Federal Agricultural Mortgage
Annual Report 2017

Plain-text annual report

INVESTED IN RURAL AMERICA ANNUAL REPORT 2017 WHO WE ARE Farmer Mac® is the premier secondary market for U.S. agricultural credit and has been a champion for and an integral part of this nation’s rural economy for 30 years. Guided by our mission—to help build a strong and vital rural America by increasing the availability and affordability of credit for the benefit of American agriculture and rural communities—we provide lenders access to flexible, low-cost financing and effective risk management tools to help their farm, ranch, and rural utilities customers. INVESTED IN RURAL AMERICA Farmer Mac’s dedicated team works tirelessly to deliver on our mission and help bolster the financial strength of agriculture and rural communities nationwide. We help ensure an even brighter future for rural America by spending countless hours traveling the countryside and visiting customers to better understand the financial challenges facing today’s rural communities. The more time we spend with our customers, the better we can customize and tailor our solutions to help meet their financing needs. The respect we have for the hard work that defines these communities runs deep, and our appreciation for all that farming and rural communities contribute to our society is unwavering. By every measure, Farmer Mac is firmly and proudly invested in rural America. 1 2017 ANNUAL REPORTOUR CONTINUED VITALITY In 2017, Farmer Mac’s strong financial performance underscored our commitment to build a strong and vital rural America. 2 FARMER MAC | INVESTED IN RURAL AMERICA2017 TOTAL OUTSTANDING BUSINESS VOLUME ($ IN BILLIONS) $19.0 $15.9 $17.4 STRONGER THAN EVER During the past year, Farmer Mac’s business development efforts resulted in broad-based portfolio growth across most of our solutions. 2015 2016 2017 3 80 70 60 50 40 80 70 60 50 40 $53.0 $47.0 $53.8 $65.6 2017 ANNUAL REPORTILLUMINATING THE HEARTLAND Farmer Mac’s remarkable growth in outstanding business volume is attributable to faithfully listening to our customers and shining a light on their needs with our innovative and customizable solutions year after year, generation after generation. 4 Since our founding in 1988, more than 1,500 lenders have benefited from OUR SOLUTIONS WHOLESALE FINANCING Our customizable wholesale financing solutions allow ag lenders, agribusinesses, mortgage funds, and investment firms access to efficient and flexible low- cost funding. LOAN PURCHASE We provide lenders with mortgage products at attractive rates to enable them to confidently serve their farm, ranch, and rural utilities customers. CREDIT PROTECTION We provide credit guarantees for loans that help manage concentration limits and provide capital relief. USDA GUARANTEED LOAN PURCHASE Designed to enhance a USDA guarantee, this solution helps lenders preserve capital and offer America’s farmers and ranchers our attractive rates and terms. FARMER MAC | INVESTED IN RURAL AMERICASUPPORTING SMALL AND FAMILY FARMS 97% OF OUR CURRENT FARM & RANCH AND USDA GUARANTEED LOANS ARE TO SMALL OR FAMILY FARMS. DEDICATED TO RURAL COMMUNITIES PURCHASED NEARLY $2.4 BILLION AGVANTAGE SECURITIES IN 2017 PURCHASED MORE THAN $1 BILLION FARM & RANCH LOANS IN 2017 PURCHASED MORE THAN $500 MILLION USDA GUARANTEES IN 2017 INVESTED IN RURAL UTILITIES ENSURING LEGACIES COMMITTED TO AGRICULTURE 30 YEARS SERVING FARM FAMILIES NEARLY 80,000 RURAL BORROWERS Our long-standing relationship with National In the 30 years since our founding, we have Tens of thousands of rural borrowers Rural Utilities Cooperative Finance Corporation had the opportunity to serve as many as three (CFC) helps to ensure that more than 900 not- generations within a single family farm, which for-profit electric cooperatives can deliver safe, demonstrates the importance of our mission affordable, and reliable electricity to 18 million and our enduring drive to serve all the farms, homes, businesses, and schools in generations to come. have benefited from Farmer Mac’s products and solutions since 1988. 