Farmer Mac Reports Second Quarter 2020 Results

WASHINGTON, Aug. 10, 2020 /PRNewswire/ -- The Federal Agricultural Mortgage Corporation (Farmer Mac; NYSE: AGM and AGM.A), the nation's secondary market provider that increases the availability and affordability of credit for the benefit of rural America, today announced its results for the fiscal quarter ended June 30, 2020.

Farmer Mac Logo (PRNewsFoto/Farmer Mac) (PRNewsfoto/Farmer Mac)

Second Quarter 2020 Highlights

  • Provided $1.7 billion in liquidity and lending capacity in second quarter 2020, resulting in net outstanding business volume growth of $502.8 million;
  • Net income attributable to common stockholders was $31.7 million, or $2.94 per diluted common share;
  • Core earnings, a non-GAAP measure was $26.3 million, or $2.45 per diluted common share;
  • Net interest income grew $5.3 million year-over-year to $48.3 million;
  • Net effective spread, a non-GAAP measure, increased 12% from the prior-year period to $46.5 million;
  • 90-day delinquencies were 0.31% of total outstanding business volume as of June 30, 2020;
  • Continued strong liquidity position, as evidenced by quarter-end cash position of $0.8 billion;
  • Issued $79.5 million of Tier 1 capital through the public offering of 5.750% Series E non-cumulative preferred stock; and
  • Executed COVID-19 payment deferments for $241.7 million of unpaid principal balance related to Farm & Ranch loans, Farm & Ranch LTSPCs, and USDA Securities to provide relief to borrowers.

"We are very pleased with our second quarter performance, generating strong earnings and asset growth across multiple lines of business, despite operating in these challenging times," said President and Chief Executive Officer Brad Nordholm. "Our outstanding business volume growth to $22.0 billion this quarter is a testament to our strategic initiatives and reflects our continued focus on fulfilling our mission by building on our customer relationships and product suite.  We grew responsibly while also maintaining a robust liquidity position and consistent credit standards.  I am proud of our entire team's tireless efforts in supporting agricultural and rural communities nationwide."

Second Quarter 2020 Results

Business Volume

Farmer Mac added $502.8 million net business volume growth in second quarter 2020, resulting in total outstanding business volume of $22.0 billion as of June 30, 2020.  The increase in net business volume was primarily attributable to historically low interest rates that drove strong market demand by borrowers seeking to take advantage of low interest rates on long-term funding.

Net growth this quarter consisted of increases of $306.2 million in Rural Utilities, $206.3 million in Farm & Ranch, and $31.6 million in the USDA Guarantees line of business, partially offset by a decrease of $41.3 million in Institutional Credit.

The $306.2 million net growth in our Rural Utilities line of business was primarily due to the purchase of $339.4 million in loans from the two main counterparties in that line of business, partially offset by regularly scheduled payments, prepayments, and maturities of loans previously purchased and loans under LTSPCs.

The $206.3 million net increase in our Farm & Ranch line of business was comprised of a $259.1 million net increase in outstanding loan purchase volume, partially offset by a $52.8 million net decrease in loans under LTSPCs. The net growth reflected our ability to retain borrowers in a decreasing interest rate environment by proactively engaging with our customers and adjusting their rates and loan sizes to reflect current market conditions and their specific funding needs. Our net growth of 18.2% in Farm & Ranch loan purchases over the twelve months ended June 30, 2020 is significantly higher than the 3.1% net growth of the overall agricultural mortgage loan market over the twelve months ended March 31, 2020 (based on our analysis of bank and Farm Credit System call report data).

Our USDA Guarantees line of business grew by $31.6 million, driven by record gross volume of $224.0 million. This growth reflected the positive effect of adjustments that we made to our product structure in the second half of 2019 to more effectively meet customer demands in an increasingly competitive environment and in response to increased loan limits mandated by the 2018 Farm Bill.

The $41.3 million net decrease in the Institutional Credit line of business was due primarily to two large counterparties who reduced their amount of outstanding credit in connection with the maturity of one bond and regularly scheduled payments on multiple bonds. We also experienced a slight net increase from smaller fund counterparties. 

