Farmer Mac Reports First Quarter 2013 Results

WASHINGTON, May 9, 2013 /PRNewswire/ -- The Federal Agricultural Mortgage Corporation (Farmer Mac; NYSE: AGM and AGM.A) today announced that it grew its total outstanding business volume to a new high of $13.4 billion as of March 31, 2013, compared to $13.0 billion as of December 31, 2012 and $12.1 billion as of March 31, 2012.  New business volume for first quarter 2013 was $904.1 million, including the purchase of $425.0 million in AgVantage securities.  Farmer Mac's first quarter 2013 results also included solid GAAP net income and non-GAAP core earnings and the continuation of good credit quality in the portfolio.

Core earnings, a non-GAAP measure, was $11.3 million ($1.01 per diluted common share) for first quarter 2013, compared to $11.8 million ($1.08 per diluted common share) for first quarter 2012.  First quarter 2013 core earnings benefited from higher net effective spread in dollars, which grew to $26.3 million in first quarter 2013, up from $25.6 million in first quarter 2012.  However, that increase was offset by an increase in net provisions to the allowance for losses of $1.2 million in first quarter 2013, up from net provisions of $0.5 million in first quarter 2012, as well as a modest increase in non-interest operating expenses, which resulted in lower core earnings for first quarter 2013 compared to the prior year's first quarter.

Farmer Mac had GAAP net income attributable to common stockholders for first quarter 2013 of $16.2 million ($1.45 per diluted common share), compared to net income of $22.2 million ($2.04 per diluted common share) for the same period in 2012.  This decrease was almost entirely attributable to the effects of fair value changes on financial derivatives.  Because Farmer Mac's financial derivatives were not designated in hedge relationships for accounting purposes prior to third quarter 2012, changes in the fair values of these instruments were recorded in earnings without offsetting fair value adjustments on the corresponding hedged items being recorded in earnings as well.  For the three months ended March 31, 2013, Farmer Mac recorded unrealized fair value gains on financial derivatives and hedging activities of $8.8 million, compared to $15.7 million for the three months ended March 31, 2012.  Because Farmer Mac expects its fair value hedge relationships to remain highly effective through maturity, a substantial portion of the volatility caused from changes in the fair values of financial derivatives is expected to be eliminated in future periods, especially once comparisons are no longer made to periods before the adoption of hedge accounting.

"Farmer Mac had a good first quarter.  We had new business volume of $904 million spread across our three lines of business, continued strong portfolio credit quality, solid earnings, and a growing equity base to support future growth," stated Farmer Mac President and Chief Executive Officer Timothy Buzby.  "We are optimistic about new business growth opportunities.  With prepayments and paydowns expected to slow for the rest of this year consistent with seasonal trends, we expect continued growth in outstanding business volume, which should drive corresponding increases in core earnings. Our confidence in our business and its potential is further reflected in our recent dividend increase."

Business Results 

For first quarter 2013, Farmer Mac's net effective interest spread was $26.3 million (90 basis points), compared to $25.6 million (94 basis points) for first quarter 2012.  The growth in dollars of net effective spread was driven by increased levels of interest earning assets held on balance sheet, while net effective spread in percentage terms contracted 4 basis points as the advantageous short-term funding levels relative to LIBOR available to Farmer Mac in late 2011 and early 2012 have returned to levels more consistent with historical averages.  Net effective spread by business segment for first quarter 2013 was 132 basis points for Farm & Ranch, 73 basis points for USDA Guarantees, 51 basis points for Rural Utilities, and 59 basis points for Corporate investment activity.

Farmer Mac's guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and long-term standby purchase commitments (LTSPCs) were $6.6 million for first quarter 2013, compared to $5.9 million for first quarter 2012. 

Business Volume

Farmer Mac added $904.1 million of new business volume during first quarter 2013, with good contributions across business lines and products.  Specifically, Farmer Mac:

• purchased $159.9 million of newly originated Farm & Ranch eligible loans;
• added $166.8 million of Farm & Ranch loans under LTSPCs;
• purchased $100.0 million of Farm & Ranch AgVantage securities;
• purchased $30.3 million of Rural Utilities loans;
• purchased $325.0 million of Rural Utilities AgVantage securities; and
• purchased $122.2 million of USDA Guaranteed Securities. 