4,000 2017 IN 47 states, benefitting the 42 million Americans their members serve. 5 2017 ANNUAL REPORTFUELING A RESILIENT AMERICA Agriculture plays an essential role in the broader U.S. economy, making it one of our nation’s most critical industries. Our range of innovative financial solutions illustrates our unwavering commitment to pursuing our mission by doing right by America’s farmers, ranchers, and rural communities. 6 FARMER MAC | INVESTED IN RURAL AMERICAFARMER MAC HAS HELPED FUND LOANS TO NEARLY 80,000 RURAL BORROWERS IN ALL 50 STATES, WHICH HAS RESULTED IN MORE THAN $48 BILLION OF INVESTMENT IN RURAL AMERICA. 7 2017 ANNUAL REPORTOUR SHARED SUCCESS Farmer Mac continues to find ways to enhance shareholder value, as evidenced by our financial performance and our dividend increase. 8 FARMER MAC | INVESTED IN RURAL AMERICA2017 PERFORMANCE 23%ANNUAL CORE EARNINGS GROWTH 38%COMMON DIVIDEND GROWTH ANNUAL CORE EARNINGS* ($ IN MILLIONS) $53.5 $47.0 2015 2016 $65.6 $70.0 $60.0 $50.0 $40.0 2017 *Core Earnings is a non-GAAP measure. For a reconciliation of core earnings to GAAP net income attributable to common stockholders, see the “Non-GAAP Performance Measures” section in this Annual Report. 2017 marked another year of financial success at Farmer Mac, highlighted by record outstanding business volume, double-digit core earnings growth, and the sixth consecutive year of dividend increases. 9 2017 ANNUAL REPORTOUR 2017 RESULTS DEMONSTRATE OUR COMMITMENT TO PRODUCT INNOVATION AND TO SERVING NEW AND EXISTING CUSTOMERS, ALL WHILE DELIVERING VALUE TO OUR SHAREHOLDERS. 10 FARMER MAC | INVESTED IN RURAL AMERICA15%CORE EARNINGS RETURN ON EQUITY 96.8% PERFORMING ASSETS IN FARM & RANCH PORTFOLIO 12.6%TIER 1 CAPITAL RATIO $1.6B NET NEW BUSINESS VOLUME 11 2017 ANNUAL REPORTHERE FOR THE LONG HAUL We’ve invested in people, infrastructure, and technology to effectively meet the burgeoning demand for our solutions, a result of our successful business development efforts, brand awareness initiatives, and growing position as an industry thought leader. 12 FARMER MAC | INVESTED IN RURAL AMERICAINVESTING IN OUR PEOPLE IS INVESTING IN THE FUTURE APPROX. 10% INCREASE IN TOTAL HEADCOUNT TO 88 IN 2017. OUR NATIONWIDE REACH WE ARE WHERE OUR CUSTOMERS NEED US TO BE Hitting the road is one of the many ways we reach new and existing customers, broaden brand awareness, and highlight the value of our solutions. Farmer Mac headquarters Farmer Mac office locations APPROX. 24% INCREASE IN OUR OFFICE SPACE, WHICH INCLUDES THE ADDITION OF TWO NEW OFFICES ACROSS THE COUNTRY. DELIVERING BROAD-BASED AG INSIGHTS VIA THE FEED In 2015, Farmer Mac launched The Feed, a free quarterly report focused on the U.S. farm economy that combines the most relevant research from trusted ag resources with the insightful commentary and analysis from our own team of experts into a single and succinct source. The Feed serves not only our lenders, but also the broader community: producers, agribusinesses, investors, media, and more. It is our goal to make this report an indispensable resource for anyone with a stake in the American rural economy. Farmer Mac investor road shows Farmer Mac lender road shows THE FEED HAS BEEN DOWNLOADED MORE THAN Presented at conferences 10,000 TIMES IN LESS THAN THREE YEARS 13 2017 ANNUAL REPORTOUR MISSION Farmer Mac is committed to help build a strong and vital rural America by increasing the availability and affordability of credit for the benefit of American agriculture and rural communities. At Farmer Mac, business is shaped by our mission and values. We remain focused on building a stronger rural America through an innovative and mission-based culture that fosters integrity and principled action from every employee, at every turn. OUR CORE VALUES STEWARDSHIP UNPARALLELED SERVICE INNOVATIVE THINKING COLLEGIAL COLLABORATION UNRELENTING EXCELLENCE ABSOLUTE INTEGRITY PASSION FOR RURAL AMERICA ONE FARMER MAC 14 FARMER MAC | INVESTED IN RURAL AMERICA“ Farmer Mac’s culture is built on the cornerstones of