate its growth opportunities and achieve its long-term strategic objectives. Farmer Mac expects continued increases in its operating expenses over the next several years along with business and revenue growth. We expect these efforts to continue and increase over the next 1 - 2 years as we continue to grow our revenue and diversify our funding sources. We will continue making investments in our infrastructure and funding platforms to support these strategies and scale with our growth.
During 2021, we closed on a strategic acquisition that enhanced our operations by expanding our internal loan servicing function and acquiring the loan servicing rights for a sizeable portion of our Farm & Ranch loan and USDA Securities portfolios. This acquisition should increase our interest income on our Farm & Ranch loans and USDA Securities that we service because there will not be any third-party central servicer retaining a central servicer fee on those assets. That increased interest income is expected to be partially offset by the increase in our operating expenses relating to our enhanced internal loan servicing operations. In the short term, we do not expect the effect on core earnings to be significant. In the medium to long term, the effect will depend on the size of our portfolio that we service and the long-run costs of our servicing operations.
Agricultural Industry . The agricultural economy experienced largely favorable conditions in the second quarter 2022, with higher commodity prices partially offset by higher input prices. In response to Russia's
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invasion of Ukraine, grain commodity prices rose rapidly during the first quarter of 2022 and continued to be elevated during much of the second quarter of 2022. Higher commodity prices for grains and many animal proteins are likely to substantially increase gross cash receipts for the 2022 marketing year. Farm expenses continued to rise in the second quarter of 2022, driven by rising feed, energy, interest, and labor costs. Commodity prices showed signs of moderating in June and July of 2022 due to a strengthening U.S. dollar and reduced demand due to the high-price conditions. Despite the mid-year decline, prices are likely to remain elevated as a result of the global supply shortages in food and energy.
Growth in farm income outpaced growth in expense in 2021 and in the first half of 2022. Net cash farm income increased nearly 15% in 2021 to $134.2 billion, the highest level since 2013. Consumers have continued their return to restaurants and food service establishments in 2022, with a 13% annual increase in retail spending at food service and drinking places, according to advance retail sales data from the U.S. Census Bureau. Combined with an annual 7% increase in retail spending at food and beverage stores (e.g., grocery), consumers have demonstrated the ability to absorb increasing commodity prices in their food budgets so far in 2022.
The increase in farm profitability combined with low interest rates in 2020 and 2021 drove a rapid rise in land values and a decrease in farm delinquencies and bankruptcies. Land value survey data from the USDA show a 12.4% increase in average farm real estate values from June 2021 to June 2022. Annual farm real estate value gains were highest in the Northern Plains (19.8%) and the Corn Belt (14.9%) but also strong in the Lake states (13.7%), the Southern Plains (11.3%), and the Pacific (9.7%). The Federal Reserve Bank of Chicago AgLetter reported a 23% gain in farmland values in the Seventh District (primarily Iowa, Indiana, Illinois, and Wisconsin) between April 2021 and April 2022. Data from the Federal Reserve Bank of Kansas City show a similar rise in land values in the Tenth District (primarily Kansas, Missouri, Nebraska, and Oklahoma). Historically, rising farm real estate values have paired with an increase in real estate secured debt. While regional averages for farmland values provide a good barometer for the overall movement in U.S. farmland values, economic forces affecting land markets are highly localized, and some markets may experience greater volatility in farmland values than state or national averages indicate.
Economic conditions are likely to bring mixed effects to credit demand in the second half of 2022. Strong asset appreciation and rising interest rates could signal a credit cycle expansion as financial decision-makers look to lock in long-term economics for their appreciating farm and agribusiness assets. Farm profitability generally increases asset values and demand for the asset class, which also contributes to increasing credit demand. A rising interest rate environment could have mixed effects on mortgage portfolios, potentially lowering new sales and originations but also slowing portfolio prepayments. Finally, a changing yield curve coupled with widening market credit spreads could increase opportunities for corporate and institutional lending, as Farmer Mac's programs become more attractive at higher costs of capital. Combined, these factors are expected to be generally supportive of continued net portfolio growth for Farmer Mac in the second half of 2022.
Positive economic conditions in the agricultural economy improved Farmer Mac's portfolio performance in the first half of 2022, and they could continue to positively influence loan delinquencies and losses throughout the year. Farmer Mac's 90-day delinquencies and substandard assets levels improved in second quarter 2022 relative to first quarter 2022. Sixty-five percent of the loan volume past due 90-days or more in first quarter 2022 cured or paid off by June 30, 2022. The overall delinquency rate fell from 0.57% of the Farm & Ranch operating segment as of March 31, 2022 to 0.20% of the Farm & Ranch operating segment by June 30, 2022, a significant improvement and the lowest levels since 2008. The percentage of
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the portfolio rated substandard also continued to improve in second quarter 2022 to the lowest levels since 2016. However, rising input costs, market volatility, and the potential for continued economic and weather-related stress increase the level of uncertainty inherent in the agricultural credit sector which could negatively effect the trajectory of the current agricultural cycle. Farmer Mac believes that its portfolio continues to be highly diversified, both geographically and by commodity and that its portfolio has been underwritten to high credit quality standards. Therefore, Farmer Mac believes that its portfolio is well-positioned to endure reasonably foreseeable volatility from cyclical and external factors. For more information about the loan balances, loan-to-value ratios, 90-day delinquencies, and substandard asset rate for the Agricultural Finance mortgage loans in Farmer Mac's portfolio as of June 30, 2022, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk—Loans and Guarantees."
Exogenous factors facing farm and food producers can create uncertainty and market instability within the sector. External market conditions that could adversely impact the farm and food sectors in 2022 include U.S. dollar strength, supply chain disruptions, foreign trade and trade policy, and environmental conditions. The U.S. agricultural sector has become increasingly dependent on foreign markets as a source of demand, making trade policy increasingly important to farms and food. The USDA's initial forecast for 2022 is a modest increase in export value over 2021, and through May 2022, agricultural export values are up 14% in 2022 compared to 2021. However, a deteriorating global economic outlook combined with increased tightening of U.S. central bank policy has increased the relative value of the U.S. dollar, which could provide a headwind for future export sales in 2022 and into 2023. Disruptions to global grain supplies in Ukraine and Russia could provide a temporary boost to U.S. agricultural product demand. However, slower global growth could be a headwind for consumer-oriented products like animal proteins, dairy, fruits, and nuts, and Ukrainian corn and wheat may eventually reach market. Because Farmer Mac has significant exposure to crop commodities like corn, soybeans, hay, wheat, and cotton, a sustained rally in agricultural commodities is likely to continue to benefit Farmer Mac's overall portfolio credit quality more than degradation from downward pressure on livestock and consumer product profitability.
Severe weather conditions and long-term environmental change continue to shape agricultural sectors. The U.S. experienced 20 separate billion-dollar weather disasters in 2021, the second-highest level in the 40 years tracked by the National Oceanic and Atmospheric Administration behind only 2020. Many of those events affected agriculture, including a midwestern derecho, western wildfires, and western drought. Federal crop insurance provides a strong mitigator against this risk, but farmers and ranchers face increasingly-severe weather incidents. Long and persistent drought conditions impacted western agriculture during much of 2021. Although drought conditions improved in fourth quarter 2021 and early weeks of 2022, roughly 17% of the continental U.S. remained in exceptional or extreme drought as of July 12, 2022, according to data from the National Drought Mitigation Center. Extended periods of drought and dryness can reduce agricultural productivity, cause lasting damage to permanent crops like fruit and tree nuts, and result in producers leaving some fields fallow due to lack of water. States also regulate water use, and state laws like California's Sustainable Groundwater Management Act (SGMA) will continue to shape state-led efforts to manage water infrastructure and use and could potentially impact producers. Agricultural production in California, Oregon, Washington, Arizona, and Utah is likely to experience the greatest impact from the 2021 and 2022 droughts. For loans in areas that commonly experience exceptional drought (primarily in California), Farmer Mac's underwriting process includes an assessment of anticipated long-term water availability for the related property and how that impacts the collateral value and borrower's cash flow position to mitigate that risk. For more information about Farmer Mac's environmental risk mitigation requirements, see "Management's Discussion and Analysis of Financial
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Condition and Results of Operations—Risk Management—Credit Risk—Loans and Guarantees—Environmental Considerations" in Farmer Mac's 2021 Annual Report.
Rural Infrastructure Industry . Economic conditions affecting the rural infrastructure industry generally follow those in the general economy. According to data from the U.S. Energy Information Administration, sales and the revenue from the sale of electricity to customers increased by 2.6% and 8.6%, respectively, in the last 12 months through April 2022 compared to April 2021. This increase was driven by a sharp recovery in sales to the commercial and industrial sectors and an increase in the retail price of electricity. Solid employment data, credit data, and retail sales activity remained positive economic indicators for the sector in the second quarter, but COVID-19 variants, trade disruptions, inflation,and a tight labor market continue to drag economic outlooks. Higher energy input prices such as natural gas and coal are a potential headwind for the industry in 2022. Natural gas prices rose consistently in 2021 and early 2022 because of reduced supply and additional demand for U.S. liquified natural gas from European countries. Coal prices also trended higher in the second quarter of 2022, driven by higher natural gas prices and additional overseas demand to offset limited Russian coal exports. Despite higher input costs, power producers are generally able to pass cost increases through higher retail electricity prices. Oil and natural gas prices abated in June and July, a positive signal for sector profitability in the second half of 2022. Through June 30, 2022, Farmer Mac had not observed material degradation in the financial performance of its rural infrastructure portfolio, and that portfolio has never experienced a serious delinquency or default since inception.
