Second Quarter 2018 Financial Results Conference Call Presentation
FARMER MAC Speakers Lowell Junkins R. Dale Lynch Anjali D. Desai John C. Covington Acting President and Chief Executive Officer Executive Vice President Chief Financial Officer and Treasurer Assistant General Counsel Corporate & Compliance Executive Vice President Agricultural Finance 02
FARMER MAC Forward-Looking Statements In addition to historical information, this presentation includes forwardlooking statements that reflect management s current expectations for Farmer Mac s future financial results, business prospects, and business developments. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. Management s expectations for Farmer Mac s future necessarily involve a number of 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. Some of these factors are identified and discussed in Farmer Mac s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission ( SEC ) on March 8, 2018, Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed with the SEC on May 10, 2018, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 9, 2018, which are also available on Farmer Mac s website (www.farmermac.com). In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this presentation. Any forward-looking statements made in this presentation are current only as of June 30, 2018, except as otherwise indicated. Farmer Mac undertakes no obligation to release publicly the results of revisions to any such forward-looking statements that may be made to reflect new information or any future events or circumstances, except as otherwise mandated by the SEC. The information contained in this presentation is not necessarily indicative of future results. NO OFFER OR SOLICITATION OF SECURITIES This presentation does not constitute an offer to sell or a solicitation of an offer to buy any Farmer Mac security. Farmer Mac securities are offered only in jurisdictions where permissible by offering documents available through qualified securities dealers. Any investor who is considering purchasing a Farmer Mac security should consult the applicable offering documents for the security and their own financial and legal advisors for information about and analysis of the security, the risks associated with the security, and the suitability of the investment for the investor s particular circumstances. Copyright 2018 by Farmer Mac. No part of this document may be duplicated, reproduced, distributed, or displayed in public in any manner or by any means without the written permission of Farmer Mac. 03
FARMER MAC Use of Non-GAAP Financial Measures This presentation is for general informational purposes only, is current only as of June 30, 2018, and should be read in conjunction with Farmer Mac s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018. In the accompanying analysis of its financial information, Farmer Mac uses the following non-gaap financial 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 financial 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. 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: 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) beginning January 1, 2018, the fair value changes of financial derivatives and the corresponding assets and liabilities designated in a fair value hedge relationship. Net effective spread also principally differs from net interest income and net interest yield because it includes: the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedge relationships; and (2) effective in fourth quarter 2017, the net effects of terminations or net settlements on financial derivatives and hedging activities. 04
$ IN BILLIONS $ IN BILLIONS $ IN BILLIONS $ IN BILLIONS FARMER MAC Business Volume Total Business Volume $20.0 $1.9 $18.0 $1.3 $16.0 $14.0 $12.0 $10.0 $18.3 $19.5 2Q17 2Q18 Institutional Credit Business Volume $2.0 $1.5 $1.0 $0.5 $0.0 Outstanding Business Volume (left-axis) Gross New Volume (right-axis) $ IN BILLIONS Farm & Ranch Business Volume $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 $312 $56 USDA Business Volume $224 $126 $3.9 $2.5 $4.4 $2.6 2Q17 Outstanding LP Vol. (left-axis) Gross New LP Vol. (right-axis) 2Q18 $400 $300 $200 $100 $0 Outstanding LTSPC Vol. (left-axis) Gross New LTSPC Vol. (right-axis) (2) (3) (2) (3) $ IN MILLIONS $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1,297 $825 $7.7 $8.4 2Q17 2Q18 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $ IN MILLIONS $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $169 $130 $2.2 $2.4 2Q17 2Q18 $200 $150 $100 $50 $0 $ IN MILLIONS Outstanding Volume (left-axis) Gross New Volume (right-axis) Outstanding Volume (left-axis) Gross New Volume (right-axis) Outstanding business volume includes on- and off-balance sheet outstanding business volume as of June 30, 2018; Gross new business volume occurred during second quarter 2018. (2) Quarterly Farm & Ranch loan purchase ( LP ) volume. (3) Quarterly Farm & Ranch long-term standby purchase commitment ( LTSPC ) volume. 05
$ IN MILLIONS $ PER DILUTED SHARE FARMER MAC Core Earnings and Core Earnings per Share (Non-GAAP Measures) $24.0 $22.0 $20.0 $2.03 $2.30 $2.10 $1.90 $18.0 $1.80 $1.70 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $1.48 $16.0 $21.8 $19.4 (2) 2Q17 1Q18 2Q18 $1.50 $1.30 $1.10 $0.90 $0.70 $0.50 Core Earnings Per Diluted Share Core earnings and core earnings per share are non-gaap measures. For more information on the use of these non-gaap measures, please see page 4. For a reconciliation of GAAP net income attributable to common stockholders and earnings per common share to core earnings and core earnings per share, respectively, please refer to pages 12 and 13 of the Appendix. (2) Second quarter 2017 information has been recast to reflect the revised methodology for calculating net effective spread that became effective in fourth quarter 2017, as further described on page 4. 06