commitment, collaboration, innovation, and integrity. I am proud to see these qualities demonstrated in the office on a daily basis. Together, we share a commitment to serving our important mission and to promoting individual and corporate integrity, as we collaborate and innovate to deliver flexible financial tools to our customers.” LOWELL L. JUNKINS CHAIRMAN OF THE BOARD AND ACTING PRESIDENT AND CHIEF EXECUTIVE OFFICER 15 2017 ANNUAL REPORTON BEHALF OF FARMER MAC’S BOARD OF DIRECTORS 16 FARMER MAC | INVESTED IN RURAL AMERICATO THE SHAREHOLDERS OF FARMER MAC: Throughout my 22 years of service on Farmer Mac’s board of directors, this company has remained steadfast in our mission to meet the financial needs of customers and, ultimately, the needs of rural America. This past year was no exception. We achieved record financial results and further cemented our central position as the nation’s leading secondary market for agricultural credit. It is an honor to address you, our valued shareholders, as Farmer Mac’s acting president and chief executive officer. It is also a pleasure to reflect on the past year’s accomplishments and to recognize the diligence and successes of our employees, who make those achievements possible. The title of this year’s annual report, “Invested in Rural America,” embodies our core mission of increasing the availability and affordability of credit for America’s farmers and ranchers, and our commitment to the continued vitality of America’s rural communities. To strengthen this investment, Farmer Mac remains committed to innovation and dedicated to successfully meeting tomorrow’s needs. By any measure, 2017 was a remarkable year for Farmer Mac. We produced record business volumes and double-digit core earnings growth and maintained a strong capital base and low credit expenses. As in previous years, our success in 2017 was driven by the disciplined execution of our strategy, as we strengthened long-standing relationships with existing customers and increased our business development efforts to attract new customers. We grew core earnings by 23% and added more than $4.7 billion of new business volume in 2017, which resulted in a net growth of $1.6 billion after maturities and repayments. We increased our common stock dividend by 38% last year and recently announced a 61% increase to $0.58 per share for first quarter 2018. This marks the seventh consecutive year that Farmer Mac has raised its quarterly dividend, further illustrating our commitment to delivering shareholder value. Farmer Mac’s strong financial performance over the past year also reflects our success in achieving our strategic objectives to increase capacity and efficiency, maintain our leadership position in financing rural America, and expand customer connectivity and brand awareness. These efforts require significant investments in people, infrastructure, and technology to ensure sustained growth. We increased our workforce by approximately 10% last year, and we expect to hire more key employees in 2018 and to expand our investments in technology and business infrastructure as we seek to achieve our long-term goals. We also began a search in late 2017 to identify and select a new CEO. That process has involved soliciting shareholder feedback, developing a CEO profile and position description, and selecting an executive search firm. This is an important decision for Farmer Mac’s future, and we will dedicate the time and effort required to make the right one. During my long tenure on Farmer Mac’s board and my short time as acting CEO, it has been a privilege to work with such outstanding and passionate colleagues. Farmer Mac’s culture is built on the cornerstones of commitment, collaboration, innovation, and integrity. I am proud to see these qualities demonstrated in the office on a daily basis. Together, we share a commitment to serving our important mission and to promoting individual and corporate integrity, as we collaborate and innovate to deliver flexible financial tools to our customers. In this way, we build a workplace that creates