Spreads

Net interest income for second quarter 2020 was $48.3 million, a $5.3 million increase compared to $43.0 million in the prior-year period, primarily driven by net growth across most lines of business.  Net interest yield was 0.87% in both second quarter 2020 and second quarter 2019.

Net effective spread, a non-GAAP measure, for second quarter 2020 was $46.5 million, a $5.1 million increase from $41.4 million in the prior year period.  This increase was primarily attributable to growth in outstanding business volume, which increased net effective spread by approximately $5.5 million. In percentage terms, net effective spread was 0.89% for second quarter 2020, as compared to 0.91% in second quarter 2019.  The decrease of 0.02% was primarily attributable to an increase in funding and liquidity costs of 0.05%, offset by an increase of 0.03% related to net volume growth.

Earnings

Farmer Mac's net income attributable to common stockholders for second quarter 2020 were $31.7 million ($2.94 per diluted common share), compared to $28.3 million ($2.63 per diluted common share) in second quarter 2019. The $3.4 million year-over-year increase in net income attributable to common stockholders was primarily due to a $4.2 million after-tax increase in net interest income, the absence of $2.0 million in deferred issuance costs related to the redemption of Series B Preferred Stock in the prior-year period, and a $0.7 million after-tax increase in other income. These increases were partially offset by a $1.9 million after-tax decrease in the fair value of undesignated financial derivatives due to fluctuations in long-term interest rates and a $1.6 million after-tax increase in operating expenses.

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

Farmer Mac's non-GAAP core earnings for second quarter 2020 was $26.3 million ($2.45 per diluted common share), compared to $23.6 million ($2.20 per diluted common share) in second quarter 2019. The $2.7 million year-over-year increase in core earnings was primarily due to a $4.0 million after-tax increase in net effective spread and a $0.3 million after-tax decrease in the total provision for losses. These increases were partially offset by a $1.6 million after-tax increase in operating expenses.

See "Use of Non-GAAP Measures" below for more information about core earnings, core earnings per share, and net effective spread and for reconciliations of the comparable GAAP measures to these non-GAAP measures.

Credit

As of June 30, 2020, Farmer Mac's total allowance for losses was $18.8 million, compared to $19.1 million as of March 31, 2020.  In the second quarter, our forecasts continue to include the effects of the COVID-19 pandemic on economic factors such as land values, gross domestic product, credit spreads, and unemployment.  The total provision for losses in the second quarter was approximately $0.1 million, primarily due to the impact of net new loan volume in the Rural Utilities portfolio of $311.8 million, partially offset by improving economic factors that uniquely impacted the on-balance sheet Farm & Ranch portfolio and repayments and payoffs that occurred in the LTSPC portfolio during the quarter.  In addition, there was a $0.4 million charge-off to the allowance related to the foreclosure of a single Farm & Ranch loan.  Across all of Farmer Mac's lines of business, Farmer Mac's allowance for losses represented 0.09% of total outstanding business volume as of June 30, 2020, compared to 0.04% as of June 30, 2019.

As of June 30, 2020, substandard assets were $304.9 million, compared to $312.3 million as of March 31, 2020.  The $7.4 million decrease in substandard assets was primarily driven by repayments during the quarter on loans that had been classified as substandard as of the first quarter, partially offset by credit downgrades during the quarter.  Across all of Farmer Mac's lines of business, substandard assets represented 1.4% of total outstanding business volume as of June 30, 2020, compared to 1.5% as of March 31, 2020.

As of June 30, 2020, Farmer Mac's 90-day delinquencies were $68.7 million, compared to $79.7 million as of March 31, 2020 and $28.0 million as of June 30, 2019.  The sequential decrease in 90-day delinquencies is primarily due to the seasonal payment pattern associated with loans that have annual (January 1st) and semi-annual (January 1st and July 1st) payment terms, which account for most of the loans in the Farm & Ranch portfolio.  Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.31% of total outstanding business volume as of June 30, 2020, compared to 0.37% as of March 31, 2020 and 0.14% as of June 30, 2019.  Loans under COVID-19 deferment are not considered past due and are not included in our delinquent loan statistics.

