Farmer Mac Reports Third Quarter 2019 Results

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

As of

September 30,

December 31,

2019

2018

(in thousands)

Assets:

Cash and cash equivalents

$

587,941

$

425,256

Investment securities

Available-for-sale, at fair value

3,111,632

2,217,852

Held-to-maturity, at amortized cost

45,032

45,032

Total Investment Securities

3,156,664

2,262,884

Farmer Mac Guaranteed Securities

Available-for-sale, at fair value

7,182,541

5,974,497

Held-to-maturity, at amortized cost

1,452,616

2,096,618

Total Farmer Mac Guaranteed Securities

8,635,157

8,071,115

USDA Securities

Trading, at fair value

8,943

9,999

Held-to-maturity, at amortized cost

2,164,064

2,166,174

Total USDA Securities

2,173,007

2,176,173

Loans:

Loans held for investment, at amortized cost

4,998,526

4,004,968

Loans held for investment in consolidated trusts, at amortized cost

1,526,718

1,517,101

Allowance for loan losses

(8,024)

(7,017)

Total loans, net of allowance

6,517,220

5,515,052

Real estate owned, at lower of cost or fair value

1,770

128

Financial derivatives, at fair value

5,589

7,487

Interest receivable (includes $13,385 and $19,783, respectively, related to consolidated trusts)

158,720

180,080

Guarantee and commitment fees receivable

39,136

40,366

Deferred tax asset, net

23,803

6,369

Prepaid expenses and other assets

16,227

9,418

Total Assets

$

21,315,234

$

18,694,328

Liabilities and Equity:

Liabilities:

Notes Payable:

Due within one year

$

9,885,633

$

7,757,050

Due after one year

8,940,989

8,486,647

Total notes payable

18,826,622

16,243,697

Debt securities of consolidated trusts held by third parties

1,532,401

1,528,957

Financial derivatives, at fair value

30,542

19,633

Accrued interest payable (includes $11,462 and $17,125, respectively, related to consolidated trusts)

104,340

96,743

Guarantee and commitment obligation

37,449

38,683

Accounts payable and accrued expenses

31,878

11,891

Reserve for losses

1,743

2,167

Total Liabilities

20,564,975

17,941,771

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 B, par value $25 per share, 3,000,000 shares authorized, issued and outstanding as of December 31, 2018 (redemption value $75,000,000)

-

73,044

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

-

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, 9,179,053 shares and 9,137,550 shares outstanding, respectively

9,179

9,138

Additional paid-in capital

118,720

118,822

Accumulated other comprehensive income, net of tax

(43,024)

24,956

Retained earnings

435,479

393,351

Total Equity

750,259

752,557

Total Liabilities and Equity

$

21,315,234

$

18,694,328

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

For the Three Months Ended

For the Nine Months Ended

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

(in thousands, except per share amounts)

Interest income:

Investments and cash equivalents

$

22,855

$

15,123

$

61,718

$

38,681

Farmer Mac Guaranteed Securities and USDA Securities

81,649

76,870

252,629

213,479

Loans

56,992

50,622

167,792

145,671

Total interest income

161,496

142,615

482,139

397,831

Total interest expense

121,384

97,557

358,374

265,611

Net interest income

40,112

45,058

123,765

132,220

Provision for loan losses

(760)

(99)

(1,074)

(92)

Net interest income after provision for loan losses

39,352

44,959

122,691

132,128

Non-interest income:

Guarantee and commitment fees

3,349

3,490

10,265

10,470

(Losses)/gains on financial derivatives

(7,360)

628

1,193

(688)

Gains/(losses) on trading securities

49

(3)

154

24

Losses on sale of real estate owned

-

(41)

-

(7)

Other income

530

365

1,378

1,259

Non-interest (loss)/income

(3,432)

4,439

12,990

11,058

Non-interest expense:

Compensation and employee benefits

7,654

6,777

22,030

20,367

General and administrative

5,253

4,350

14,538

13,878

Regulatory fees

688

625

2,063

1,875

Real estate owned operating costs, net

-

-

64

16

(Release of)/provision for reserve for losses

(137)

(102)

(424)

77

Non-interest expense

13,458

11,650

38,271

36,213

Income before income taxes

22,462

37,748

97,410

106,973

Income tax expense

4,629

7,979

20,362

21,749

Net income attributable to Farmer Mac

17,833

29,769

77,048

85,224

Preferred stock dividends

(3,427)

(3,295)

(10,508)

(9,886)

Loss on retirement of preferred stock

-

-

(1,956)

-

Net income attributable to common stockholders

$

14,406

$

26,474

64,584

75,338

Earnings per common share:

Basic earnings per common share

$

1.34

$

2.48

$

6.04

$

7.07

Diluted earnings per common share

$

1.33

$

2.46

$

5.99

$

7.01

Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings

For the Three Months Ended

September 30, 2019

June 30, 2019

September 30, 2018

(in thousands, except per share amounts)

Net income attributable to common stockholders

$

14,406

$

28,304

$

26,474

Less reconciling items:

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

(7,117)

10,485

3,625

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

(4,535)

(1,438)

1,051

Unrealized gains/(losses) on trading securities

49

61

(3)

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

(7)

(139)

(38)

Net effects of terminations or net settlements on financial derivatives

232

(592)

546

Issuance costs on the retirement of preferred stock

-

(1,956)

-

Income tax effect related to reconciling items

2,389

(1,759)

(1,088)

Sub-total

(8,989)

4,662

4,093

Core earnings

$

23,395

$

23,642

$

22,381

Composition of Core Earnings:

Revenues:

Net effective spread(1)

$

42,461

$

41,355

$

39,077

Guarantee and commitment fees(2)

5,208

5,276

5,170

Other(3)

389

777

110

Total revenues

48,058

47,408

44,357

Credit related expense (GAAP):

Provision for/(release of) losses

623

420

(3)

REO operating expenses

-

64

-

Losses on sale of REO

-

-

41

Total credit related expense

623

484

38

Operating expenses (GAAP):

Compensation and employee benefits

7,654

6,770

6,777

General and administrative

5,253

4,689

4,350

Regulatory fees

688

687

625

Total operating expenses

13,595

12,146

11,752

Net earnings

33,840

34,778

32,567

Income tax expense(4)

7,018

7,351

6,891

Preferred stock dividends (GAAP)

3,427

3,785

3,295

Core earnings

$

23,395

$

23,642

$

22,381

Core earnings per share:

Basic

$

2.19

$

2.21

$

2.10

Diluted

2.17

2.20

2.08

(1)

Net effective spread is a non-GAAP measure.  See "Use of Non-GAAP Measures—Net Effective Spread" 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 hedging activities, 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, 2019

September 30, 2018

(in thousands, except per share amounts)

Net income attributable to common stockholders

$

64,584

$

75,338

Less reconciling items:

Gains on undesignated financial derivatives due to fair value changes

5,608

8,055

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

(8,790)

5,302

Unrealized gains on trading securities

154

24

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

(162)

(528)

Net effects of terminations or net settlements on financial derivatives

(250)

2,020

Issuance costs on the retirement of preferred stock

(1,956)

-

Income tax effect related to reconciling items

722

(3,123)

Sub-total

(4,674)

11,750

Core earnings

$

69,258

$

63,588

Composition of Core Earnings:

Revenues:

Net effective spread(1)

$

122,617

$

112,340

Guarantee and commitment fees(2)

15,903

15,424

Other(3)

1,675

649

Total revenues

140,195

128,413

Credit related expenses (GAAP):

Provision for losses

650

169

REO operating expenses

64

16

Losses on sale of REO

-

7

Total credit related expenses

714

192

Operating expenses (GAAP):