Prospects for loan growth within the rural infrastructure industry overall appear to be moderate in the near term, as ongoing normal-course capital expenditures related to maintaining and upgrading utility infrastructure continue at typical levels. Farmer Mac's future growth opportunities for financing the electric cooperative industry may be affected by the demand for electric power in rural areas, capital expenditures by electric cooperatives driven by regulatory or technological changes, the changing interest rate environment, increased policy initiatives to support rural connectivity, and competitive dynamics within the rural utilities cooperative finance industry. Cooperatives and service providers have access to numerous federally funded programs in 2022, such as the Federal Communications Commission's Rural Digital Opportunity Fund (RDOF), the USDA’s ReConnect, and the USDA’s Telecommunications Infrastructure Loan and Loan Guarantee program. In addition to capital projects spurred by these programs, Farmer Mac could see an increase in financing opportunities for other telecommunications providers in rural areas with wireless broadband increasingly important to economic opportunity and precision agriculture.
The growth in renewable energy generation and deployment of energy storage technologies may help deepen Farmer Mac's relationships with existing customers through new business opportunities. According to data from the U.S. Energy Information Administration, renewable electricity capacity is expected to grow by 48% in the next five years, compared to total electric capacity growth of 10%. The rising cost of fossil fuel-based inputs combined with the falling costs of renewable power generation may hasten this increase in capacity. This growth may broaden Farmer Mac's customer base with cooperative lenders focused on lending to renewable energy customers. In response to this growth, Farmer Mac has deployed new financing products tailored to the renewable energy sector, which represents a new market opportunity for Farmer Mac. Under this new initiative, Farmer Mac's total outstanding loans and loan commitments of renewable energy financing transactions was $148.0 million as of June 30, 2022.
Legislative and Regulatory Outlook . Farmer Mac continues to monitor potential legislative and regulatory changes that could affect Farmer Mac or its stakeholders, including:
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• Section 1005 of the American Rescue Plan Act of 2021 allows the USDA to provide debt relief to socially disadvantaged producers who had outstanding principal balances on FSA direct and guaranteed loans as of January 1, 2021. Multiple lawsuits have been filed challenging the constitutionality of the debt relief and delaying its implementation. If ultimately implemented, this provision could lead to a short-term acceleration in the prepayment of the FSA guaranteed loans in Farmer Mac’s USDA Securities portfolio.
• The current farm bill is set to expire in 2023. This omnibus piece of legislation contains several programs that impact farm profitability and rural vitality, and could affect Farmer Mac’s charter as well. The House and Senate Agriculture Committees began consideration of a new farm bill earlier this year. Farmer Mac will continue to monitor this legislation for any impact it may have on Farmer Mac and its stakeholders.
• Agricultural exports from the United States were valued at more than $177 billion in the 2021 fiscal year. In 2021, Congress passed a $550 billion bipartisan infrastructure bill that provides for key investments to improve roads, bridges, freight rail, electric, broadband, ports, and waterways that are expected to support farmers and ranchers' profitability, competitiveness, and access to global markets. The ability to produce food and fiber and transport it efficiently across the globe is critical for the U.S. food and agricultural sectors' competitiveness internationally.
• The prudential regulator of Farmer Mac is expected to undergo significant changes to its board. The three-member board of the Farm Credit Administration (FCA) currently has one vacant seat, a member whose term expired in 2018, and a third member whose term expired in May 2022. The two board members in holdover status will continue to serve until replacements for them are nominated by the President and confirmed by the U.S. Senate. The Biden Administration recently announced a nominee to the vacant seat on the FCA board. That nominee will need to be confirmed by the U.S. Senate before officially joining the FCA board. Farmer Mac will continue to monitor changes to the composition of the FCA board, as it may affect Farmer Mac's regulatory environment.
COVID-19 Pandemic . While disruptions caused by COVID-19 have significantly moderated, recent and rapid increases in cases of COVID-19 resulting from variants of coronavirus demonstrate continued uncertainty stemming from the pandemic. Farmer Mac's mission is to support rural America, and the social and economic disruptions caused by COVID-19 may continue to present new and expanded opportunities for Farmer Mac to help meet the financing needs of rural America while also presenting uncertainties and risks. See "Risk Factors" in Part I, Item 1A of Farmer Mac's 2021 Annual Report for more information about the uncertainties and risks associated with the COVID-19 pandemic on Farmer Mac and its business.
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Balance Sheet Review
The following table summarizes Farmer Mac's balance sheet as of the periods indicated:
Table 23
As of Change
June 30, 2022 December 31, 2021 $ %
(in thousands)
Assets
Cash and cash equivalents $ 909,430 $ 908,785 $ 645 — %
Investment securities, net of allowance 4,292,581 3,882,590 409,991 11 %
Farmer Mac Guaranteed Securities, net of allowance 8,139,681 8,361,798 (222,117) (3) %
USDA Securities 2,433,105 2,440,732 (7,627) — %
Loans, net of allowance 8,899,429 8,300,619 598,810 7 %
Loans held in trusts, net of allowance 834,584 948,059 (113,475) (12) %
Other 407,593 302,908 104,685 35 %
Total assets $ 25,916,403 25,916,403 $ 25,145,491 $ 770,912 3 %
Liabilities
Notes Payable $ 23,474,095 $ 22,716,156 $ 757,939 3 %
Debt securities of consolidated trusts held by third parties 866,107 981,379 (115,272) (12) %
Other 363,853 243,543 120,310 49 %
Total liabilities $ 24,704,055 $ 23,941,078 $ 762,977 3 %
Total equity 1,212,348 1,204,413 7,935 1 %
Total liabilities and equity $ 25,916,403 $ 25,145,491 $ 770,912 3 %
Assets . The increase in total assets was primarily attributable to new loan volume and a larger investment portfolio.
Liabilities . The increase in total liabilities was primarily due to an increase in total notes payable to fund the acquisition of loan volume.
Equity . The increase in total equity was primarily due to an increase in retained earnings, partially offset by a decrease in accumulated other comprehensive income.
Risk Management
Credit Risk – Loans and Guarantees .
Agricultural Finance - Direct Credit Exposure
Farmer Mac's direct credit exposure to Agricultural Finance mortgage loans as of June 30, 2022 was $10.1 billion across 48 states. Farmer Mac applies credit underwriting standards and methodologies to help assess exposures to loan purchases, which may include collateral valuation, financial metrics, and other appropriate borrower financial and credit information. For Corporate AgFinance loans, which are often larger loan exposures to agriculture production and agribusinesses that support agriculture production, food and fiber processing, and other supply chain production, and which may have risk profiles that differ from smaller agricultural mortgage loans, Farmer Mac has implemented methodologies and parameters that help assess credit risk based on the appropriate sector, borrower construct, and transaction complexity. For more information about Farmer Mac's underwriting and collateral valuation
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standards for Agricultural Finance mortgage loans, see "Business—Farmer Mac's Lines of Business—Agricultural Finance—Underwriting and Collateral Standards—Farm & Ranch" and "Business—Farmer Mac's Lines of Business—Agricultural Finance—Underwriting and Collateral Standards—Corporate AgFinance" in Farmer Mac's 2021 Annual Report.
Farmer Mac's 90-day delinquency measure includes loans 90 days or more past due, as well as loans in foreclosure and non-performing loans where the borrower is in bankruptcy. For Agricultural Finance mortgage loans to which Farmer Mac has direct credit exposure, Farmer Mac's 90-day delinquencies as of June 30, 2022, were $20.6 million (0.20% of the Agricultural Finance mortgage loan portfolio to which Farmer Mac has direct credit exposure), compared to $55.8 million (0.57% of the Agricultural Finance mortgage loan portfolio) as of March 31, 2022 and $47.3 million (0.48% of the Agricultural Finance mortgage loan portfolio) as of December 31, 2021. Those 90-day delinquencies were comprised of 19 delinquent loans as of June 30, 2022, compared to 40 delinquent loans as of March 31, 2022 and 32 delinquent loans as of December 31, 2021. The decrease in 90-day delinquencies was primarily driven by decreased delinquencies in crops, livestock, permanent plantings, and agricultural storage and processing, partially offset by increased delinquencies in part-time farms. The top ten borrower exposures over 90 days delinquent represented over half of the 90-day delinquencies as of June 30, 2022. Farmer Mac believes that it remains adequately collateralized on its delinquent loans.
Farmer Mac's 90-day delinquency rate as of June 30, 2022 was below Farmer Mac's historical average. In the near-term, our delinquency rate may exceed our historical average due to the impact of adverse weather events and/or supply chain disruptions on the agricultural economy. Farmer Mac's average 90-day delinquency rate as a percentage of its Agricultural Finance mortgage loan portfolio over the last 15 years is approximately 1%. The highest 90-day delinquency rate observed during that period occurred in 2009 at approximately 2%, which coincided with increased delinquencies in loans within Farmer Mac's ethanol loan portfolio.