Capital

As of June 30, 2020, Farmer Mac's core capital level was $915.6 million, which was $247.9 million above the minimum capital level required by our statutory charter.  This compares to $815.1 million as of March 31, 2020, which was $165.8 million above the minimum capital requirement.  Farmer Mac's Tier 1 capital ratio was 13.4% as of June 30, 2020.  The increase in capital in excess of the minimum capital level required was primarily due to the Board-authorized issuance of Series E Preferred Stock and the increase in retained earnings, partially offset by growth in our outstanding business volume.

Preferred Stock

In May 2020, Farmer Mac issued 3.2 million shares of 5.750% Non-Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), which has a par value and liquidation preference of $25.00 per share, or $79.5 million aggregate outstanding.  Farmer Mac incurred direct costs of $2.5 million related to the issuance of the Series E preferred stock.  The dividend rate on the Series E preferred stock will remain at a non-cumulative, fixed rate of 5.750% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series E preferred stock remains outstanding.  The Series E preferred stock has no maturity date, but Farmer Mac has the option to redeem the preferred stock at any time on any dividend payment date on and after July 17, 2025.

Earnings Conference Call Information

The conference call to discuss Farmer Mac's second quarter 2020 financial results will be held beginning at 5:00 p.m. Eastern time on Monday, August 10, 2020 and can be accessed by telephone or live webcast as follows:

Telephone (Domestic): (888) 346-2616
Telephone (International): (412) 902-4254
Webcast: https://www.farmermac.com/investors/events-presentations/   

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

More complete information about Farmer Mac's performance for second quarter 2020 is in Farmer Mac's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 filed today with the SEC.

Use of Non-GAAP Measures

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

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

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

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

Net effective spread also principally differs from net interest income and net interest yield because it includes: (1) the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedge accounting relationships ("undesignated financial derivatives"); and (2) the net effects of terminations or net settlements on financial derivatives.  More information about Farmer Mac's use of non-GAAP measures is available in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2019 filed February 25, 2020 with the SEC.

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

Forward-Looking Statements

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

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

Other risk factors are discussed in "Risk Factors" in Part I, Item 1A in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2019, filed February 25, 2020 and in Part II, Item 1A in Farmer Mac's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed today with the SEC. Considering these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this release. The forward-looking statements contained in this release represent management's expectations as of the date of this release. Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements included in this release to reflect new information or any future events or circumstances, except as otherwise required by applicable law. The information in this release is not necessarily indicative of future results.

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

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)




As of







June 30,


December 31,






2020

2019







(in thousands)

Assets:












Cash and cash equivalents

$

827,600



$

604,381



Investment securities










Available-for-sale, at fair value (amortized cost of $3,458,957 and $2,961,430, respectively)


3,467,378




2,959,843




Held-to-maturity, at amortized cost


45,032




45,032





Total Investment Securities


3,512,410




3,004,875



Farmer Mac Guaranteed Securities










Available-for-sale, at fair value (amortized cost of $7,539,944 and $7,016,971, respectively)


7,898,387




7,143,025




Held-to-maturity, at amortized cost


1,140,718




1,447,451





Total Farmer Mac Guaranteed Securities


9,039,105




8,590,476



USDA Securities










Trading, at fair value


7,786




8,913




Held-to-maturity, at amortized cost


2,339,923




2,232,160





Total USDA Securities


2,347,709




2,241,073



Loans:












Loans held for investment, at amortized cost


6,469,997




5,390,977




Loans held for investment in consolidated trusts, at amortized cost


1,436,090




1,600,917




Allowance for loan losses


(14,939)




(10,454)





Total loans, net of allowance


7,891,148




6,981,440



Financial derivatives, at fair value


16,588




10,519



Interest receivable (includes $17,415 and $20,568, respectively, related to consolidated trusts)