Farmer Mac's outstanding business volume was $13.4 billion as of March 31, 2013, an increase of $422.7 million from December 31, 2012, as new volume exceeded maturities and principal paydowns on existing business volumes.  Demand has recently increased for Farmer Mac's longer-term, fixed-rate loan products in the Farm & Ranch line of business, which drove a 45% increase in Farm & Ranch loan purchases in first quarter 2013, as compared to first quarter 2012.  Farmer Mac believes that the trend toward longer-term mortgage financing by farmland owners will continue, driven by expectations for increasing rates in the future, and that demand for Farmer Mac's secondary market tools will also increase as rural lenders make more loans and adapt to the changing regulatory environment, which could require more liquidity and capital.  The new business volume in first quarter 2013 included $325.0 million of Rural Utilities AgVantage securities purchased from the National Rural Utilities Cooperative Finance Corporation and $100.0 million of Farm & Ranch AgVantage securities purchased from Rabo Agrifinance, Inc.  Principal paydowns and maturities in first quarter 2013 included $75.2 million related to Rural Utilities AgVantage securities.  In Farmer Mac's experience, the largest paydowns on the loans in its three lines of business usually occur in January (first quarter) of each year because almost all loans have a required January 1 payment date, including most loans that pay on a quarterly, semi-annual, or annual basis.  

Credit Quality 

The loans in Farmer Mac's three lines of business continued to perform well during first quarter 2013, as the portfolio experienced small variations in credit quality metrics from quarter to quarter with an overall favorable trend in place.  In the Farm & Ranch portfolio, 90-day delinquencies were $39.7 million (0.83 percent of the non-AgVantage Farm & Ranch portfolio) as of March 31, 2013, compared to $33.3 million (0.70 percent) as of December 31, 2012 and $53.1 million (1.21 percent) as of March 31, 2012.  The increase in delinquencies from year-end is consistent with the historical trend of Farmer Mac's delinquencies fluctuating from quarter to quarter, both in dollars and as a percentage of the outstanding portfolio, with higher levels generally observed at the end of the first and third quarters of each year, corresponding to the annual (January 1st) and semi-annual (January 1st and July 1st) payment characteristics of most Farm & Ranch loans.  Farmer Mac recorded net provisions of $1.2 million to the allowance for losses during the three months ended March 31, 2013, compared to $0.5 million for the same period in March 31, 2012. This increase resulted primarily from a change in the methodology for providing for losses within Farmer Mac's non-ethanol ag storage and processing commodity group that resulted in more conservative loss assumptions on these types of properties, which tend to be more developed and specialized. Farmer Mac recorded charge-offs to its allowance for loan losses of $3.8 million during first quarter 2013, including a $3.6 million charge-off related to one ethanol loan that transitioned to REO during the quarter and for which Farmer Mac had previously provided a specific allowance.

When analyzing the overall risk profile of its portfolio, Farmer Mac takes into account more than the Farm & Ranch loan delinquency percentages provided above.  Total business volume also includes AgVantage securities and rural utilities loans, neither of which have any delinquencies, and USDA Guaranteed Securities, which are backed by the full faith and credit of the United States.  Across Farmer Mac's three lines of business, 90-day delinquencies represented 0.30 percent of total volume as of March 31, 2013, compared to 0.26 percent as of December 31, 2012 and 0.44 percent as of March 31, 2012. 

The agricultural sector remained profitable across a variety of industries through 2012 and the first part of 2013.  The drought conditions that adversely affected many corn and other feed grain producers during 2012 have had no measurable impact on the credit quality of Farmer Mac's portfolio as of the end of first quarter 2013.  Farmer Mac continues to monitor for any lingering effects of the drought on agricultural producers, particularly for industries that rely on feed grains as an input to production, such as livestock and ethanol producers.  The core 2012 drought areas have benefited from improved moisture conditions recently.  This improvement, combined with the increased number of acres intended to be planted in 2013, as reported by the USDA, has resulted in a reduction of grain prices, relieving some cost pressure for those commodity groups directly affected by the price of grains. 