Compensation and employee benefits

22,030

20,367

General and administrative

14,538

13,878

Regulatory fees

2,063

1,875

Total operating expenses

38,631

36,120

Net earnings

100,850

92,101

Income tax expense(4)

21,084

18,627

Preferred stock dividends (GAAP)

10,508

9,886

Core earnings

$

69,258

$

63,588

Core earnings per share:

Basic

$

6.48

$

5.97

Diluted

6.43

5.92

(1)

Net effective spread is a non-GAAP measure.  See "Use of Non-GAAP Measures—Net Effective Spread" 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 hedging activities, 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, 2019

June 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

(in thousands, except per share amounts)

GAAP - Basic EPS

$

1.34

$

2.65

$

2.48

$

6.04

$

7.07

Less reconciling items:

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

(0.66)

0.98

0.34

0.52

0.76

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

(0.42)

(0.13)

0.10

(0.82)

0.50

Unrealized gains on trading securities

-

0.01

—

0.01

-

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

-

(0.01)

—

(0.02)

(0.05)

Net effects of terminations or net settlements on financial derivatives

0.02

(0.06)

0.05

(0.02)

0.19

Issuance costs on the retirement of preferred stock

-

(0.18)

—

(0.18)

—

Income tax effect related to reconciling items

0.21

(0.17)

(0.11)

0.07

(0.30)

Sub-total

(0.85)

0.44

0.38

(0.44)

1.10

Core Earnings - Basic EPS

$

2.19

$

2.21

$

2.10

$

6.48

$

5.97

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

10,706

10,698

10,668

10,691

10,650

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, 2019

June 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

(in thousands, except per share amounts)

GAAP - Diluted EPS

$

1.33

$

2.63

$

2.46

$

5.99

$

7.01

Less reconciling items:

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

(0.66)

0.96

0.33

0.52

0.75

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

(0.42)

(0.14)

0.10

(0.82)

0.49

Unrealized gains on trading securities

-

0.01

—

0.01

—

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

-

(0.01)

—

(0.02)

(0.05)

Net effects of terminations or net settlements on financial derivatives and hedging activities

0.02

(0.05)

0.05

(0.02)

0.19

Issuance costs on the retirement of preferred stock

-

(0.18)

—

(0.18)

—

Income tax effect related to reconciling items

0.22

(0.16)

(0.10)

0.07

(0.29)

Sub-total

(0.84)

0.43

0.38

(0.44)

1.09

Core Earnings - Diluted EPS

$

2.17

$

2.20

$

2.08

$

6.43

$

5.92

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

10,776

10,770

10,744

10,774

10,743

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

For the Three Months Ended

For the Nine Months Ended

September 30, 2019

June 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Dollars

Yield

Dollars

Yield

Dollars

Yield

Dollars

Yield

Dollars

Yield

(dollars in thousands)

Net interest income/yield

$

40,112

0.78

%

$

43,054

0.87

%

$

45,058

0.99

%

$

123,765

0.84

%

$

132,220

0.98

%

Net effects of consolidated trusts

(1,859)

0.02

%

(1,873)

0.03

%

(1,681)

0.05

%

(5,638)

0.03

%

(4,953)

0.04

%

Expense related to undesignated financial derivatives

(268)

-

%

(1,557)

(0.03)

%

(3,223)

(0.08)

%

(4,370)

(0.03)

%

(9,523)

(0.08)

%

Amortization of premiums/discounts on assets consolidated at fair value

28

-

%

289

0.01

%

49

-

%

341

-

%

555

0.01

%

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

(42)

-

%

14

-

%

(75)

-

%

(98)

-

%

(207)

-

%

Fair value changes on fair value hedge relationships

4,490

0.10

%

1,428

0.03

%

(1,051)

(0.03)

%

8,617

0.06

%

(5,752)

(0.05)