175,659




199,195



Guarantee and commitment fees receivable


36,612




38,442



Deferred tax asset, net


38,790




16,510



Prepaid expenses and other assets


47,035




22,463






Total Assets

$

23,932,656



$

21,709,374















Liabilities and Equity:








Liabilities:











Notes payable


21,421,550




19,098,648



Debt securities of consolidated trusts held by third parties


1,476,964




1,616,504



Financial derivatives, at fair value


47,543




27,042



Accrued interest payable (includes $15,007 and $18,018, respectively, related to consolidated trusts)


100,134




106,959



Guarantee and commitment obligation


35,162




36,700



Accounts payable and accrued expenses


24,167




22,081



Reserve for losses


3,020




2,164






Total Liabilities


23,108,540




20,910,098


Commitments and Contingencies








Equity:












Preferred stock:










Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding


58,333




58,333




Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding


73,382




73,382




Series D, par value $25 per share, 4,000,000 shares authorized, issued and outstanding


96,659




96,659




Series E, par value $25 per share, 3,180,000 shares authorized, issued and outstanding


77,003




-



Common stock:










Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding


1,031




1,031




Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding


500




500




Class C Non-Voting, $1 par value, no maximum authorization, 9,201,623 shares and 9,180,744 shares outstanding, respectively


9,202




9,181



Additional paid-in capital


120,856




119,304



Accumulated other comprehensive loss, net of tax


(91,497)




(16,161)



Retained earnings


478,647




457,047






Total Equity


824,116




799,276







Total Liabilities and Equity

$

23,932,656



$

21,709,374















 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



For the Three Months Ended


For the Six Months Ended





June 30, 2020


June 30, 2019


June 30, 2020


June 30, 2019





(in thousands, except per share amounts)

Interest income:










Investments and cash equivalents

$

10,399



$

20,156



$

28,140



$

38,863




Farmer Mac Guaranteed Securities and USDA Securities


61,792




85,569




133,309




170,980




Loans


55,430




59,403




116,026




110,800





Total interest income


127,621




165,128




277,475




320,643




Total interest expense


79,273




122,074




187,815




236,990





Net interest income


48,348




43,054




89,660




83,653




Provision for losses


(451)




(578)




(3,889)




(314)





Net interest income after provision for losses


47,897




42,476




85,771




83,339



Non-interest income/(expense):










Guarantee and commitment fees


3,140




3,403




6,336




6,916




Gains/(losses) on financial derivatives


6,523




8,913




(2,775)




8,553




(Losses)/gains on trading securities


(21)




61




85




105




Gains on sale of real estate owned








485







Release of reserve for losses


400




158




7




287




Other income


1,229




355




2,045




848





Non-interest income


11,271




12,890




6,183




16,709



Operating expenses:


















Compensation and employee benefits


8,087




6,770




18,214




14,376




General and administrative


5,295




4,689




10,658




9,285




Regulatory fees


725




687




1,450




1,375




Real estate owned operating costs, net





64







64





Operating expenses


14,107




12,210




30,322




25,100





Income before income taxes


45,061




43,156




61,632




74,948



Income tax expense


9,435




9,111




13,176




15,733




Net income attributable to Farmer Mac


35,626




34,045




48,456




59,215



Preferred stock dividends


(3,939)




(3,785)




(7,370)




(7,081)



Loss on retirement of preferred stock





(1,956)







(1,956)





Net income attributable to common stockholders

$

31,687



$

28,304



$

41,086



$

50,178






















Earnings per common share:



















Basic earnings per common share

$

2.95



$

2.65



$

3.83



$

4.70





Diluted earnings per common share

$

2.94



$

2.63



$

3.81



$

4.66



Reconciliations

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

Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings





For the Three Months Ended





June 30, 2020


March 31, 2020


June 30, 2019





(in thousands, except per share amounts)

Net income attributable to common stockholders


$

31,687



$

9,399



$

28,304


Less reconciling items:














Gains/(losses) on undesignated financial derivatives due to fair value changes



8,700




(6,484)




10,485



Losses on hedging activities due to fair value changes



(2,676)




(5,925)




(1,438)



Unrealized (losses)/gains on trading securities



(20)




106




61



Amortization of premiums/discounts and deferred gains on assets consolidated at fair value


35




3




(139)



Net effects of terminations or net settlements on financial derivatives


720




(1,300)




(592)



Issuance costs on the retirement of preferred stock



-




-




(1,956)



Income tax effect related to reconciling items



(1,419)




2,856




(1,759)




Sub-total



5,340




(10,744)




4,662


Core earnings


$

26,347



$

20,143



$

23,642















Composition of Core Earnings:













Revenues:














Net effective spread(1)


$

46,469



$

44,163



$

41,355



Guarantee and commitment fees(2)



4,943




4,896




5,276



Other(3)



1,048




674




777




Total revenues



52,460




49,733




47,408

















Credit related expense (GAAP):














Provision for losses



51




3,831




420



REO operating expenses



-




-




64



Gains on sale of REO



-




(485)




-




Total credit related expense



51




3,346




484

















Operating expenses (GAAP):














Compensation and employee benefits



8,087




10,127




6,770



General and administrative



5,295




5,363




4,689



Regulatory fees



725




725




687




Total operating expenses



14,107




16,215




12,146



















Net earnings



38,302




30,172




34,778



Income tax expense(4)



8,016




6,598




7,351



Preferred stock dividends (GAAP)



3,939




3,431




3,785




Core earnings


$

26,347



$

20,143



$

23,642

















Core earnings per share:














Basic


$

2.46



$

1.88



$

2.21



Diluted



2.45




1.87




2.20



(1)

Net effective spread is a non-GAAP measure.  See "Use of Non-GAAP Measures" above for an explanation of net effective spread.  See below 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.

 

Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings





For the Six Months Ended





June 30, 2020


June 30, 2019





(in thousands, except per share amounts)

Net income attributable to common stockholders


$

41,086



$

50,178


Less reconciling items:










Gains on undesignated financial derivatives due to fair value changes



2,216




12,725



Losses on hedging activities due to fair value changes



(8,601)




(4,255)



Unrealized gains on trading securities



86




105



Amortization of premiums/discounts and deferred gains on assets consolidated at fair value


38




(155)



Net effects of terminations or net settlements on financial derivatives


(580)




(482)



Issuance costs on the retirement of preferred stock



-




(1,956)



Income tax effect related to reconciling items



1,437




(1,667)




Sub-total



(5,404)




4,315


Core earnings


$

46,490



$

45,863













Composition of Core Earnings:









Revenues:










Net effective spread(1)


$

90,632



$

80,156



Guarantee and commitment fees(2)



9,839




10,695



Other(3)



1,722




1,286




Total revenues



102,193




92,137













Credit related expense (GAAP):










Provision for losses



3,882




27



REO operating expenses



-




64



Gain on sale of REO



(485)




-




Total credit related expense



3,397




91













Operating expenses (GAAP):










Compensation and employee benefits



18,214




14,376



General and administrative



10,658




9,285



Regulatory fees



1,450




1,375




Total operating expenses



30,322




25,036















Net earnings



68,474




67,010



Income tax expense(4)



14,614




14,066



Preferred stock dividends (GAAP)



7,370




7,081




Core earnings


$

46,490



$

45,863













Core earnings per share:










Basic


$

4.34



$

4.29



Diluted



4.31




4.26



(1)

Net effective spread is a non-GAAP measure.  See "Use of Non-GAAP Measures" above for an explanation of net effective spread.  See below 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.