The following table presents historical information about Farmer Mac's 90-day delinquencies in the Agricultural Finance mortgage loan portfolio compared to the unpaid principal balance of all Agricultural Finance mortgage loans to which Farmer Mac has direct credit exposure:
Table 24
Agricultural Finance Mortgage Loans 90-Day
Delinquencies Percentage
(dollars in thousands)
As of:
June 30, 2022 $ 10,128,083 $ 20,623 0.20 %
March 31, 2022 9,879,978 55,847 0.57 %
December 31, 2021 9,811,749 47,307 0.48 %
September 30, 2021 9,445,359 54,792 0.58 %
June 30, 2021 9,056,152 63,076 0.70 %
March 31, 2021 8,629,352 72,346 0.84 %
December 31, 2020 8,581,181 46,232 0.54 %
September 30, 2020 8,249,349 88,041 1.07 %
June 30, 2020 8,017,850 68,682 0.86 %
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Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.08% of total outstanding business volume as of June 30, 2022, compared to 0.20% as of December 31, 2021 and 0.28% as of June 30, 2021.
The following table presents outstanding Agricultural Finance mortgage loans and 90-day delinquencies as of June 30, 2022 by year of origination, geographic region, commodity/collateral type, original loan-to-value ratio, and range in the size of borrower exposure:
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Table 25
Agricultural Finance Mortgage Loans 90-Day Delinquencies as of June 30, 2022
Distribution of Agricultural Loans Agricultural Loans 90-Day Delinquencies (1)
Percentage
(dollars in thousands)
By year of origination:
2012 and prior 6 % $ 661,542 $ 2,975 0.45 %
2013 3 % 288,237 116 0.04 %
2014 2 % 245,118 — — %
2015 4 % 375,510 5,989 1.59 %
2016 6 % 564,614 1,023 0.18 %
2017 6 % 585,167 5,363 0.92 %
2018 6 % 616,016 2,409 0.39 %
2019 9 % 891,130 1,512 0.17 %
2020 21 % 2,147,189 305 0.01 %
2021 28 % 2,790,728 931 0.03 %
2022 9 % 962,832 — 0.03 %
Total 100 % $ 10,128,083 $ 20,623 0.20 %
By geographic region (2) :
Northwest 13 % $ 1,312,735 $ 820 0.06 %
Southwest 31 % 3,172,391 6,321 0.20 %
Mid-North 27 % 2,736,714 4,677 0.17 %
Mid-South 16 % 1,631,536 5,989 0.37 %
Northeast 4 % 426,477 1,566 0.37 %
Southeast 9 % 848,230 1,250 0.15 %
Total 100 % $ 10,128,083 $ 20,623 0.20 %
By commodity/collateral type:
Crops 50 % $ 5,054,459 $ 9,236 0.18 %
Permanent plantings 22 % 2,262,699 6,630 0.29 %
Livestock 19 % 1,874,589 3,177 0.17 %
Part-time farm 5 % 465,657 1,580 0.34 %
Ag. Storage and Processing 4 % 453,297 — — %
Other — 17,382 — — %
Total 100 % $ 10,128,083 $ 20,623 0.20 %
By original loan-to-value ratio:
0.00% to 40.00% 18 % $ 1,794,439 $ 2,512 0.14 %
40.01% to 50.00% 23 % 2,335,626 5,269 0.23 %
50.01% to 60.00% 36 % 3,647,002 7,683 0.21 %
60.01% to 70.00% 20 % 2,067,478 4,550 0.22 %
70.01% to 80.00% (3)
3 % 255,234 609 0.24 %
80.01% to 90.00% (3)
— % 28,304 — — %
Total 100 % $ 10,128,083 $ 20,623 0.20 %
By size of borrower exposure (4) :
Less than $1,000,000 26 % $ 2,593,555 $ 3,825 0.15 %
$1,000,000 to $4,999,999 37 % 3,743,028 10,809 0.29 %
$5,000,000 to $9,999,999 16 % 1,636,095 — — %
$10,000,000 to $24,999,999 12 % 1,242,325 5,989 0.48 %
$25,000,000 and greater 9 % 913,080 — — %
Total 100 % $ 10,128,083 $ 20,623 0.20 %
(1) Includes loans held and loans underlying off-balance sheet Agricultural Finance Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(2) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(3) Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.
(4) Includes aggregated loans to single borrowers or borrower-related entities.
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Another indicator that Farmer Mac considers in analyzing the credit quality of its Agricultural Finance mortgage loans is the level of internally-rated "substandard" assets, both in dollars and as a percentage of the outstanding portfolio. Assets categorized as "substandard" have a well-defined weakness or weaknesses, and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected. As of June 30, 2022, Farmer Mac's Agricultural Finance mortgage loans (to which it has direct credit exposure) comprising substandard assets were $213.7 million (2.1% of the portfolio), compared to $215.8 million (2.2% of the portfolio) as of March 31, 2022 and $246.7 million (2.5% of the portfolio) as of December 31, 2021. Those substandard assets comprised 249 loans as of June 30, 2022, 254 loans as of March 31, 2022, and 274 loans as of December 31, 2021.
The decrease of $2.1 million in substandard assets during second quarter 2022 was driven by credit upgrades in our on-balance sheet portfolio, partially offset by credit downgrades in our off-balance sheet portfolio. Substandard assets decreased as a percentage of the total on-balance sheet portfolio due to a combination of volume growth and credit upgrades. Substandard assets increased as a percentage of the total off-balance sheet portfolio due to a combination of credit downgrades and decreased volume.
The percentage of substandard assets within the portfolio as of June 30, 2022 was below the historical average. Farmer Mac's average substandard assets as a percentage of its Agricultural Finance mortgage loans over the last 15 years is approximately 4%. The highest substandard asset rate observed during the last 15 years occurred in 2010 at approximately 8%, which coincided with an increase in substandard loans within Farmer Mac's ethanol portfolio. If Farmer Mac's substandard asset rate increases from current levels, it is likely that Farmer Mac's provision to the allowance for loan losses and the reserve for losses will also increase.
Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of its portfolio, which Farmer Mac believes is adequately collateralized.
Farmer Mac considers a loan's original loan-to-value ratio as one of many factors in evaluating loss severity. Loan-to-value ratios depend on the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards. As of June 30, 2022 and December 31, 2021, the average unpaid principal balances for Agricultural Finance mortgage loans outstanding and to which Farmer Mac has direct credit exposure was $799,000 and $790,000, respectively. Farmer Mac calculates the "original loan-to-value" ratio of a loan by dividing the original loan principal balance by the original appraised property value. This calculation does not reflect any amortization of the original loan balance or any adjustment to the original appraised value to provide a current market value. The original loan-to-value ratio of any cross-collateralized loans is calculated on a combined basis rather than on a loan-by-loan basis. The weighted-average original loan-to-value ratio for Agricultural Finance mortgage loans purchased during second quarter 2022 was 43%, compared to 48% for loans purchased during second quarter 2021. The weighted-average original loan-to-value ratio for Agricultural Finance mortgage loans and loans underlying off-balance sheet Agricultural Finance Guaranteed Securities and LTSPCs was 51% and 52% as of June 30, 2022 and December 31, 2021, respectively. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 53% and 51% as of June 30, 2022 and December 31, 2021, respectively.
The weighted-average current loan-to-value ratio (the loan to-value ratio based on original appraised value and current outstanding loan amount adjusted to reflect amortization) for Agricultural Finance mortgage
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loans and loans underlying off-balance sheet Agricultural Finance Guaranteed Securities and LTSPCs was 46% and 47% as of June 30, 2022 and December 31, 2021, respectively.
The following table presents the current loan-to-value ratios for the Agricultural Finance mortgage loans to which Farmer Mac has direct credit exposure, as disaggregated by internally assigned risk ratings:
Table 26
Agricultural Finance Mortgage Loans current loan-to-value ratio by internally assigned risk rating as of June 30, 2022
Acceptable Special Mention Substandard Total
(in thousands)
Current loan-to-value ratio (1) :
0.00% to 40.00% $ 2,873,999 $ 44,583 $ 67,019 $ 2,985,601
40.01% to 50.00% 2,487,094 94,280 59,486 2,640,860
50.01% to 60.00% 2,683,031 119,047 43,186 2,845,264
60.01% to 70.00% 1,356,243 59,000 29,132 1,444,375
70.01% to 80.00% 165,672 17,243 14,591 197,506
80.01% and greater 13,066 1,153 258 14,477
Total $ 9,579,105 $ 335,306 $ 213,672 $ 10,128,083
(1) The current loan-to-value ratio is based on original appraised value (or most recently obtained valuation, if available) and current outstanding loan amount adjusted to reflect loan amortization.
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The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original balance for all Agricultural Finance mortgage loans as of June 30, 2022 by year of origination, geographic region, and commodity/collateral type. The purpose of this information is to present information about realized losses relative to original Farm & Ranch purchases, guarantees, and commitments.
