Farmer Mac Reports Third Quarter 2020 Results

WASHINGTON, Nov. 9, 2020 /PRNewswire/ -- The Federal Agricultural Mortgage Corporation AGM (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 September 30, 2020.

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

Third Quarter 2020 Highlights

  • Provided $1.3 billion in liquidity and lending capacity in third quarter 2020;
  • Net income attributable to common stockholders grew 29.5% from the prior-year period to $18.7 million, or $1.73 per diluted common share;
  • Core earnings, a non-GAAP measure, grew 18.4% from the prior-year period to $27.7 million, or $2.57 per diluted common share;
  • Net interest income grew $4.5 million year-over-year to $44.7 million;
  • Net effective spread, a non-GAAP measure, increased 22.0% from the prior-year period to $51.8 million;
  • 90-day delinquencies were 0.40% of total outstanding business volume as of September 30, 2020;
  • Continued strong liquidity position, as evidenced by quarter-end cash position of $910.6 million;
  • Issued $120.0 million of Tier 1 capital through the public offering of 5.250% Series F non-cumulative preferred stock; and
  • Executed total COVID-19 payment deferments for $374.5 million of unpaid principal balance related to Farm & Ranch loans, Farm & Ranch LTSPCs, and USDA Securities to provide relief to borrowers from April 1, 2020 through September 30, 2020.

"We continue to execute and produce very strong results in the face of the ongoing pandemic, once again generating double-digit net effective spread and core earnings growth," said President & Chief Executive Officer Brad Nordholm.  "We continue to make progress in acquiring new business by successfully broadening our customer relationships, while maintaining our underwriting standards.  We also remained competitive in the debt capital markets and held ample liquidity on our balance sheet to ensure that we successfully fulfill our mission during this unpredictable economic environment.  The entire Farmer Mac team continues to do an outstanding job navigating us through the pandemic and supporting agricultural and rural communities across the nation."

Third Quarter 2020 Results

Business Volume

Our outstanding business volume was $22.0 billion as of September 30, 2020, a net decrease of $52.8 million from June 30, 2020 after taking into account all new business, maturities, and repayments on existing assets.  This net decrease consisted of decreases of $335.3 million in Institutional Credit and $6.3 million in Rural Utilities, partially offset by increases of $231.5 million in Farm & Ranch and $57.3 million in USDA Guarantees.

The $231.5 million net increase in our Farm & Ranch line of business was comprised of a $399.5 million net increase in outstanding loan purchase volume, partially offset by net decreases of $159.7 million in loans held in consolidated trusts and $8.3 million in loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. The net growth in third quarter 2020 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 21.1% in Farm & Ranch loan purchases over the twelve months ended September 30, 2020 is significantly higher than the 3.5% net growth of the overall agricultural mortgage loan market over the twelve months ended June 30, 2020 (based on our analysis of bank and Farm Credit System call report data). During third quarter 2020, Farmer Mac syndicated a $15.0 million position of a newly purchased $59.2 million agricultural loan. This transaction represents new activity for Farmer Mac to broaden its relationships across the agricultural lending spectrum.

Our USDA Guarantees line of business grew by $57.3 million in third quarter 2020.  The third quarter gross volume of $225.5 million was the highest gross volume that we have ever recorded in any quarter.  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 $335.3 million net decrease in the Institutional Credit line of business during third quarter 2020 was due primarily to three large counterparties who reduced their amount of outstanding credit in connection with scheduled maturities and payments on multiple AgVantage bonds.  Changes in quarterly AgVantage securities volume are primarily driven by the generally larger transaction sizes for that product, scheduled maturity amounts for a particular quarter, the liquidity needs of Farmer Mac's AgVantage counterparties, and changes in the pricing and availability of wholesale funding.

The $6.3 million net decrease in our Rural Utilities line of business was comprised of a $14.1 million net decrease in loans under LTSPCs, partially offset by $7.8 million net increase in outstanding loan purchase volume. During the third quarter, as part of our renewable energy project finance strategic initiative, Farmer Mac purchased a $10.0 million loan in connection with a wind project financing.

Spreads

Net interest income for third quarter 2020 was $44.7 million, a $4.5 million increase compared to $40.1 million in the prior-year period, primarily driven by net growth across most lines of business.  Net interest yield was 0.78% in both third quarter 2020 and third quarter 2019.