 

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,
2020


March 31,
2020
 


June 30,
2019


June 30,
2020


June 30,
2019




(in thousands, except per share amounts)

GAAP - Basic EPS

$

2.95



$

0.88



$

2.65



$

3.83



$

4.70


Less reconciling items:





















Gains/(losses) on undesignated financial derivatives due to fair value changes


0.81




(0.61)




0.98




0.21




1.19



Losses on hedging activities due to fair value changes


(0.25)




(0.55)




(0.13)




(0.80)




(0.39)



Unrealized gains on trading securities


-




0.01




0.01




0.01




0.01



Amortization of premiums/discounts and deferred gains on assets consolidated at fair value


-




-




(0.01)




-




(0.01)



Net effects of terminations or net settlements on financial derivatives


0.06




(0.12)




(0.06)




(0.06)




(0.05)



Issuance costs on the retirement of preferred stock


-




-




(0.18)




-




(0.18)



Income tax effect related to reconciling items


(0.13)




0.27




(0.17)




0.13




(0.16)




Sub-total


0.49




(1.00)




0.44




(0.51)




0.41


Core Earnings - Basic EPS

$

2.46



$

1.88



$

2.21



$

4.34



$

4.29
























Shares used in per share calculation (GAAP and Core Earnings)


10,730




10,712




10,698




10,721




10,684





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,
2020


March 31,
2020  


June 30,
2019


June 30,
2020


June 30,
2019




(in thousands, except per share amounts)

GAAP - Diluted EPS

$

2.94



$

0.87



$

2.63



$

3.81



$

4.66


Less reconciling items:





















Gains/(losses) on undesignated financial derivatives due to fair value changes


0.81




(0.60)




0.96




0.21




1.17



Losses on hedging activities due to fair value changes


(0.25)




(0.55)




(0.14)




(0.80)




(0.40)



Unrealized gains on trading securities


-




0.01




0.01




0.01




0.01



Amortization of premiums/discounts and deferred gains on assets consolidated at fair value


-




-




(0.01)




-




(0.01)



Net effects of terminations or net settlements on financial derivatives 


0.06




(0.12)




(0.05)




(0.05)




(0.04)



Issuance costs on the retirement of preferred stock


-




-




(0.18)




-




(0.18)



Income tax effect related to reconciling items


(0.13)




0.26




(0.16)




0.13




(0.15)




Sub-total


0.49




(1.00)




0.43




(0.50)




0.40


Core Earnings - Diluted EPS

$

2.45



$

1.87



$

2.20



$

4.31



$

4.26
























Shares used in per share calculation (GAAP and Core Earnings)


10,776




10,782




10,770




10,779




10,774


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

Reconciliation of GAAP Net Interest Income/Yield to Net Effective Spread




For the Three Months Ended


For the Six Months Ended




June 30, 2020


March 31, 2020


June 30, 2019


June 30, 2020


June 30, 2019




Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield




(dollars in thousands)

Net interest income/yield

$

48,348



0.87


%


$

41,312



0.78


%


$

43,054



0.87


%


$

89,660



0.82


%


$

83,653



0.87


%

Net effects of consolidated trusts


(1,804)



0.02


%



(1,700)



0.02


%



(1,873)



0.03


%



(3,505)



0.03


%



(3,778)



0.03


%

Expense related to undesignated financial derivatives


(2,413)



(0.05)


%



(1,190)



(0.02)


%



(1,557)



(0.03)


%



(3,603)



(0.04)


%



(4,102)



(0.05)


%

Amortization of premiums/discounts on assets consolidated at fair value


(21)



-


%



11



-


%



289



0.01


%



(10)



-


%



311



-


%

Amortization of losses due to terminations or net settlements on financial derivatives


(22)



-


%



49



-


%



14



-


%



27



-


%



(56)



-


%

Fair value changes on fair value hedge relationships


2,381



0.05


%



5,681



0.11


%



1,428



0.03


%



8,063



0.08


%



4,128



0.05


%


Net effective spread

$

46,469



0.89


%


$

44,163



0.89


%


$

41,355



0.91


%


$

90,632



0.89


%


$

80,156



0.90


%

The following table presents core earnings for Farmer Mac's reportable operating segments and a reconciliation to consolidated net income for the three months ended June 30, 2020:

Core Earnings by Business Segment

For the Three Months Ended June 30, 2020




Farm &
Ranch


USDA
Guarantees


Rural
Utilities


Institutional
Credit


Corporate


Reconciling
Adjustments


Consolidated
Net Income




(in thousands)

Net interest income

$

19,310



$

5,403



$

2,322



$

20,084



$

1,229



$



$

48,348



Less: reconciling adjustments(1)(2)(3)


(2,577)




(714)




3,194




(1,302)




(480)




1,879





Net effective spread


16,733




4,689




5,516




18,782




749




1,879





Guarantee and commitment fees(2)


4,394




210




332




7







(1,803)




3,140


Other income/(expense)(3)


585




617




5







(159)




6,683




7,731



Non-interest income/(loss)


4,979




827




337




7




(159)




4,880




10,871
































Provision for loan losses


920







(1,397)




41




(15)







(451)
































Provision for reserve for losses


370







30













400


Other non-interest expense


(5,254)




(1,584)




(1,386)




(2,083)




(3,800)







(14,107)



Non-interest expense(4)


(4,884)




(1,584)




(1,356)




(2,083)




(3,800)







(13,707)


Core earnings before income taxes


17,748




3,932




3,100




16,747




(3,225)




6,759


(5)


45,061


Income tax (expense)/benefit


(3,727)




(826)




(651)




(3,517)




705




(1,419)




(9,435)



Core earnings before preferred stock dividends 


14,021




3,106




2,449




13,230




(2,520)




5,340


(5)


35,626


Preferred stock dividends














(3,939)







(3,939)



Segment core earnings/(losses)

$

14,021



$

3,106



$

2,449



$

13,230



$

(6,459)



$

5,340


(5)

$

31,687
































Total assets at carrying value

$

5,746,556



$

2,408,713



$

2,281,490



$

9,049,393



$

4,446,504



$

-



$

23,932,656


Total on-and off-balance sheet program assets at principal balance

$

8,017,850



$

2,677,807



$

2,691,621



$

8,654,830



$

-



$

-



$

22,042,108



(1)

Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.

(2)

Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee. 

(3)

Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in "Gains/(Losses) on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.

(4)

Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.

(5)

Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders. 

Supplemental Information

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

Lines of Business - Outstanding Business Volume






As of June 30, 2020


As of December 31, 2019






(in thousands)

Farm & Ranch:





Loans


$

4,181,422



$

3,675,640



Loans held in trusts:










Beneficial interests owned by third party investors


1,436,090




1,600,917



LTSPCs


2,310,113




2,393,071



Guaranteed Securities


90,225




107,322


USDA Guarantees:









USDA Securities


2,314,961




2,199,072



Farmer Mac Guaranteed USDA Securities


362,846




421,103


Rural Utilities:









Loans



2,101,568




1,671,293



LTSPCs(1)


590,053




609,278


Institutional Credit:









AgVantage securities


8,654,830




8,440,246




Total

$

22,042,108



$

21,117,942


(1)

As of both June 30, 2020 and December 31, 2019, includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee.

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



Net Effective Spread by Line of Business

















Farm & Ranch


USDA Guarantees


Rural Utilities


Institutional Credit


Corporate


Net Effective
Spread



Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield



(dollars in thousands)

For the quarter ended:




























June 30, 2020(1)