Table 27
Agricultural Finance Mortgage Loans Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of June 30, 2022
Cumulative Original Loans, Guarantees and LTSPCs Cumulative Net Credit Losses/(Recoveries) Cumulative Loss Rate
(dollars in thousands)
By year of origination:
2012 and prior $ 17,249,759 $ 33,785 0.20 %
2013 1,470,293 — — %
2014 1,073,151 — — %
2015 1,227,120 (516) (0.04) %
2016 1,549,972 84 0.01 %
2017 1,646,522 4,311 0.26 %
2018 1,336,483 — — %
2019 1,556,913 — — %
2020 2,843,026 — — %
2021 3,173,793 — — %
2022 1,001,172 — %
Total $ 34,128,204 $ 37,664 0.11 %
By geographic region (1) :
Northwest $ 4,449,511 $ 11,275 0.25 %
Southwest 11,571,679 8,542 0.07 %
Mid-North 8,605,186 17,165 0.20 %
Mid-South 4,709,056 (613) (0.01) %
Northeast 1,806,310 323 0.02 %
Southeast 2,986,462 972 0.03 %
Total $ 34,128,204 $ 37,664 0.11 %
By commodity/collateral type:
Crops $ 15,812,938 $ 2,971 0.02 %
Permanent plantings 7,422,289 9,783 0.13 %
Livestock 7,534,936 3,836 0.05 %
Part-time farm 1,858,482 1,090 0.06 %
Ag. Storage and Processing 1,331,754 19,984 1.50 %
Other 167,805 — — %
Total $ 34,128,204 $ 37,664 0.11 %
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
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Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer Mac's exposure to loss on a given loan. The following tables present concentrations of Agricultural Finance mortgage loans by commodity type within geographic region and cumulative credit losses by origination year and commodity type:
Table 28
As of June 30, 2022
Agricultural Finance Mortgage Loans Concentrations by Commodity Type within Geographic Region
Crops Permanent
Plantings Livestock Part-time
Farm Ag. Storage and
Processing Other Total
(dollars in thousands)
By geographic region (1) :
Northwest $ 655,549 $ 215,231 $ 308,247 $ 100,019 $ 33,666 $ 23 $ 1,312,735
6.5 % 2.1 % 3.0 % 1.0 % 0.4 % — % 13.0 %
Southwest 678,271 1,688,061 555,443 98,101 137,155 15,360 3,172,391
6.6 % 16.7 % 5.4 % 1.0 % 1.4 % 0.2 % 31.3 %
Mid-North 2,326,315 10,466 210,797 91,318 96,039 1,779 2,736,714
23.0 % 0.1 % 2.1 % 0.9 % 0.9 % — % 27.0 %
Mid-South 912,854 71,481 512,757 62,256 72,171 17 1,631,536
9.0 % 0.7 % 5.1 % 0.6 % 0.7 % — % 16.1 %
Northeast 190,151 43,185 77,831 51,627 63,683 — 426,477
1.9 % 0.4 % 0.8 % 0.5 % 0.5 % — % 4.1 %
Southeast 291,319 234,275 209,514 62,336 50,583 203 848,230
2.9 % 2.3 % 2.2 % 0.6 % 0.5 % — % 8.5 %
Total $5,054,459 $2,262,699 $1,874,589 $465,657 $453,297 $17,382 $10,128,083
49.9 % 22.3 % 18.6 % 4.6 % 4.4 % 0.2 % 100.0 %
(1) Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
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Table 29
As of June 30, 2022
Agricultural Loans Cumulative Credit Losses by Origination Year and Commodity Type
Crops Permanent
Plantings Livestock Part-time
Farm Ag. Storage and
Processing Total
(in thousands)
By year of origination:
2012 and prior $ 3,427 $ 9,783 $ 3,836 $ 1,066 $ 15,673 $ 33,785
2013 — — — — — —
2014 — — — — — —
2015 (540) — — 24 — (516)
2016 84 — — — — 84
2017 — — — — 4,311 4,311
2018 — — — — — —
2019 — — — — — —
2020 — — — — — —
2021 — — — — — —
2022 — — — — — —
Total $ 2,971 $ 9,783 $ 3,836 $ 1,090 $ 19,984 $ 37,664
For more information about the credit quality of Farmer Mac's Agricultural Finance mortgage loans and the associated allowance for losses please refer to Note 5 and Note 6 to the consolidated financial statements. Activity affecting the allowance for loan losses and reserve for losses is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Provision for and Release of Allowance for Loan Losses and Reserve for Losses."
Rural Infrastructure Finance - Direct Credit Exposure
Farmer Mac's direct credit exposure to Rural Infrastructure Finance loans held and loans underlying LTSPCs as of June 30, 2022 was $3.3 billion across 45 states. For more information about Farmer Mac's underwriting and collateral valuation standards for Rural Infrastructure Finance loans, see "Business—Farmer Mac's Lines of Business—Rural Infrastructure Finance—Underwriting and Collateral Standards" in Farmer Mac’s 2021 Annual Report. As of June 30, 2022, there were no delinquencies in Farmer Mac's portfolio of Rural Infrastructure Finance loans.
Farmer Mac evaluates credit risk for these assets by reviewing a variety of borrower credit risk characteristics. These characteristics can include (but is not limited to) financial metrics, internal risk ratings, ratings assigned by ratings agencies, types of customers served, sources of power supply, and the regulatory environment.
The following table presents Farmer Mac’s portfolio of generation and transmission ("G&T") and distribution cooperative borrowers, as well as renewable energy loans, disaggregated by internally assigned risk ratings.
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Table 30
Rural Infrastructure Finance portfolio by internally assigned risk rating as of June 30, 2022
Acceptable Special Mention Substandard Total
(in thousands)
Distribution Cooperative $ 2,287,110 $ — $ — $ 2,287,110
G&T Cooperative 699,868 — — 699,868
Renewable Energy 148,018 — — 148,018
Telecommunications 195,926 — — 195,926
Rural Utilities Total $ 3,330,922 $ — $ — $ — $ — $ — $ 3,330,922
For more information about the credit quality of Farmer Mac's Rural Infrastructure Finance portfolio and the associated allowance for losses please refer to Notes 5 and 6 of the consolidated financial statements.
Other Considerations Regarding Credit Risk Related to Loans and Guarantees
The credit exposure on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is guaranteed by the full faith and credit of the United States. Therefore, Farmer Mac believes that we have little or no credit risk exposure to the USDA Securities in the Agricultural Finance line of business because of the USDA guarantee. As of June 30, 2022, Farmer Mac had not experienced any credit losses on any USDA Securities or Farmer Mac Guaranteed USDA Securities and does not expect to incur any such losses in the future. Because we do not expect credit losses on this portfolio, Farmer Mac does not provide an allowance for losses on its portfolio of USDA Securities.
Farmer Mac requires many lenders to make representations and warranties about the conformity of Agricultural Finance mortgage loans and Rural Infrastructure Finance loans to Farmer Mac's standards, the accuracy of loan data provided to Farmer Mac, and other requirements related to the loans. Sellers who make these representations and warranties are responsible to Farmer Mac for breaches of those representations and warranties. Farmer Mac has the ability to require a seller to cure, replace, or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac's decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac. During the previous three years ended June 30, 2022, there have been no breaches of representations and warranties by sellers that resulted in Farmer Mac requiring a seller to cure, replace, or repurchase a loan. In addition to relying on the representations and warranties of sellers, Farmer Mac also underwrites the Agricultural Finance mortgage loans (other than rural housing and part-time farm mortgage loans) and Rural Infrastructure Finance loans on which it has direct credit exposure. For rural housing and part-time farm mortgage loans, Farmer Mac relies on representations and warranties from the seller that those loans conform to Farmer Mac's specified underwriting criteria. For more information about Farmer Mac's loan eligibility requirements and underwriting standards, see "Business—Farmer Mac's Lines of Business—Agricultural Finance—Loan Eligibility," "Business—Farmer Mac's Lines of Business—Agricultural Finance—Underwriting and Collateral Standards—Farm & Ranch," "Business—Farmer Mac's Lines of Business—Agricultural Finance—Underwriting and Collateral Standards—Corporate AgFinance," and "Business—Farmer Mac's Lines of Business—Rural Infrastructure Finance—Underwriting and Collateral Standards" in Farmer Mac’s 2021 Annual Report.
Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved servicers service loans in accordance with Farmer Mac's requirements. Servicers are responsible to Farmer Mac for serious errors in the servicing of those loans. If a servicer materially breaches the terms of its servicing
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agreement with Farmer Mac, such as failing to forward payments received or releasing collateral without Farmer Mac's consent, or experiences insolvency or bankruptcy, the servicer is responsible for any corresponding damages to Farmer Mac and, in most cases, Farmer Mac has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by the servicer. Farmer Mac also can proceed against the servicer in arbitration or exercise any remedies available to it under law. During the previous three years ended June 30, 2022, Farmer Mac had not exercised any remedies or taken any formal action against any servicers. For more information about Farmer Mac's servicing requirements, see "Business—Farmer Mac's Lines of Business—Agricultural Finance—Loan Servicing" and "Business—Farmer Mac's Lines of Business—Rural Infrastructure Finance—Lenders and Loan Servicing" in Farmer Mac’s 2021 Annual Report.
Credit Risk – Counterparty Risk . Farmer Mac is exposed to credit risk arising from its business relationships with other institutions, which include:
• issuers of AgVantage securities;
• approved lenders and servicers; and
• interest rate swap counterparties.
Farmer Mac approves AgVantage counterparties and manages institutional credit risk related to those AgVantage counterparties by requiring them to meet Farmer Mac's standards for creditworthiness for the particular counterparty type and transaction. The required collateralization level is established when the AgVantage facility is entered into with the counterparty and does not change during the life of the AgVantage securities issued under the facility without Farmer Mac's consent. In AgVantage transactions, the corporate obligor is typically required to remove from the pool of pledged collateral loans that become and remain (within specified parameters) delinquent in the payment of principal or interest and to substitute eligible loans that are current in payment or pay down the AgVantage securities to maintain the minimum required collateralization level.