opportunities, drives success, and inspires excellence. Together, we continue to deliver low-cost capital to the rural and agricultural communities we so proudly serve, investing in their future and in ours. LOWELL L. JUNKINS Chairman of the Board and Acting President and Chief Executive Officer 17 2017 ANNUAL REPORT EXECUTIVE OFFICERS As of April 2, 2018 BOARD OF DIRECTORS As of April 2, 2018 LOWELL L. JUNKINS Acting President and Chief Executive Officer R. DALE LYNCH Executive Vice President – Chief Financial Officer and Treasurer JOHN C. COVINGTON Senior Vice President – Agricultural Finance STEPHEN P. MULLERY Senior Vice President – General Counsel and Secretary LOWELL L. JUNKINS, CHAIRMAN1 Political Affairs Consultant Lowell Junkins & Associates Donnellson, Iowa MYLES J. WATTS, VICE CHAIRMAN1 Professor Emeritus, Agricultural Economics Montana State University Bozeman, Montana DENNIS L. BRACK 2 Director Bath State Bank and Bath State Bancorp Bath, Indiana CHESTER J. CULVER1 Founder Chet Culver Group Des Moines, Iowa RICHARD H. DAVIDSON3 Director AgriBank, FCB St. Paul, Minnesota CORPORATE INFORMATION CORPORATE HEADQUARTERS 1999 K Street, N.W. Fourth Floor Washington, DC 20006 Phone: 202.872.7700 800.879.3276 Website: www.farmermac.com ANNUAL MEETING OF STOCKHOLDERS Thursday, May 3, 2018 8:00 a.m. The Town Hall 1999 K Street, N.W. First Floor Washington, DC 20006 STOCK EXCHANGE Farmer Mac’s Class A voting common stock and Class C non-voting common stock trade on the New York Stock Exchange under the symbols AGM.A and AGM, respectively. Formal notice of the meeting, the proxy statement, and the proxy card are being mailed to each stockholder of record entitled to vote at the meeting simultaneously with the mailing of this Annual Report. 18 JAMES R. ENGEBRETSEN2 Retired Professor, Finance Marriott School of Management Brigham Young University Provo, Utah DENNIS A. EVERSON2 Director First Dakota National Bank Yankton, South Dakota SARA L. FAIVRE1 Founder and President Sara Faivre Executive Mentoring Cameron, Texas DOUGLAS A. FELTON3 President and Owner D&T Enterprises of Minnesota, Inc. Northfield, Minnesota DOUGLAS L. FLORY3 Former Farm Credit Administration Board Member Former Farm Credit System Insurance Corporation Board Chairman McLean, Virginia THOMAS W. HILL3 Former Chief Financial and Operations Officer Farm Credit Bank of Texas Austin, Texas MITCHELL A. JOHNSON2 Financial Consultant Washington, District of Columbia CLARK B. MAXWELL2 Chief Operating Officer Chatham Financial Corp. Kennett Square, Pennsylvania BRUCE J. SHERRICK1 Professor, Agricultural and Applied Finance University of Illinois Champaign, Illinois DOUGLAS E. WILHELM3 Former Chief Risk Officer CoBank, ACB Denver, Colorado 1 Presidential Appointee 2 Director elected by holders of Class A Common Stock 3 Director elected by holders of Class B Common Stock TRANSFER AGENT AND REGISTRAR Continental Stock Transfer & Trust Company 1 State Street 30th Floor New York, NY 10004 Phone: 212.509.4000 800.509.5586 Website: www.continentalstock.com CERTIFICATION Farmer Mac has included as Exhibit 31 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC the certifications of the Acting Chief Executive Officer and Chief Financial Officer certifying the quality of Farmer Mac’s financial disclosures. FORM 10-K Stockholders may obtain, without charge, a copy of Farmer Mac’s 2017 Annual Report on Form 10-K, as filed with the SEC on March 8, 2018, from Farmer Mac’s website or by contacting Farmer Mac’s Secretary at Farmer Mac’s Corporate Headquarters. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDED DECEMBER 31, 2017 PricewaterhouseCoopers LLP 1800 Tysons Boulevard McLean, VA 22102 FARMER MAC | INVESTED IN RURAL AMERICA NON-GAAP PERFORMANCE MEASURES RECONCILIATION OF NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS TO CORE EARNINGS For the Year Ended December 31, ($ in thousands) Net income attributable to common stockholders Less reconciling items: Gains on financial derivatives and hedging activities due to fair value changes Unrealized (losses)/gains on trading assets Amortization of premiums/discounts and deferred gains on assets consolidated at fair value Net effects of terminations or net settlements on financial derivatives and hedging activities 1 Loss on retirement of Farmer Mac II LLC Preferred Stock2 Re-measurement of net deferred tax asset due to enactment of new tax legislation Income tax effect related to reconciling items Core earnings 2017 $71,300 9,499 (24) (1,327) 2,674 - (1,365) (3,788) $65,631 2016 $64,152 13,628 1,460 (849) 2,178 - - (5,746) $53,481 2015 $47,371 10,924 1,220 (1,319) (699) (8,147) - (1,643) $47,035 Farmer Mac reports its financial results in or as more important than, the related financial believes are not indicative of future operating consolidated balance sheets as “Loans held accordance with accounting principles generally information prepared in accordance with GAAP. results and that may not reflect the trends and for investment in consolidated trusts, at accepted in the United States (“GAAP”). In economic financial performance of Farmer amortized cost;” and includes (3) the accrual of addition to GAAP measures, Farmer Mac uses Core earnings and core earnings per share Mac’s core business. the following non-GAAP financial measures: principally differ from net income attributable income and expense related to the contractual amounts due on financial derivatives that core earnings, core earnings per share, and net to common stockholders and earnings per Farmer Mac uses net effective spread to are not designated in hedge accounting effective spread. Farmer Mac uses these non- common share, respectively, by excluding measure the net spread Farmer Mac earns relationships; and (4) the net effects of GAAP measures to measure corporate economic the effects of fair value fluctuations. These between its interest-earning assets and the terminations or net settlements on financial performance and develop financial plans fluctuations are not expected to have a related net funding costs of these assets. derivatives and hedging activities. because, in management’s view, they are useful cumulative net impact on Farmer Mac’s Net effective spread differs from net interest alternative measures in understanding Farmer financial condition or results of operations income and net interest yield because it: Mac’s economic performance, transaction reported in accordance with GAAP if the related excludes (1) the amortization of premiums economics, and business trends. These non- financial instruments are held to maturity, as and discounts on assets consolidated at fair GAAP financial measures that Farmer Mac uses is expected. may not be comparable to similarly labeled non- value that are amortized as adjustments to yield in interest income over the contractual GAAP financial measures disclosed by other Core earnings and core earnings per share also or estimated remaining lives of the underlying companies. Farmer Mac’s disclosure of these differ from net income attributable to common assets; and (2) interest income and interest non-GAAP financial measures is intended to be supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, stockholders and earnings per common share, respectively, by excluding specified infrequent or unusual transactions that Farmer Mac expense related to consolidated trusts with beneficial interests owned by third parties, which are presented on Farmer Mac’s 1 2 Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, which is a component of core earnings, to also include the net effects of terminations or net settlements on financial derivatives and hedging activities. All prior period information above has been recast to reflect the revised methodology. Relates to the write-off of deferred issuance costs as a result of the retirement of Farmer Mac II LLC Preferred Stock. 19 2017 ANNUAL REPORT ® 1999 K Street, N.W. Fourth Floor Washington, DC 20006 Phone: 202.872.7700 or 800.879.3276 www.farmermac.com Financing Rural America ® 20 FARMER MAC | INVESTED IN RURAL AMERICA

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