Net effective spread, a non-GAAP measure, for third quarter 2020 was $51.8 million, a $9.3 million increase from $42.5 million in the prior year period.  This increase was primarily attributable to growth in outstanding business volume, which increased net effective spread by approximately $6.5 million, and a $2.2 million decrease in non-GAAP funding costs. In percentage terms, the increase of 0.06% was primarily attributable to an increase of 0.03% related to net volume growth, and a decrease in non-GAAP funding costs of 0.03%.

Earnings

Farmer Mac's net income attributable to common stockholders for third quarter 2020 were $18.7 million ($1.73 per diluted common share), compared to $14.4 million ($1.33 per diluted common share) in third quarter 2019. The $4.3 million year-over-year increase in net income attributable to common stockholders was primarily due to a $5.4 million after-tax increase in the fair value of undesignated financial derivatives due to fluctuations in long-term interest rates and a $3.6 million after-tax increase in net interest income. These increases were partially offset by a $1.7 million increase in preferred stock dividends, the recognition of $1.7 million in deferred issuance costs related to the redemption of the Series A Preferred Stock, and a $0.7 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 third quarter 2020 was $27.7 million ($2.57 per diluted common share), compared to $23.4 million ($2.17 per diluted common share) in third quarter 2019. The $4.3 million year-over-year increase in core earnings was primarily due to a $7.4 million after-tax increase in net effective spread, partially offset by a $1.7 million increase in preferred stock dividends, a $0.8 million after-tax increase in operating expenses, and a $0.5 million after-tax increase in the total provision for credit losses.

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 September 30, 2020, Farmer Mac's total allowance for losses was $20.0 million, compared to $18.8 million as of June 30, 2020.  In the third 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 third quarter was approximately $1.2 million, primarily due to the impact of net new loan volume in the Rural Utilities portfolio and some credit downgrades in the Farm & Ranch LTSPC portfolio, partially offset by improving economic factors that uniquely impacted the on-balance sheet Farm & Ranch portfolio during the quarter.  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 September 30, 2020, compared to 0.05% as of September 30, 2019.

As of September 30, 2020, Farmer Mac's Farm & Ranch substandard assets were $321.2 million, compared to $304.9 million as of June 30, 2020.  The $16.3 million increase in substandard assets was primarily driven by credit downgrades in our off-balance sheet portfolio, partially offset by credit upgrades in our on-balance sheet portfolio during the quarter. 

As of September 30, 2020, Farmer Mac's 90-day delinquencies were $88.0 million (1.07% of the Farm & Ranch portfolio), compared to $68.7 million (0.86% of the Farm & Ranch portfolio) as of June 30, 2020 and $61.0 million (0.78% of the Farm & Ranch portfolio) as of December 31, 2019.  The sequential increase 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 0.40% of total outstanding business volume as of September 30, 2020, compared to 0.31% as of June 30, 2020.  Loans under COVID-19 deferment are not considered past due and are not included in our delinquent loan statistics. Farmer Mac believes that it remains adequately collateralized on its delinquent loans.

In the Rural Utilities portfolio, one $4.5 million loan was downgraded to substandard in the previous quarter and remained substandard in third quarter 2020. There were no delinquencies in the Rural Utilities portfolio as of September 30, 2020.

Capital

As of September 30, 2020, Farmer Mac's core capital level was $984.2 million, which was $314.2 million above the minimum capital level required by our statutory charter.  This compares to $915.6 million as of June 30, 2020, which was $247.9 million above the minimum capital requirement.  Farmer Mac's Tier 1 capital ratio was 14.3% as of September 30, 2020.  The increase in capital in excess of the minimum capital level required was primarily due to the Board-authorized issuance of the Series E Preferred Stock and Series F Preferred Stock and the increase in retained earnings, partially offset by growth in our outstanding business volume and the Board-authorized redemption of the Series A Preferred Stock.

Preferred Stock

In August 2020, Farmer Mac issued 4.8 million shares of 5.250% Non-Cumulative Preferred Stock, Series F ("Series F Preferred Stock"), which has a par value and liquidation preference of $25.00 per share, or $120.0 million aggregate outstanding.  Farmer Mac incurred direct costs of $3.8 million related to the issuance of the Series F preferred stock.  The dividend rate on the Series F preferred stock will remain at a non-cumulative, fixed rate of 5.250% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series F preferred stock remains outstanding.  The Series F 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 October 17, 2025.