In the event of a default on an AgVantage security, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing borrower payments of principal and interest. As a result, Farmer Mac has indirect credit exposure to the Agricultural Finance mortgage loans and Rural Utilities loans that secure AgVantage securities. For AgVantage counterparties that are institutional real estate investors or financial funds and other similar entities, Farmer Mac also typically requires that the counterparty (1) maintain a higher collateralization level, through either a higher overcollateralization percentage or lower loan-to-value ratio thresholds and (2) comply with specified financial covenants for the life of the related AgVantage security to avoid default. As of June 30, 2022, Farmer Mac had not experienced any credit losses on any AgVantage securities. For a more detailed description of AgVantage securities, see "Business—Farmer Mac's Lines of Business—Agricultural Finance—Other Products – Agricultural Finance—AgVantage Securities" and "Business—Farmer Mac's Lines of Business—Rural Infrastructure Finance—Other Products – Rural Infrastructure Finance—AgVantage Securities" in Farmer Mac's 2021 Annual Report.
The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans eligible for the Agricultural Finance line of business totaled $5.3 billion as of June 30, 2022 and $5.1 billion as of December 31, 2021. The unpaid principal balance of on-balance sheet AgVantage securities secured by loans eligible for the Rural Infrastructure Finance line of business totaled $3.0 billion as of both June 30, 2022 and December 31, 2021. The unpaid principal balance of outstanding off-balance sheet AgVantage securities totaled $2.8 million as of both June 30, 2022 and December 31, 2021.
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The following table provides information about the issuers of AgVantage securities and the required collateralization levels for those transactions as of June 30, 2022 and December 31, 2021:
Table 31
As of June 30, 2022 As of December 31, 2021
Counterparty Balance Required Collateralization Balance Required Collateralization
(dollars in thousands)
AgVantage:
CFC $ 2,989,159 100% $ 3,036,017 100%
MetLife 2,050,000 103% 2,050,000 103%
Rabo AgriFinance 2,445,000 110% 2,550,000 110%
Other (1)
852,968 106% to 125% 492,464 106% to 125%
Total outstanding $ 8,337,127 $ 8,128,481
(1) Consists of AgVantage securities issued by 12 and 13 different issuers as of June 30, 2022 and December 31, 2021, respectively.
Farmer Mac manages institutional credit risk related to lenders and servicers by requiring those institutions to meet Farmer Mac's standards for creditworthiness. Farmer Mac monitors the financial condition of those institutions by evaluating financial statements and credit rating agency reports. For more information about Farmer Mac's lender eligibility requirements, see "Business—Farmer Mac's Lines of Business—Agricultural Finance—Lenders" and "Business—Farmer Mac's Lines of Business—Rural Infrastructure Finance—Lenders and Loan Servicing" in Farmer Mac’s 2021 Annual Report.
Farmer Mac manages institutional credit risk related to its interest rate swap counterparties through collateralization provisions contained in each of its swap agreements that vary based on the market value of its swap portfolio with each counterparty. Farmer Mac and its interest rate swap counterparties are required to fully collateralize their derivatives positions without any minimum threshold for cleared swap transactions, as well as for non-cleared swap transactions entered into after March 1, 2017. Farmer Mac transacts interest rate swaps with multiple counterparties to reduce counterparty credit exposure concentration. Farmer Mac's usage of cleared derivatives has increased over time as has its exposure to clearinghouses. The usage of cleared swap transactions reduces Farmer Mac's exposure to individual counterparties with the central clearinghouse acting to settle the change in value of contracts on a daily basis. Credit risk related to interest rate swap contracts is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" and Note 4 to the consolidated financial statements.
Credit Risk – Other Investments . As of June 30, 2022, Farmer Mac had $0.9 billion of cash and cash equivalents and $4.3 billion of investment securities. The management of the credit risk inherent in these investments is governed by Farmer Mac's internal policies as well as FCA regulations found at 12 C.F.R. §§ 652.1-652.45 (the "Liquidity and Investment Regulations"). In addition to establishing a portfolio of highly liquid investments as an available source of cash, the goals of Farmer Mac's investment policies are designed to minimize Farmer Mac's exposure to financial market volatility, preserve capital, and support Farmer Mac's access to the debt markets.
The Liquidity and Investment Regulations and Farmer Mac's internal policies require that investments held in Farmer Mac's investment portfolio meet the following creditworthiness standards: (1) at a minimum, at least one obligor of the investment must have a very strong capacity to meet financial commitments for the life of the investment, even under severely adverse or stressful conditions, and
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generally present a very low risk of default; (2) if the obligor whose capacity to meet financial commitments is being relied upon to meet the standard set forth in subparagraph (1) is located outside of the United States, the investment must also be fully guaranteed by a U.S. government agency; and (3) the investment must exhibit low credit risk and other risk characteristics consistent with the purpose or purposes for which it is held.
The Liquidity and Investment Regulations and Farmer Mac's internal policies also establish concentration limits, which are intended to limit exposure to any single entity, issuer, or obligor. The Liquidity and Investment Regulations limit Farmer Mac's total credit exposure to any single entity, issuer, or obligor of securities to 10% of Farmer Mac's regulatory capital ($127.7 million as of June 30, 2022). However, Farmer Mac's current policy limits this total credit exposure to 5% of its regulatory capital ($63.8 million as of June 30, 2022). These exposure limits do not apply to obligations of U.S. government agencies or GSEs, although Farmer Mac's current policy restricts investing more than 100% of regulatory capital in the senior non-convertible debt securities of any one GSE.
Although the Liquidity and Investments Regulations do not establish limits on the maximum amount, expressed as a percentage of Farmer Mac's investment portfolio, that can be invested in each eligible asset class, Farmer Mac's internal policies set forth asset class limits as part of Farmer Mac's overall risk management framework.
Interest Rate Risk . Farmer Mac is subject to interest rate risk on all interest-earning assets on its balance sheet because of timing differences in the cash flows due to maturity, paydown, or repricing of the assets and debt together with financial derivatives. Cash flow mismatches due to changing interest rates can reduce the earnings of Farmer Mac if assets prepay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments when Farmer Mac's funding costs cannot be correspondingly reduced. Alternatively, Farmer Mac could realize a decline in income if assets repay more slowly than originally forecasted and the associated maturing debt must be replaced by debt issuances at higher interest rates.
Interest Rate Risk Management
The goal of interest rate risk management at Farmer Mac is to manage the balance sheet in a manner that generates stable earnings and value across a variety of interest rate environments. Recognizing that interest rate sensitivities may change with the passage of time and as interest rates change, Farmer Mac regularly assesses this exposure and, if necessary, adjusts its portfolio of interest-earning assets, debt, and financial derivatives.
Farmer Mac's objective is to maintain its exposure to interest rate risk within appropriate limits, as approved by Farmer Mac's board of directors. Farmer Mac's management-level Asset and Liability Committee ("ALCO") provides oversight, establishes guidelines, and approves strategies to maintain interest rate risk within the board-established limits.
Farmer Mac's primary strategy for managing interest rate risk is to fund asset purchases with debt that together with financial derivatives have similar duration and convexity characteristics and help mitigate impacts from interest rate changes across the yield curve. As part of this debt issuance strategy, Farmer Mac seeks to issue debt securities across a variety of maturities that together with financial derivatives closely align the forecasted debt and financial derivative cash flows with forecasted asset cash flows.
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Farmer Mac issues discount notes and both callable and non-callable medium-term notes across a spectrum of maturities to execute its debt issuance strategy. Callable debt is issued to mitigate prepayment risk associated with certain interest-earning assets held on balance sheet. In general, as interest rates decline, prepayments typically increase, and Farmer Mac is able to economically extinguish certain callable debt issuances. In addition, Farmer Mac enters into financial derivatives, primarily interest rate swaps, to better match the durations of Farmer Mac's assets and liabilities, thereby reducing overall sensitivity to changing interest rates.
Taking into consideration the prepayment provisions and the default probabilities associated with its portfolio of interest-earning assets, Farmer Mac incorporates behavioral models when projecting and valuing cash flows associated with these assets. In recognition that borrowers' behaviors in various interest rate environments may change over time, Farmer Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience and adjusts and refines the models as necessary to improve the precision of future prepayment forecasts.
Changes in interest rates may affect the timing of asset prepayments which may, in turn, impact durations and values of the assets. Declining interest rates generally result in increased prepayments, which shortens the duration of these assets, while rising interest rates generally result in lower prepayments, thereby extending the duration of the assets.
Farmer Mac is subject to interest rate risk on loans and securities it has committed to acquire but not yet purchased (other than delinquent loans purchased through LTSPCs or loans designated for securitization under a forward purchase agreement). When Farmer Mac commits to purchase these assets, it is exposed to interest rate risk between the time it commits to purchase the loans and the time it issues debt to fund the purchase of these loans. Farmer Mac manages the interest rate risk exposure related to these loans by entering into exchange-traded futures contracts involving U.S. Treasury securities and other financial derivatives. Similarly, when Farmer Mac commits to sell certain assets, the associated interest rate exposure is primarily managed with exchange-traded futures contracts involving U.S. Treasury securities and other financial derivatives.