$ IN MILLIONS % FARMER MAC Net Effective Spread (Non-GAAP Measure) $40 1.00% $35 $30 $25 0.91% 0.91% 0.86% 0.90% 0.80% $20 0.70% $15 0.60% $10 $35.3 $37.1 $36.2 (2) 2Q17 1Q18 2Q18 Net Effective Spread ($) Net Effective Spread (%) 0.50% Net effective spread is a non-gaap measure. For more information on these non-gaap measures, please see page 4. For a reconciliation of net effective spread to GAAP net interest income, please refer to page 14 of the Appendix. (2) Second quarter 2017 information has been recast to reflect the revised methodology for calculating net effective spread that became effective in fourth quarter 2017, as further described on page 4. 07
$ IN MILLIONS % $ IN MILLIONS % $ IN MILLIONS % FARMER MAC Credit Metrics Total Allowance for Losses $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 0.3% 0.2% 0.19% 0.12% 0.13% 0.13% 0.1% $10.6 $7.1 $8.1 $9.0 0.0% 2Q15 2Q16 2Q17 2Q18 Total Allowance for Losses % of Farm & Ranch Portfolio 90-Day Delinquencies $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 0.58% Historical Average ~1.0% 0.38% 0.65% 0.61% $31.9 $22.1 $41.9 $43.1 2Q15 2Q16 2Q17 2Q18 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 90-Day Delinquencies % of Farm & Ranch Portfolio Average Substandard Assets $250.0 Historical Average ~4.0% 5.5% $200.0 3.5% $150.0 3.0% 3.2% $100.0 2.5% 2.1% 1.5% $50.0 $136.4 $122.3 $192.1 $226.5 $0.0-0.5% 2Q15 2Q16 2Q17 2Q18 Substandard Assets % of Farm & Ranch Portfolio Average Farmer Mac s historical averages are based on approximately 15 years of historical data for the Farm & Ranch line of business. 08
CORE CAPITAL $ IN MILLIONS CORE CAPITAL AMOUNT ABOVE STATUTORY MINIMUM CAPITAL $ IN MILLIONS FARMER MAC Capital $750 $700 $190 $650 $170 $600 $137 $150 $150 $550 $130 $500 $110 $450 $400 $90 $350 $300 $657 $693 2017 2Q18 $70 $50 Core Capital Core Capital Amount Above Statutory Minimum Capital Core capital defined as total stockholders equity less accumulated other comprehensive income. 09
$ PER SHARE FARMER MAC Historical Dividend Growth $0.70 $0.60 $0.58 $0.50 $0.40 Initiated New Dividend Policy: Target ~30% Payout Ratio of Core Earnings Over Time $0.36 $0.30 $0.26 $0.20 $0.10 $0.05 $0.10 $0.12 $0.14 $0.16 $0.00 2011 2012 2013 2014 2015 2016 2017 2018 Quarterly Dividend per Share per Year 010
Appendix
FARMER MAC Reconciliation of Core Earnings to Net Income For the Three Months Ended $ in thousands Jun-18 Mar-18 Jun-17 Net income attributable to common stockholders $ 26,340 $ 22,524 $ 17,488 Less reconciling items: Gains on financial derivatives and hedging activities 8,396 285 2,221 Unrealized gains/(losses) on trading securities 11 16 (2) Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 196 (686) (117) Net effects of terminations or net settlements on financial derivatives and hedging activities 232 1,242 232 Income tax effect related to reconciling items (1,855) (180) (816) Sub-total 6,980 677 1,518 Core earnings $ 19,360 $ 21,847 $ 15,970 Second quarter 2017 information has been recast to reflect the revised methodology for calculating net effective spread that became effective in fourth quarter 2017, as further described on page 4. APPENDIX 12
FARMER MAC Reconciliation of Core Earnings per Share to Earnings per Common Share For the Three Months Ended Jun-18 Mar-18 Jun-17 GAAP - Diluted EPS $ 2.45 $ 2.10 $ 1.62 Less reconciling items: Gains on financial derivatives and hedging activities due to fair value changes 0.78 0.03 0.21 Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 0.02 (0.06) (0.01) Net effects of terminations or net settlements on financial derivatives and hedging activities 0.02 0.12 0.02 Income tax effect related to reconciling items (0.17) (0.02) (0.08) Sub-total 0.65 0.07 0.14 Core Earnings - Diluted EPS $ 1.80 $ 2.03 $ 1.48 Second quarter 2017 information has been recast to reflect the revised methodology for calculating net effective spread that became effective in fourth quarter 2017, as further described on page 4. APPENDIX 13
FARMER MAC Reconciliation of Net Effective Spread to Net Interest Income June 30, 2018 For the Three Months Ended March 31, 2018 June 30, 2017 $ in thousands Dollars Yield Dollars Yield Dollars Yield Net interest income/yield $ 43,933 0.96% $ 43,229 0.98% $ 39,731 0.95% Net effects of consolidated trusts (1,690) 0.04% $ (1,584) 0.04% $ (1,470) 0.04% Expense related to undesignated financial derivatives (3,998) -0.09% (2,302) -0.06% (2,775) -0.07% Amortization of premiums/discounts on assets consolidated at fair value (188) -0.01% 694 0.02% 124 0.00% Amortization of losses due to terminations or net settlements on financial derivatives and hedging activities (33) 0.00% (98) 0.00% (276) -0.01% Fair Value Changes on fair value hedge relationships (1,862) -0.04% (2,838) -0.07% 0 0.00% Net Effective Spread $ 36,162 0.86% $ 37,101 0.91% $ 35,334 0.91% Second quarter 2017 information has been recast to reflect the revised methodology for calculating net effective spread that became effective in fourth quarter 2017, as further described on page 4. APPENDIX 14