Earnings Conference Call Information

The conference call to discuss Farmer Mac's third quarter 2020 financial results will be held beginning at 5:00 p.m. Eastern time on Monday, November 9, 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 third quarter 2020 is in Farmer Mac's Quarterly Report on Form 10-Q for the quarter ended September 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 September 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


September 30, 2020


December 31, 2019


(in thousands)

Assets:




Cash and cash equivalents

$

910,592



$

604,381


Investment securities:




Available-for-sale, at fair value (amortized cost of $3,522,674 and $2,961,430, respectively)

3,532,190



2,959,843


Held-to-maturity, at amortized cost

45,032



45,032


Total Investment Securities

3,577,222



3,004,875


Farmer Mac Guaranteed Securities:




Available-for-sale, at fair value (amortized cost of $7,150,606 and $7,016,971, respectively)

7,511,638



7,143,025


Held-to-maturity, at amortized cost

1,200,570



1,447,451


Total Farmer Mac Guaranteed Securities

8,712,208



8,590,476


USDA Securities:




Trading, at fair value

6,830



8,913


Held-to-maturity, at amortized cost

2,410,848



2,232,160


Total USDA Securities

2,417,678



2,241,073


Loans:




Loans held for sale, at lower of cost or fair value

20,000




Loans held for investment, at amortized cost

6,825,061



5,390,977


Loans held for investment in consolidated trusts, at amortized cost

1,276,407



1,600,917


Allowance for losses

(15,821)



(10,454)


Total loans, net of allowance

8,105,647



6,981,440


Financial derivatives, at fair value

12,837



10,519


Interest receivable (includes $11,525 and $20,568, respectively, related to consolidated trusts)

153,170



199,195


Guarantee and commitment fees receivable

36,664



38,442


Deferred tax asset, net

29,288



16,510


Prepaid expenses and other assets

43,531



22,463


Total Assets

$

23,998,837



$

21,709,374






Liabilities and Equity:




Liabilities:




Notes payable

21,589,285



19,098,648


Debt securities of consolidated trusts held by third parties

1,292,416



1,616,504


Financial derivatives, at fair value

37,357



27,042


Accrued interest payable (includes $9,353 and $18,018, respectively, related to consolidated trusts)

92,648



106,959


Guarantee and commitment obligation

35,140



36,700


Accounts payable and accrued expenses

18,078



22,081


Reserve for losses

3,568



2,164


Total Liabilities

23,068,492



20,910,098


Commitments and Contingencies




Equity:




Preferred stock:




Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding as of December 31, 2019 (redemption value $60,000,000)



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




Series F, par value $25 per share, 4,800,000 shares authorized, issued and outstanding

116,160




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,9,204,724 shares and 9,180,744 shares outstanding, respectively

9,205



9,181


Additional paid-in capital

121,525



119,304


Accumulated other comprehensive loss, net of tax

(53,837)



(16,161)


Retained earnings

488,717



457,047


Total Equity

930,345



799,276


Total Liabilities and Equity

$

23,998,837



$

21,709,374


 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



For the Three Months Ended


For the Nine Months Ended


September 30,
2020


September 30,
2019


September 30,
2020


September 30,
2019


(in thousands, except per share amounts)

Interest income:








Investments and cash equivalents

$

7,096



$

22,855



$

35,236



$

61,718


Farmer Mac Guaranteed Securities and USDA Securities

45,335



81,649



178,644



252,629


Loans

56,204



56,992



172,230



167,792


Total interest income

108,635



161,496



386,110



482,139


Total interest expense

63,974



121,384



251,789



358,374


Net interest income

44,661



40,112



134,321



123,765


Provision for losses

(653)



(760)



(4,542)



(1,074)


Net interest income after provision for losses

44,008



39,352



129,779



122,691


Non-interest income/(expense):








Guarantee and commitment fees

3,159



3,349



9,495



10,265


(Losses)/gains on financial derivatives

(564)



(7,360)



(3,339)



1,193


(Losses)/gains on trading securities

(258)



49



(173)



154


Gains on sale of real estate owned





485




(Provision)/release of reserve for losses

(547)



137



(540)



424


Other income

594



530



2,639



1,378


Non-interest income/(expense)

2,384



(3,295)



8,567



13,414


Operating expenses:








Compensation and employee benefits

8,791



7,654



27,005



22,030


General and administrative

5,044



5,253



15,702



14,538


Regulatory fees

725



688



2,175



2,063


Real estate owned operating costs, net







64


Operating expenses

14,560



13,595



44,882



38,695


Income before income taxes

31,832



22,462



93,464



97,410


Income tax expense

6,340



4,629



19,516



20,362


Net income

25,492



17,833



73,948



77,048


Preferred stock dividends

(5,166)



(3,427)