Farmer Mac's $0.9 billion of cash and cash equivalents held as of June 30, 2022 mature within three months. As of June 30, 2022, $3.2 billion of the $4.3 billion of investment securities (74%) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. Farmer Mac's floating rate investment securities are funded with floating rate debt. The fixed rate investment securities are generally funded in a manner consistent with Farmer Mac's overall funding strategy that approximates a duration and convexity match.
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Interest Rate Risk Metrics
Farmer Mac regularly evaluates and conducts interest rate shock simulations on its portfolio of financial assets, debt, and financial derivatives and examines a variety of metrics to quantify and manage its exposure to interest rate risk. These metrics include sensitivity to interest rate movements on the market value of equity ("MVE") and forecasted net effective spread ("NES") as well as a duration gap analysis.
MVE represents management's estimate of the present value of all future cash flows from its current portfolio of on- and off-balance sheet assets, liabilities, and financial derivatives, discounted at current interest rates and appropriate spreads. However, MVE is not indicative of the market value of Farmer Mac as a going concern because these market values are theoretical and do not reflect future business activities. The MVE sensitivity analysis measures the degree to which the market values of Farmer Mac's assets, liabilities, and financial derivatives are estimated to change for a given change in interest rates.
Farmer Mac's NES simulation represents the difference between projected income over the next twelve months from the current portfolio of interest-earning assets and interest expense produced by the related funding, including associated financial derivatives. Farmer Mac's NES simulation may be impacted by changes in market interest rates resulting from timing differences between maturities and re-pricing characteristics of funded assets and debt together with the associated financial derivatives. The direction and magnitude of any such effect depends on the direction and magnitude of the change in interest rates across the yield curve as well as the composition of Farmer Mac's portfolio. The NES simulation represents an estimate of the net effective spread income that Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, the NES simulation sensitivity statistics provide a short-term view of Farmer Mac's NES income sensitivity to interest rate shocks.
Duration is a measure of a financial instrument's fair value sensitivity to small changes in interest rates. Duration gap is calculated using the net estimated durations of Farmer Mac's interest-earning assets, debt, and financial derivatives. Duration gap quantifies the extent to which estimated fair value sensitivities are matched for interest-earning assets, debt and financial derivatives. Duration gap provides a relatively concise measure of the interest rate risk inherent in Farmer Mac's outstanding portfolio.
A positive duration gap denotes that the duration of Farmer Mac's interest-earning assets is greater than the duration of its debt and financial derivatives. A positive duration gap indicates that with small changes in interest rate movements the fair value change of Farmer Mac's interest-earning assets is more sensitive than the fair value change of its debt and financial derivatives. Conversely, a negative duration gap indicates that with small changes in interest rate movements the fair value change of Farmer Mac's interest-earning assets are less sensitive than the fair value change of its debt and financial derivatives. A duration gap of zero indicates that with small changes in interest rate movements the fair value change of Farmer Mac's interest-earning assets is effectively offset by the fair value change of its debt and financial derivatives.
Each of the interest rate risk metrics is quantified using asset/liability models and derived based on management's best estimates of factors such as implied forward interest rates across the yield curve, interest rate volatility, and timing of asset prepayments and callable debt redemptions. Accordingly, these metrics are estimates rather than precise measurements. Actual results may differ to the extent there are material changes to Farmer Mac's financial asset portfolio or changes in funding or hedging strategies undertaken to mitigate unfavorable sensitivities to interest rate changes.
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The following schedule summarizes the results of Farmer Mac's MVE and NES sensitivity analysis as of June 30, 2022 and December 31, 2021 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:
Table 32
Percentage Change in MVE from Base Case
Interest Rate Scenario (1)
As of June 30, 2022 As of December 31, 2021 (1)
+100 basis points (1.9) % 3.7 %
-100 basis points (0.7) % (0.1) %
Percentage Change in NES from Base Case
Interest Rate Scenario As of June 30, 2022 As of December 31, 2021 (1)
+100 basis points 1.7 % 6.6 %
-100 basis points (1.7) % (0.1) %
(1) The down 100 basis points shock scenario was replaced in 2020 with a proportional shock relative to 50% of the 3-month Treasury bill rate, with the approval of the Financial Risk Committee of the Board of Directors. The replacement down shock scenario was negative 2 basis points as of December 31, 2021.
As of June 30, 2022, Farmer Mac's duration gap was positive 2.4 months, compared to negative 1.5 months as of December 31, 2021. Farmer Mac updated its duration gap measure to interest-earning assets, debt, and financial derivatives as of December 31, 2021. Interest rates within the yield curve flattened during the first half of 2022 with the 2-year and 10-year U.S. Treasury Note yield-to-maturity increasing by approximately 222 basis points and 150 basis points, respectively, versus year-end 2021. This rate movement contributed to extending the duration of Farmer Mac's funded assets compared to its debt and financial derivatives, thereby lengthening Farmer Mac's duration gap.
Financial Derivatives Transactions
The economic effects of financial derivatives are included in Farmer Mac's MVE, NES, and duration gap analyses. Farmer Mac typically enters into the following types of financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of interest-earning assets, future cash flows, and debt issuance, and not for trading or speculative purposes:
• "pay-fixed" interest rate swaps, in which Farmer Mac pays fixed rates of interest to, and receives floating rates of interest from, counterparties;
• "receive-fixed" interest rate swaps, in which Farmer Mac receives fixed rates of interest from, and pays floating rates of interest to, counterparties;
• "basis swaps," in which Farmer Mac pays floating rates of interest based on one index to, and receives floating rates of interest based on a different index from, counterparties; and
• exchange-traded futures contracts involving U.S. Treasury securities.
As of June 30, 2022, Farmer Mac had $20.3 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to just over thirty years, of which $8.1 billion were pay-fixed interest rate swaps, $10.4 billion were receive-fixed interest rate swaps, and $1.8 billion were basis swaps.
Farmer Mac enters into interest rate swaps to more closely match the cash flow and duration characteristics of its interest-earning assets with those of its debt. For example, Farmer Mac transacts pay-fixed interest rate swaps and issues floating rate debt to effectively create fixed rate funding that approximately matches the duration of the corresponding fixed rate assets being funded. Farmer Mac
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evaluates the overall cost of using interest rate swaps in conjunction with debt issuance as a funding alternative to duration-matched debt and enters into interest rate swaps to manage interest rate risks across the balance sheet.
Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available for sale or liabilities to protect against fair value changes in the assets or liabilities related to a benchmark interest rate (e.g., LIBOR or Secured Overnight Financing Rate (“SOFR”)). Also, certain financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.
As discussed in Note 4 to the consolidated financial statements, all financial derivatives are recorded on the balance sheet at fair value as derivative assets or as derivative liabilities. Changes in the fair values of undesignated financial derivatives are reported in "Gains/(losses) on financial derivatives" in the consolidated statements of operations. For financial derivatives designated in fair value hedge accounting relationships, changes in the fair values of the hedged items related to the risk being hedged are reported in "Net interest income" in the consolidated statements of operations. Interest accruals on derivatives designated in fair value hedge accounting relationships are also recorded in "Net interest income" in the consolidated statements of operations. For financial derivatives designated in cash flow hedge accounting relationships, the unrealized gain or loss on the derivative is recorded in other comprehensive income. Because the hedging instrument is an interest rate swap and the hedged forecasted transactions are future interest payments on floating rate debt, amounts recorded in accumulated other comprehensive income are reclassified to "Total interest expense" in conjunction with the recognition of interest expense on the debt. All of Farmer Mac's interest rate swap transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty. As of both June 30, 2022 and December 31, 2021, Farmer Mac had no uncollateralized net exposures based on the mark-to-market value of the portfolio of interest rate swaps
Re-funding and repricing risk
Farmer Mac is subject to re-funding and repricing risk on any floating rate assets that are not funded to contractual maturity. Re-funding and repricing risk arises from potential changes in funding costs resulting from a funding strategy whereby Farmer Mac issues floating rate debt across a variety of maturities to fund floating rate or synthetically floating rate assets that on average may have longer maturities. Changes in Farmer Mac's funding costs relative to the benchmark market index rate to which the assets are indexed can cause changes to net interest income when debt matures and is reissued at then current interest rates to continue funding those assets.
Farmer Mac is subject to re-funding and repricing risk on a portion of its fixed rate assets as a result of its use of pay-fixed receive-floating interest rate swaps that effectively convert the required funding needed from fixed rate to floating rate. These fixed rate assets are then effectively floating rate assets that require floating rate funding.
Farmer Mac can meet floating rate funding needs in several ways, including:
• issuing short-term fixed rate discount notes with maturities that match the reset period of the assets;
• issuing floating rate medium-term notes with maturities and reset frequencies that match the assets being funded;
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• issuing non-maturity matched, floating rate medium-term notes with reset frequencies that match the assets being funded; or
• issuing non-maturity matched, fixed rate discount notes or medium-term notes swapped to floating rate to match the interest rate reset dates of the assets.
To meet certain floating rate funding needs, Farmer Mac frequently issues shorter-term floating-rate medium-term notes or fixed rate medium-term notes paired with a received-fixed interest rate swap because these funding alternatives generally provide a lower cost of funding while generating an effective interest rate match. As funding for these floating rate assets matures, Farmer Mac seeks to refinance the debt associated with these assets in a similar fashion to achieve an appropriate interest rate match in the context of Farmer Mac's overall debt issuance and liquidity management strategies.