%

Net effective spread

$

42,461

0.90

%

$

41,355

0.91

%

$

39,077

0.93

%

$

122,617

0.90

%

$

112,340

0.90

%

Core Earnings by Business Segment

For the Three Months Ended September 30, 2019

Farm & Ranch

USDA Guarantees

Rural Utilities

Institutional Credit

Corporate

Reconciling Adjustments

Consolidated Net Income

(in thousands)

Net interest income

$

15,345

$

4,491

$

2,602

$

14,583

$

2,821

$

—

$

40,112

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

(2,164)

(177)

1,900

2,954

(164)

(2,349)

—

Net effective spread

13,181

4,314

4,502

17,807

2,657

(2,349)

—

Guarantee and commitment fees(2)

4,523

250

348

87

—

(1,859)

3,349

Other income/(expense)(3)

390

92

17

—

(110)

(7,170)

(6,781)

Non-interest income/(loss)

4,913

342

365

87

(110)

(9,029)

(3,432)

Provision for loan losses

(760)

—

—

—

—

—

(760)

Release of reserve for losses

137

—

—

—

—

—

137

Other non-interest expense

(5,062)

(1,506)

(913)

(2,277)

(3,837)

—

(13,595)

Non-interest expense(4)

(4,925)

(1,506)

(913)

(2,277)

(3,837)

—

(13,458)

Core earnings before income taxes

12,409

3,150

3,954

15,617

(1,290)

(11,378)

(5)

22,462

Income tax (expense)/benefit

(2,606)

(662)

(830)

(3,280)

360

2,389

(4,629)

Core earnings before preferred stock dividends 

9,803

2,488

3,124

12,337

(930)

(8,989)

(5)

17,833

Preferred stock dividends

—

—

—

—

(3,427)

—

(3,427)

Loss on retirement of preferred stock

—

—

—

—

—

—

—

Segment core earnings/(losses)

$

9,803

$

2,488

$

3,124

$

12,337

$

(4,357)

$

(8,989)

(5)

$

14,406

Total assets at carrying value

$

4,934,887

$

2,238,558

$

1,692,835

$

8,651,264

$

3,797,690

$

-

$

21,315,234

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

$

7,393,728

$

2,567,763

$

2,232,602

$

8,738,266

$

-

$

-

$

20,932,359

(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 and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders. 

Lines of Business - Outstanding Business Volume

As of September 30, 2019

As of December 31, 2018

(in thousands)

Farm & Ranch:

Loans

$

3,310,248

$

3,071,222

Loans held in trusts:

Beneficial interests owned by third party investors

1,526,718

1,517,101

LTSPCs

2,441,456

2,509,787

Guaranteed Securities

115,306

135,862

USDA Guarantees:

USDA Securities

2,131,066

2,120,553

Farmer Mac Guaranteed USDA Securities

436,697

395,067

Rural Utilities:

Loans

1,612,773

938,843

LTSPCs(1)

619,829

653,272

Institutional Credit:

AgVantage securities

8,438,266

8,082,817

Revolving floating rate AgVantage facility(2)

300,000

300,000

Total

$

20,932,359

$

19,724,524

(1)

Includes $20.0 million and $17.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee as of September 30, 2019 and December 31, 2018, respectively.

(2)

During the first nine months of both 2019 and 2018, $100.0 million of this facility was drawn and later repaid. Farmer Mac receives a fixed fee based on the full dollar amount of the facility.  If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage securities, and Farmer Mac will earn interest income on those securities.

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, 2019(1)

$

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

%

March 31, 2018

12,540

1.80

%

4,400

0.82

%

2,950

1.12

%

14,824

0.78

%

2,387

0.36

%

37,101

0.91

%

December 31, 2017

12,396

1.80

%

4,979

0.93

%

3,057

1.14

%

14,800

0.78

%

2,235

0.35

%

37,467

0.93

%

September 30, 2017

11,303

1.73

%

4,728

0.90

%

2,765

1.07

%

14,455

0.78

%

2,725

0.41

%

35,976

0.91

%