(12,536)



(10,508)


Loss on retirement of preferred stock

(1,667)





(1,667)



(1,956)


Net income attributable to common stockholders

$

18,659



$

14,406



$

59,745



$

64,584










Earnings per common share:








Basic earnings per common share

$

1.74



$

1.34



$

5.57



$

6.04


Diluted earnings per common share

$

1.73



$

1.33



$

5.54



$

5.99


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


September 30, 2020


June 30, 2020


September 30, 2019


(in thousands, except per share amounts)

Net income attributable to common stockholders

$

18,659



$

31,687



$

14,406


Less reconciling items:






(Losses)/gains on undesignated financial derivatives due to fair value changes

(4,149)



8,700



(7,117)


Losses on hedging activities due to fair value changes

(5,245)



(2,676)



(4,535)


Unrealized (losses)/gains on trading securities

(258)



(20)



49


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

97



35



(7)


Net effects of terminations or net settlements on financial derivatives

233



720



232


Issuance costs on the retirement of preferred stock

(1,667)






Income tax effect related to reconciling items

1,957



(1,419)



2,389


Sub-total

(9,032)



5,340



(8,989)


Core earnings

$

27,691



$

26,347



$

23,395








Composition of Core Earnings:






Revenues:






Net effective spread(1)

$

51,802



$

46,469



$

42,461


Guarantee and commitment fees(2)

4,659



4,943



5,208


Other(3)

453



1,048



389


Total revenues

56,914



52,460



48,058








Credit related expense (GAAP):






Provision for losses

1,200



51



623


Total credit related expense

1,200



51



623








Operating expenses (GAAP):






Compensation and employee benefits

8,791



8,087



7,654


General and administrative

5,044



5,295



5,253


Regulatory fees

725



725



688


Total operating expenses

14,560



14,107



13,595








Net earnings

41,154



38,302



33,840


Income tax expense(4)

8,297



8,016



7,018


Preferred stock dividends (GAAP)

5,166



3,939



3,427


Core earnings

$

27,691



$

26,347



$

23,395








Core earnings per share:






  Basic

$

2.58



$

2.46



$

2.19


  Diluted

2.57



2.45



2.17




(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 Nine Months Ended


September 30, 2020


September 30, 2019


(in thousands, except per share amounts)

Net income attributable to common stockholders

$

59,745



$

64,584


Less reconciling items:




(Losses)/gains on undesignated financial derivatives due to fair value changes

(1,933)



5,608


Losses on hedging activities due to fair value changes

(13,846)



(8,790)


Unrealized (losses)/gains on trading securities

(173)



154


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

135



(162)


Net effects of terminations or net settlements on financial derivatives

(346)



(250)


Issuance costs on the retirement of preferred stock

(1,667)



(1,956)


Income tax effect related to reconciling items

3,394



722


Sub-total

(14,436)



(4,674)


Core earnings

$

74,181



$

69,258






Composition of Core Earnings:




Revenues:




Net effective spread(1)

$

142,434



$

122,617


Guarantee and commitment fees(2)

14,498



15,903


Other(3)

2,175



1,675


Total revenues

159,107



140,195






Credit related expense (GAAP):




Provision for losses

5,082



650


REO operating expenses



64


Gains on sale of REO

(485)




Total credit related expense

4,597



714






Operating expenses (GAAP):




Compensation and employee benefits

27,005



22,030


General and administrative

15,702



14,538


Regulatory fees

2,175



2,063


Total operating expenses

44,882



38,631






Net earnings

109,628



100,850


Income tax expense(4)

22,911



21,084


Preferred stock dividends (GAAP)

12,536



10,508


Core earnings

$

74,181



$

69,258






Core earnings per share:




  Basic

$

6.92



$

6.48


  Diluted

6.88



6.43




(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 Nine Months Ended


September 30,
2020


June 30,
2020


September 30,
2019


September 30,
2020


September 30,
2019


(in thousands, except per share amounts)

GAAP - Basic EPS

$

1.74



$

2.95



$

1.34



$

5.57



$

6.04


Less reconciling items:










(Losses)/gains on undesignated financial derivatives due to fair value changes

(0.39)



0.81



(0.66)



(0.18)



0.52


Losses on hedging activities due to fair value changes

(0.49)



(0.25)



(0.42)



(1.29)



(0.82)


Unrealized (losses)/gains on trading securities

(0.02)







(0.02)



0.01


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

0.01







0.01



(0.02)


Net effects of terminations or net settlements on financial derivatives

0.02



0.06



0.02



(0.03)