However, if the funding cost of Farmer Mac’s discount notes or medium-term notes increased relative to the benchmark market index of the associated assets during the time between when these floating rate assets were first funded and when Farmer Mac refinanced the associated debt, Farmer Mac would be exposed to a commensurate reduction of net effective spread. Conversely, if the funding cost on Farmer Mac’s discount notes or medium-term notes decreased relative to the benchmark market index during that time, Farmer Mac would benefit from a commensurate increase to net effective spread.
Farmer Mac's debt issuance strategy targets balancing liquidity risk and re-funding and repricing risk while maintaining an appropriate liability management profile that is consistent with Farmer Mac's risk tolerance. Farmer Mac regularly adjusts its funding strategies to mitigate the effects of interest rate variability and seeks to maintain an effective mixture of funding structures in the context of its overall liability and liquidity management strategies.
As of June 30, 2022, Farmer Mac held $5.7 billion of floating rate assets in its lines of business and its investment portfolio that reset based on floating rate market indices, such as LIBOR or SOFR. As of the same date, Farmer Mac also had $8.1 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of interest and receives a floating rate of interest, primarily LIBOR or SOFR.
Discontinuation of LIBOR
As described in "Risk Factors—Market Risk" in Part I, Item 1A of the 2021 Annual Report, Farmer Mac faces risks associated with the reform, replacement, or discontinuation of the LIBOR benchmark interest rate and the transition to an alternative benchmark interest rate. Farmer Mac is evaluating the potential effect on our business of the replacement of the LIBOR benchmark interest rate, including the possibility of replacement benchmark interest rates.
As of June 30, 2022, Farmer Mac held $3.1 billion of floating rate assets in its lines of business and its investment portfolio, had issued $0.3 billion of floating rate debt, and had entered into $11.9 billion notional amount of interest rate swaps, each of which reset based on LIBOR. In addition, our Non-Cumulative Series C Preferred Stock currently pays a fixed rate of interest until July 17, 2024. It becomes redeemable at our option on July 18, 2024 and thereafter pays interest at a floating rate equal to three-month LIBOR plus 3.260%.
The market transition away from LIBOR and towards alternative benchmark interest rate indices that may be developed is expected to be complicated and may require the development of term and credit adjustments to accommodate for differences between the benchmark interest rate indices. The transition
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may also result in different financial performance for existing transactions, require different hedging strategies, or require renegotiation of existing transactions. As of June 30, 2022, we had $1.8 billion outstanding in medium-term notes based on SOFR, a potential alternative benchmark interest rate index.
Liquidity and Capital Resources
Farmer Mac's primary sources of funds to meet its liquidity and funding needs are the proceeds of its debt issuances, guarantee and commitment fees, net effective spread, loan repayments, and maturities of AgVantage and investment securities. Farmer Mac regularly accesses the debt capital markets for funding, and Farmer Mac has maintained steady access to the debt capital markets throughout second quarter 2022. Farmer Mac funds its purchases of eligible loan assets, USDA Securities, Farmer Mac Guaranteed Securities, and investment assets and finances its operations primarily by issuing debt obligations of various maturities in the debt capital markets. As of June 30, 2022, Farmer Mac had outstanding discount notes of $1.5 billion, medium-term notes that mature within one year of $5.6 billion, and medium-term notes that mature after one year of $16.8 billion.
Assuming continued access to the debt capital markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future. Farmer Mac has a contingency funding plan to manage unanticipated disruptions in its access to the debt capital markets. Farmer Mac must maintain a minimum of 90 days of liquidity under the Liquidity and Investment Regulations prescribed for Farmer Mac by FCA. In accordance with the methodology for calculating available days of liquidity under those regulations, Farmer Mac maintained a monthly average of 387 days of liquidity during second quarter 2022 and had 364 days of liquidity as of June 30, 2022.
Farmer Mac maintains cash, cash equivalents (including U.S. Treasury securities and other short-term money market instruments), and other investment securities that can be drawn upon for liquidity needs. Farmer Mac's current policies authorize liquidity investments in:
• obligations of or fully guaranteed by the United States or a U.S. government agency;
• obligations of or fully guaranteed by GSEs;
• municipal securities;
• international and multilateral development bank obligations;
• money market instruments;
• diversified investment funds;
• asset-backed securities;
• corporate debt securities; and
• mortgage-backed securities.
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The following table presents these assets as of June 30, 2022 and December 31, 2021:
Table 33
As of June 30, 2022 As of December 31, 2021
(in thousands)
Cash and cash equivalents $ 909,430 $ 908,785
Investment securities:
Guaranteed by U.S. Government and its agencies 1,526,785 1,579,452
Guaranteed by GSEs 2,745,198 2,282,655
Asset-backed securities 19,061 19,254
Total $ 5,200,474 $ 4,790,146
The objective of the investment portfolio as of June 30, 2022 and December 31, 2021 was to provide a level of liquidity that mitigates enterprise risk, provides a reliable source of short-term and long-term liquidity, to prepare for the possibility of future volatility in the debt capital markets, and to support program asset growth.
Capital Requirements . Farmer Mac is subject to the following statutory capital requirements – minimum, critical, and risk-based. Farmer Mac must comply with the higher of the minimum capital requirement and the risk-based capital requirement. As of June 30, 2022, Farmer Mac was in compliance with its statutory capital requirements and was classified as within "level 1" (the highest compliance level).
In accordance with FCA's rule on capital planning, Farmer Mac's board of directors has adopted a policy for maintaining a sufficient level of "Tier 1" capital (consisting of retained earnings, paid-in capital, common stock, and qualifying preferred stock). That policy restricts Tier 1-eligible dividends and any discretionary bonus payments if Tier 1 capital falls below specified thresholds. As of both June 30, 2022 and December 31, 2021, Farmer Mac's Tier 1 capital ratio was 14.7%, respectively. As of June 30, 2022, Farmer Mac was in compliance with its capital adequacy policy. Farmer Mac does not expect its compliance on an ongoing basis with FCA's rule on capital planning, including Farmer Mac's policy on Tier 1 capital, to materially affect Farmer Mac's operations or financial condition.
For more information about the capital requirements applicable to Farmer Mac, its capital adequacy policy, and FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—Capital Standards" in Farmer Mac's 2021 Annual Report. See Note 8 to the consolidated financial statements for more information about Farmer Mac's capital position.
Other Matters
None.
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Supplemental Information
The following tables present quarterly and annual information about new business volume, repayments, and outstanding business volume:
Table 34
New Business Volume
Agricultural Finance Rural Infrastructure Finance
Farm & Ranch Corporate AgFinance Rural Utilities Renewable Energy Total
(in thousands)
For the quarter ended:
June 30, 2022 $ 1,418,397 $ 107,916 $ 326,899 $ 35,307 $ 1,888,519
March 31, 2022 2,452,539 103,353 377,965 41,636 2,975,493
December 31, 2021 2,075,540 411,838 631,338 12,594 3,131,310
September 30, 2021 1,791,662 122,043 609,745 4,152 2,527,602
June 30, 2021 925,950 159,958 410,666 3,441 1,500,015
March 31, 2021 1,087,897 186,393 171,546 23,484 1,469,320
December 31, 2020 907,316 242,394 145,416 44,313 1,339,439