$

16,733



1.71

%


$

4,689



0.81

%


$

5,516



1.15

%


$

18,782



0.86

%


$

749



0.08

%


$

46,469



0.89

%


March 31, 2020


14,938



1.64

%



4,625



0.81

%



4,920



1.14

%



17,702



0.84

%



1,978



0.21

%



44,163



0.89

%


December 31, 2019


16,374



1.90

%



4,363



0.78

%



4,871



1.17

%



18,008



0.85

%



2,375



0.27

%



45,991



0.95

%


September 30, 2019


13,181



1.66

%



4,314



0.79

%



4,502



1.16

%



17,807



0.84

%



2,657



0.30

%



42,461



0.90

%


June 30, 2019


13,335



1.72

%



4,097



0.76

%



3,996



1.10

%



17,371



0.82

%



2,556



0.34

%



41,355



0.91

%


March 31, 2019


12,737



1.70

%



3,964



0.74

%



3,233



1.12

%



16,373



0.79

%



2,494



0.35

%



38,801



0.89

%


December 31, 2018


13,288



1.79

%



4,630



0.85

%



2,833



1.19

%



15,751



0.80

%



2,353



0.36

%



38,855



0.93

%


September 30, 2018


13,887



1.91

%



4,627



0.86

%



2,877



1.18

%



15,642



0.78

%



2,044



0.30

%



39,077



0.93

%


June 30, 2018


13,347



1.86

%



4,398



0.83

%



2,923



1.15

%



15,220



0.76

%



274



0.04

%



36,162



0.86

%

(1)

See above for a reconciliation of GAAP net interest income by line of business to net effective spread by line of business for the three months ended June 30, 2020.

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

Core Earnings by Quarter End






June
2020


March
2020


December
2019


September
2019


June
2019


March
2019


December
2018


September
2018


June
2018






 (in thousands)

Revenues:






































Net effective spread


$

46,469



$

44,163



$

45,991



$

42,461



$

41,355



$

38,801



$

38,855



$

39,077



$

36,162



Guarantee and commitment fees



4,943




4,896




5,432




5,208




5,276




5,419




5,309




5,170




5,171



Other



1,048




674




100




389




777




509




(129)




110




111




Total revenues



52,460




49,733




51,523




48,058




47,408




44,729




44,035




44,357




41,444










































Credit related expense/(income):






































Provision for/(release of) losses



51




3,831




2,851




623




420




(393)




166




(3)




582



REO operating expenses



-




-




-




-




64




-




-




-




-



(Gains)/losses on sale of REO



-




(485)




-




-




-




-




-




41




(34)




Total credit related expense/(income)



51




3,346




2,851




623




484




(393)




166




38




548










































Operating expenses:






































Compensation and employee benefits



8,087




10,127




6,732




7,654




6,770




7,606




7,167




6,777




6,936



General and administrative



5,295




5,363




5,773




5,253




4,689




4,596




5,829




4,350




5,202



Regulatory fees



725




725




725




688




687




688




687




625




625




Total operating expenses



14,107




16,215




13,230




13,595




12,146




12,890




13,683




11,752




12,763












































Net earnings



38,302




30,172




35,442




33,840




34,778




32,232




30,186




32,567




28,133


Income tax expense



8,016




6,598




7,526




7,018




7,351




6,715




6,431




6,891




5,477


Preferred stock dividends



3,939




3,431




3,432




3,427




3,785




3,296




3,296




3,295




3,296




Core earnings


$

26,347



$

20,143



$

24,484



$

23,395



$

23,642



$

22,221



$

20,459



$

22,381



$

19,360










































Reconciling items:







































Gains/(losses) on undesignated financial derivatives due to fair value changes



8,700




(6,484)




4,469




(7,117)




10,485




2,240




(96)




3,625




6,709




(Losses)/gains on hedging activities due to fair value changes



(2,676)




(5,925)




(220)




(4,535)




(1,438)




(2,817)




(853)




1,051




1,687




Unrealized (losses)/gains on trading assets



(20)




106




172




49




64




44




57




(3)




11




Amortization of premiums/discounts and deferred gains on assets consolidated at fair value



35




3




40




(7)




(139)




(16)




67




(38)




196




Net effects of terminations or net settlements on financial derivatives



720




(1,300)




232




232




(592)




110




(312)




546




232




Issuance costs on the retirement of preferred stock















(1,956)
















Income tax effect related to reconciling items



(1,419)




2,856




(1,218)




2,389




(1,759)




92




238




(1,088)




(1,855)





Net income attributable to common stockholders


$

31,687



$

9,399



$

29,066



$

14,406



$

28,304



$

21,874



$

19,560



$

26,474



$

26,340










































 

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SOURCE Farmer Mac

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