Federal Agricultural Mortgage Corporation (NYSE: AGM) is a federally chartered bank specializing in the agricultural sector in the United States and mandated by Congress to provide a secondary market for loans in rural America. As the bank is backed by the US federal government, it is able to borrow money more cheaply, which translates into a strong earnings profile, as loan loss provisions also remain fairly low. I last spoke about the company in June when it issued a new series of preferred shares.
A set of solid results in 2021 as the default rate remains very low
As Farmer Mac continues to grow its loan portfolio and its net interest margin remains stable (but relatively low as AGM has access to cheap capital but also invests in lower risk loans where returns are also lower ), the bank’s net interest income continues to expand.
In 2021, the bank saw lower total interest income, but an even steeper decline in interest expense and net interest income rose more than 15% to just under $221 million. . Not only is this a significant improvement over fiscal year 2020, but net interest income of nearly $221 million is also nearly 30% higher than the 2019 result, so AGM can be quite pleased with its performance net of interest.
The bank obviously also has non-interest income and expenses, and net non-interest expenses for fiscal year 2021 were around $54 million. This resulted in earnings before tax and provisions for loan losses of approximately $167 million. This was then boosted slightly by the reversal of historical loan loss provisions, resulting in pre-tax profit of $167.6m and net profit of $107.6m. Since there are approximately 10.8 million shares outstanding (across all classes), EPS was $10.00 per share.
Low loan loss provisions over the past few years have been low and even in 2020 the total amount of loan loss provisions was less than $8 million. Considering the bank has a total balance sheet of over $25 billion, keeping loan loss provisions this low is a spectacular performance and further confirms the asset quality of the bank’s loan portfolio. Agriculture-related loans total approximately $8.3 billion (the rest of the balance sheet consists of cash and investment securities) and, as you can see below, the bank has recorded a full provision for losses. on loans of nearly $13.5 million.
And while those provisions, totaling just under 0.2% of the total size of the loan portfolio, seem small, the delinquency status of the loans explains why Farmer Mac doesn’t have to increase loan loss provisions. At the end of 2021, only $5.1 million of loans were in arrears, of which approximately 90% were less than two months past due.
There was also a total of $127 million in outstanding loans. This is significantly higher than the allowance for loan losses, but keep in mind that the average LTV ratio of the loan portfolio is around 47%. This means that based on the $126 million in unbooked loans, there should be over $250 million in collateral available, so the odds that Farmer Mac can avoid a haircut on the unbooked loans seems pretty low. . According to AGM’s own internal stress test, the value of the warranty would decrease by 17% to 48%, so even under the worst circumstances of the stress test, the warranty should be sufficient. Of course, the stress test and LTV ratios are based on averages and some loans will have a higher LTV ratio than others. I’m not saying AGM will be able to avoid all losses, but I think the bank will be able to keep potential losses very low.
The dividend has just been increased
Thanks to the good results, AGM was able to increase its dividend again and the bank has now declared quarterly dividends of $0.95 per share. This is an increase of approximately 8% from the previously paid $0.88 per share and, based on the current share price of approximately $115, the current dividend yield of Federal Agricultural Mortgage is around 3.3%.
Although this is obviously not the highest in the banking sector, it is important to know that this is a very safe dividend because the payout ratio is less than 40% and the bank itself manages its activities. very conservatively. And because the bank keeps a substantial portion of its earnings on the balance sheet, it will be able to further grow its loan portfolio, which will translate into stronger earnings in the future and the potential to further increase the dividend.
I currently have no position in Farmer Mac common stock, but I do have preferred stock in my income portfolio, as I like the asset coverage ratio and the safety of the preferred dividend, as the preferred dividend requires less than 20% of net income on a pre-preferred dividend basis.
While preferred shares are a useful component of the portfolio, I believe AGM offers excellent potential for capital gains, as the bank retains over 60% of its earnings on the balance sheet, allowing it to further expand its balance sheet for an even higher amount. net interest income. In the past twelve months I have sold put options on AGM, but all options have expired out of the money. I will likely continue to use this strategy to attempt to establish a long position in Farmer Mac common stock.