(0.02)


Issuance costs on the retirement of preferred stock

(0.15)







(0.16)



(0.18)


Income tax effect related to reconciling items

0.18



(0.13)



0.21



0.32



0.07


Sub-total

(0.84)



0.49



(0.85)



(1.35)



(0.44)


Core Earnings - Basic EPS

$

2.58



$

2.46



$

2.19



$

6.92



$

6.48












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

10,734



10,730



10,706



10,725



10,691


 

Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings Diluted Earnings Per Share


For the Three Months Ended


For the Nine Months Ended


September 30,
2020


June 30,
2020


September 30,
2019


September 30,
2020


September 30,
2019


(in thousands, except per share amounts)

GAAP - Diluted EPS

$

1.73



$

2.94



$

1.33



$

5.54



$

5.99


Less reconciling items:










(Losses)/gains on undesignated financial derivatives due to fair value changes

(0.39)



0.81



(0.66)



(0.18)



0.52


Losses on hedging activities due to fair value changes

(0.49)



(0.25)



(0.42)



(1.28)



(0.82)


Unrealized (losses)/gains on trading securities

(0.02)







(0.02)



0.01


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

0.01







0.01



(0.02)


Net effects of terminations or net settlements on financial derivatives

0.02



0.06



0.02



(0.03)



(0.02)


Issuance costs on the retirement of preferred stock

(0.15)







(0.15)



(0.18)


Income tax effect related to reconciling items

0.18



(0.13)



0.22



0.31



0.07


Sub-total

(0.84)



0.49



(0.84)



(1.34)



(0.44)


Core Earnings - Diluted EPS

$

2.57



$

2.45



$

2.17



$

6.88



$

6.43












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

10,785



10,776



10,776



10,781



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 Nine Months Ended


September 30, 2020


June 30, 2020


September 30, 2019


September 30, 2020


September 30, 2019


Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield


Dollars


Yield


(dollars in thousands)

Net interest income/yield

$

44,661



0.78

%


$

48,348



0.87

%


$

40,112



0.78

%


$

134,321



0.80

%


$

123,765



0.84

%

Net effects of consolidated trusts

(1,500)



0.02

%


(1,804)



0.02

%


(1,859)



0.02

%


(5,003)



0.03

%


(5,638)



0.03

%

Expense related to undesignated financial derivatives

3,613



0.07

%


(2,413)



(0.05)

%


(268)



%


9



%


(4,370)



(0.03)

%

Amortization of premiums/discounts on assets consolidated at fair value

(81)



%


(21)



%


28



%


(92)



%


341



%

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

62



%


(22)



%


(42)



%


90



%


(98)



%

Fair value changes on fair value hedge relationships

5,047



0.09

%


2,381



0.05

%


4,490



0.10

%


13,109



0.09

%


8,617



0.06

%

Net effective spread

$

51,802



0.96

%


$

46,469



0.89

%


$

42,461



0.90

%


$

142,434



0.92

%


$

122,617



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 September 30, 2020:

Core Earnings by Business Segment

For the Three Months Ended September 30, 2020


Farm &
Ranch


USDA
Guarantees


Rural 

Utilities


Institutional
Credit


Corporate


Reconciling

Adjustments


Consolidated
Net Income


(in thousands)

Net interest income

$

18,093



$

4,747



$

5,709



$

14,171



$

1,941



$



$

44,661


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

(68)



1,118



1,230



4,430



431



(7,141)




Net effective spread

18,025



5,865



6,939



18,601



2,372



(7,141)




Guarantee and commitment fees(2)

4,111



213



328



7





(1,500)



3,159


Other income/(expense)(3)

443



135







(125)



(681)



(228)


Non-interest income/(loss)

4,554



348



328



7



(125)



(2,181)



2,931
















Provision for loan losses

300





(1,182)



228



1





(653)
















(Provision for)/release of reserve for losses

(628)





81









(547)


Other non-interest expense

(5,381)



(1,643)



(1,438)



(2,160)



(3,938)





(14,560)


Non-interest expense(4)

(6,009)



(1,643)



(1,357)



(2,160)



(3,938)





(15,107)


Core earnings before income taxes

16,870



4,570



4,728



16,676



(1,690)



(9,322)


(5)

31,832


Income tax (expense)/benefit

(3,543)



(960)



(993)



(3,502)



701



1,957



(6,340)


Core earnings before preferred stock dividends

13,327



3,610



3,735



13,174



(989)



(7,365)


(5)