September 30, 2020 1,059,891 212,829 52,300 10,000 1,335,020
June 30, 2020 1,069,693 279,021 358,866 — 1,707,580
For the year ended:
December 31, 2021 $ 5,881,049 $ 880,232 $ 1,823,295 $ 43,671 $ 8,628,247
December 31, 2020 3,805,600 899,372 949,250 64,313 5,718,535
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Table 35
Repayments of Assets
Agricultural Finance Rural Infrastructure Finance
Farm & Ranch Corporate AgFinance Rural Utilities Renewable Energy Total
(in thousands)
For the quarter ended:
Scheduled $ 1,114,779 $ 42,162 $ 159,491 $ 7,898 $ 1,324,330
Unscheduled 286,303 30,203 1,791 — 318,297
June 30, 2022 $ 1,401,082 $ 72,365 $ 161,282 $ 7,898 $ 1,642,627
Scheduled $ 1,535,369 $ 39,480 $ 266,349 $ 7,790 $ 1,848,988
Unscheduled 434,794 60,947 397 — 496,138
March 31, 2022 $ 1,970,163 $ 100,427 $ 266,746 $ 7,790 $ 2,345,126
Scheduled $ 928,663 $ 205,778 $ 816,802 $ 18,526 $ 1,969,769
Unscheduled 318,024 48,042 — — 366,066
December 31, 2021 $ 1,246,687 $ 253,820 $ 816,802 $ 18,526 $ 2,335,835
Scheduled $ 725,713 $ 406,285 $ 95,443 $ 4,043 $ 1,231,484
Unscheduled 374,287 — 201 — 374,488
September 30, 2021 $ 1,100,000 $ 406,285 $ 95,644 $ 4,043 $ 1,605,972
Scheduled $ 380,684 $ 139,774 $ 225,257 $ 4,704 $ 750,419
Unscheduled 409,393 3,921 1,652 — 414,966
June 30, 2021 $ 790,077 $ 143,695 $ 226,909 $ 4,704 $ 1,165,385
Scheduled $ 721,090 $ 120,621 $ 100,482 $ 2,671 $ 944,864
Unscheduled 501,651 82,090 2,279 — 586,020
March 31, 2021 $ 1,222,741 $ 202,711 $ 102,761 $ 2,671 $ 1,530,884
Scheduled $ 365,732 $ 197,108 $ 405,597 $ 561 $ 968,998
Unscheduled 400,809 27,850 1,610 — 430,269
December 31, 2020 $ 766,541 $ 224,958 $ 407,207 $ 561 $ 1,399,267
Scheduled $ 569,820 $ 74,038 $ 211,152 $ 279 $ 855,289
Unscheduled 531,062 1,489 — — 532,551
September 30, 2020 $ 1,100,882 $ 75,527 $ 211,152 $ 279 $ 1,387,840
Scheduled $ 523,721 $ 109,543 $ 67,708 $ 240 $ 701,212
Unscheduled 448,900 50,737 3,935 — 503,572
June 30, 2020 $ 972,621 $ 160,280 $ 71,643 $ 240 $ 1,204,784
For the year ended:
Scheduled $ 2,756,150 $ 872,458 $ 1,237,984 $ 29,944 $ 4,896,536
Unscheduled 1,603,355 134,053 4,132 — 1,741,540
December 31, 2021 $ 4,359,505 $ 1,006,511 $ 1,242,116 $ 29,944 $ 6,638,076
Scheduled $ 1,779,761 $ 475,464 $ 849,924 $ 1,080 $ 3,106,229
Unscheduled 1,706,849 88,394 5,545 — 1,800,788
December 31, 2020 $ 3,486,610 $ 563,858 $ 855,469 $ 1,080 $ 4,907,017
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Table 36
Outstanding Business Volume
Agricultural Finance Rural Infrastructure Finance
Farm & Ranch Corporate AgFinance Rural Utilities Renewable Energy Total
(in thousands)
As of:
June 30, 2022 $ 16,591,999 $ 1,567,311 $ 6,172,063 $ 148,018 $ 24,479,391
March 31, 2022 16,575,595 1,540,760 6,006,446 120,609 24,243,410
December 31, 2021 16,094,639 1,537,834 5,895,227 86,763 23,614,463
September 30, 2021 15,565,589 1,379,816 6,080,691 92,695 23,118,791
June 30, 2021 14,873,926 1,664,059 5,566,591 92,585 22,197,161
March 31, 2021 14,738,052 1,647,796 5,382,835 93,848 21,862,531
December 31, 2020 14,872,894 1,664,115 5,314,051 73,035 21,924,095
September 30, 2020 14,737,485 1,646,679 5,575,841 29,283 21,989,288
June 30, 2020 14,778,474 1,509,378 5,734,694 19,562 22,042,108
Table 37
On-Balance Sheet Outstanding Business Volume
Fixed Rate 5- to 10-Year ARMs & Resets 1-Month to 3-Year ARMs Total Held in Portfolio
(in thousands)
As of:
June 30, 2022 $ 13,798,771 $ 2,939,467 $ 3,993,956 $ 20,732,194
March 31, 2022 14,174,611 2,858,521 3,443,816 20,476,948
December 31, 2021 13,228,675 2,896,014 3,695,269 19,819,958
September 30, 2021 12,921,572 2,872,499 3,818,550 19,612,621
June 30, 2021 11,800,429 2,878,637 4,254,625 18,933,691
March 31, 2021 11,454,321 2,824,551 4,410,661 18,689,533
December 31, 2020 11,330,414 2,816,840 4,511,964 18,659,218
September 30, 2020 10,879,372 2,811,547 5,013,640 18,704,559
June 30, 2020 10,793,629 2,845,266 5,076,445 18,715,340
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The following table presents the quarterly net effective spread (a non-GAAP measure) by segment:
Table 38
Net Effective Spread (1)
Agricultural Finance Rural Infrastructure Finance Treasury
Farm & Ranch Corporate AgFinance Rural Utilities Renewable Energy Funding Investments Net Effective Spread
Dollars Yield Dollars Yield Dollars Yield Dollars Yield Dollars Yield Dollars Yield Dollars Yield
(dollars in thousands)
For the quarter ended:
June 30, 2022 (2)
$ 32,590 1.05 % $ 6,929 1.87 % $ 3,733 0.27 % $ 468 1.78 % $ 18,508 0.30 % $ (1,282) (0.10) % $ 60,946 0.99 %
March 31, 2022 30,354 1.02 % 7,209 1.96 % 3,159 0.23 % 375 1.69 % 16,738 0.28 % 4 — % 57,839 0.97 %
December 31, 2021 28,998 0.99 % 6,321 1.84 % 2,521 0.19 % 356 1.53 % 15,979 0.28 % 158 0.01 % 54,333 0.94 %
September 30, 2021 28,914 1.06 % 7,163 1.80 % 2,067 0.16 % 236 1.09 % 17,386 0.31 % 159 0.01 % 55,925 0.99 %
June 30, 2021 (2)
29,163 1.06 % 6,676 1.65 % 1,759 0.14 % 378 1.80 % 18,449 0.33 % 126 0.01 % 56,551 1.01 %
March 31, 2021 26,461 0.98 % 6,921 1.67 % 1,720 0.14 % 249 1.28 % 18,394 0.33 % 114 0.01 % 53,859 0.97 %
December 31, 2020 25,596 0.95 % 6,237 1.53 % 1,838 0.15 % 123 1.20 % 20,585 0.37 % 143 0.01 % 54,522 0.98 %
September 30, 2020 23,735 0.89 % 5,786 1.45 % 2,022 0.16 % 75 1.19 % 20,034 0.37 % 150 0.01 % 51,802 0.96 %
June 30, 2020 21,597 0.83 % 4,997 1.36 % 1,701 0.14 % 47 0.93 % 19,449 0.37 % (1,322) (0.13) % 46,469 0.89 %
(1) Farmer Mac excludes the Corporate segment in the presentation above because the segment does not have any interest-earning assets.
(2) See Note 10 to the consolidated financial statements for a reconciliation of GAAP net interest income by segment to net effective spread by segment for the three months ended June 30, 2022 and 2021.
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The following table presents quarterly core earnings (a non-GAAP measure) reconciled to net income attributable to common stockholders:
Table 39
Core Earnings by Quarter End
June
2022 March 2022 December 2021 September 2021 June 2021 March 2021 December 2020 September 2020 June 2020
(in thousands)
Revenues:
Net effective spread $ 60,946 $ 57,839 $ 54,333 $ 55,925 $ 56,551 $ 53,859 $ 54,522 $ 51,802 $ 46,469
Guarantee and commitment fees 4,709 4,557 4,637 4,322 4,334 4,240 4,652 4,659 4,943
Gain on sale of mortgage loans — — 6,539 — — — — — —
Other 307 514 241 687 301 451 512 453 1,048
Total revenues 65,962 62,910 65,750 60,934 61,186 58,550 59,686 56,914 52,460
Credit related expense/(income):
(Release of)/provision for losses (1,535) (54) (1,428) 255 (983) (31) 2,973 1,200 51
REO operating expenses — — — — — — — — —
Losses/(gains) on sale of REO — — — — — — 22 — —
Total credit related expense/(income) (1,535) (54) (1,428) 255 (983) (31) 2,995 1,200 51
Operating expenses:
Compensation and employee benefits 11,715 13,298 11,246 10,027 9,779 11,795 9,497 8,791 8,087
General and administrative 7,520 7,278 8,492 6,330 6,349 6,336 6,274 5,044 5,295
Regulatory fees 813 812 812 750 750 750 750 725 725
Total operating expenses 20,048 21,388 20,550 17,107 16,878 18,881 16,521 14,560 14,107
Net earnings 47,449 41,576 46,628 43,572 45,291 39,700 40,170 41,154 38,302
Income tax expense 9,909 9,024 9,809 9,152 9,463 8,520 8,470 8,297 8,016
Preferred stock dividends 6,792 6,791 6,792 6,774 5,842 5,269 5,269 5,166 3,939
Core earnings $ 30,748 $ 25,761 $ 30,027 $ 27,646 $ 29,986 $ 25,911 $ 26,431 $ 27,691 $ 26,347
Reconciling items:
Gains/(losses) on undesignated financial derivatives due to fair value changes $ 2,473 $ 1,698 $ (1,213) $ (1,864) $ (3,721) $ 1,695 $ (1,758) $ (4,149) $ 8,700
Gains/(losses) on hedging activities due to fair value changes 5,916 2,024 1,476 (2,093) (2,097) (271) 3,827 (5,245) (2,676)
Unrealized gains/(losses) on trading assets (285) 94 (76) 36 (61) (14) 223 (258) (20)
Net effects of amortization of premiums/discounts and deferred gains on assets consolidated at fair value (62) 20 71 23 20 16 (77) 97 35
Net effects of terminations or net settlements on financial derivatives 2,536 15,512 (429) (351) 109 1,165 1,583 233 720
Issuance costs on the retirement of preferred stock — — — — — — — (1,667) —
Income tax effect related to reconciling items (2,222) (4,063) 36 892 1,208 (544) (798) 1,957 (1,419)
Net income attributable to common stockholders $ 39,104 $ 41,046 $ 29,892 $ 24,289 $ 25,444 $ 27,958 $ 29,431 $ 18,659 $ 31,687
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