25,492


Preferred stock dividends









(5,166)





(5,166)


Loss on retirement of preferred stock











(1,667)



(1,667)


Segment core earnings/(losses)

$

13,327



$

3,610



$

3,735



$

13,174



$

(6,155)



$

(9,032)


(5)

$

18,659
















Total assets at carrying value

$

5,961,307



$

2,487,687



$

2,256,011



$

8,716,923



$

4,576,909



$



$

23,998,837


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

$

8,249,349



$

2,735,128



$

2,685,309



$

8,319,502



$



$



$

21,989,288




(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 "(Losses)/gains 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 September 30, 2020


As of December 31, 2019


(in thousands)

Farm & Ranch:




Loans

$

4,580,917



$

3,675,640


Loans held in trusts:




Beneficial interests owned by third party investors

1,276,407



1,600,917


LTSPCs

2,306,258



2,393,071


Guaranteed Securities

85,767



107,322


USDA Guarantees:




USDA Securities

2,388,033



2,199,072


Farmer Mac Guaranteed USDA Securities

347,095



421,103


Rural Utilities:




Loans

2,109,355



1,671,293


LTSPCs(1)

575,954



609,278


Institutional Credit




AgVantage Securities

8,319,502



8,440,246


Total

$

21,989,288



$

21,117,942




(1) 

As of both September 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:
























September 30, 2020(1)

$

18,025



1.67

%


$

5,865



0.97

%


$

6,939



1.32

%


$

18,601



0.87

%


$

2,372



0.23

%


$

51,802



0.96

%

June 30, 2020

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

%



(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 September 30, 2020.

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

Core Earnings by Quarter Ended


September
2020


June
2020


March
2020


December
2019


September
2019


June
2019


March
2019


December
2018


September
2018


(in thousands)

Revenues:


















Net effective spread

$

51,802



$

46,469



$

44,163



$

45,991



$

42,461



$

41,355



$

38,801



$

38,855



$

39,077


Guarantee and commitment fees

4,659



4,943



4,896



5,432



5,208



5,276



5,419



5,309



5,170


Other

453



1,048



674



100



389



777



509



(129)



110


Total revenues

56,914



52,460



49,733



51,523



48,058



47,408



44,729



44,035



44,357




















Credit related expense/(income):


















Provision for/(release of) losses

1,200



51



3,831



2,851



623



420



(393)



166



(3)


REO operating expenses











64








(Gains)/losses on sale of REO





(485)













41


Total credit related expense/(income)

1,200



51



3,346



2,851



623



484



(393)



166



38




















Operating expenses:


















Compensation and employee benefits

8,791



8,087



10,127



6,732



7,654



6,770



7,606



7,167



6,777


General and administrative

5,044



5,295



5,363



5,773



5,253



4,689



4,596



5,829



4,350


Regulatory fees

725



725



725



725



688



687



688



687



625


Total operating expenses

14,560



14,107



16,215



13,230



13,595



12,146



12,890



13,683



11,752




















Net earnings

41,154



38,302



30,172



35,442



33,840



34,778



32,232



30,186



32,567


Income tax expense

8,297



8,016



6,598



7,526



7,018



7,351



6,715



6,431



6,891


Preferred stock dividends

5,166



3,939



3,431



3,432



3,427



3,785



3,296



3,296



3,295


Core earnings

$

27,691



$

26,347



$

20,143



$

24,484



$

23,395



$

23,642



$

22,221



$

20,459



$

22,381




















Reconciling items:


















(Losses)/gains on undesignated financial derivatives due to fair value changes

(4,149)



8,700



(6,484)



4,469



(7,117)



10,485



2,240



(96)



3,625


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

(5,245)



(2,676)



(5,925)



(220)



(4,535)



(1,438)



(2,817)



(853)



1,051


Unrealized (losses)/gains on trading assets

(258)



(20)



106



172



49



61



44



57



(3)


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

97



35



3



40



(7)



(139)



(16)



67



(38)


Net effects of terminations or net settlements on financial derivatives

233



720



(1,300)



1,339



232



(592)



110



(312)



546


Issuance costs on the retirement of preferred stock

(1,667)











(1,956)








Income tax effect related to reconciling items

1,957



(1,419)



2,856



(1,218)



2,389



(1,759)



92



238



(1,088)


Net income attributable to common stockholders

$

18,659



$

31,687



$

9,399



$

29,066



$

14,406



$

28,304



$

21,874



$

19,560



$

26,474


 

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SOURCE Farmer Mac

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