Capital and Liquidity

Farmer Mac is required to hold capital at the higher of its statutory minimum capital requirement and the amount required by the risk-based capital stress test prescribed by Farm Credit Administration (FCA) regulations.  As of March 31, 2013, Farmer Mac's core capital totaled $536.5 million and exceeded its statutory minimum capital requirement of $380.9 million by $155.6 million.  As of March 31, 2013, Farmer Mac's risk-based capital stress test generated a risk-based capital requirement of $66.5 million.  Farmer Mac's regulatory capital of $550.7 million exceeded that amount by approximately $484.2 million. 

As prescribed by FCA regulations, Farmer Mac is required to maintain a minimum of 60 days of liquidity.  As of March 31, 2013, Farmer Mac had 183 days of liquidity, as calculated in accordance with FCA regulations. 

Reconciliation of Core and GAAP Earnings

Farmer Mac uses core earnings, a non-GAAP financial measure, to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics, and business trends.  Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance.  Core earnings also differs from GAAP net income 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 the Corporation's core business.  This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies.  Farmer Mac's disclosure of this non-GAAP measure is not intended to replace GAAP information but, rather, to supplement it.

A reconciliation of Farmer Mac's GAAP net income attributable to common stockholders to core earnings is presented in the following table. 

More complete information on Farmer Mac's performance for first quarter 2013 is set forth in the Form 10-Q filed by Farmer Mac earlier today with the Securities and Exchange Commission (SEC). 

Forward-Looking Statements

In addition to historical information, this release includes forward-looking statements that reflect management's current expectations for Farmer Mac's future financial results, business prospects, and business developments.  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 could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including uncertainties regarding:  (1) the availability to Farmer Mac and Farmer Mac II LLC of debt financing and, if available, the reasonableness of rates and terms; (2) legislative or regulatory developments that could affect Farmer Mac or its sources of business, including but not limited to developments related to agricultural policies and programs contained in the current Farm Bill (the Food, Conservation and Energy Act of 2008), which is currently scheduled to expire in September 2013, reduced funding for agricultural policies and programs as a result of federal budget cuts, and changes in policies related to renewable fuel standards and the use of ethanol as a blending agent; (3) fluctuations in the fair value of assets held by Farmer Mac and Farmer Mac II LLC; (4) the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the Farmer Mac secondary market; (5) the general rate of growth in agricultural mortgage and rural utilities indebtedness; (6) the impact of economic conditions, including the effects of drought and other weather-related conditions and fluctuations in agricultural real estate values, on agricultural mortgage lending and borrower repayment capacity; (7) developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving GSEs, including Farmer Mac; (8) changes in the level and direction of interest rates, which could among other things affect the value of collateral securing Farmer Mac's agricultural mortgage loan assets; and (9) volatility in commodity prices and/or export demand for U.S. agricultural products.  Other risk factors are discussed in Farmer Mac's Annual Report on Form 10‑K for the year ended December 31, 2012, as filed with the SEC on March 18, 2013, and in Farmer Mac's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, as filed with the SEC earlier today.  In light of 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 mandated by the SEC. 

Farmer Mac is a stockholder-owned instrumentality of the United States chartered by Congress to help increase the availability of credit in rural America through the operation of a secondary market for eligible loans to agricultural and rural borrowers.  Farmer Mac's Class C non-voting and Class A voting common stocks are listed on the New York Stock Exchange under the symbols AGM and AGM.A, respectively.  Additional information about Farmer Mac (as well as the Annual Report on Form 10-K and Quarterly Report on Form 10-Q referenced above) is available on Farmer Mac's website at www.farmermac.com.  Farmer Mac II LLC is a subsidiary of Farmer Mac that operates the USDA Guarantees line of business of purchasing and holding USDA-guaranteed loans.  Additional information about Farmer Mac II LLC is available on its website at www.farmermac2.com.

The conference call to discuss Farmer Mac's first quarter 2013 financial results and Form 10-Q will be webcast on Farmer Mac's website beginning at 11:00 a.m. eastern time on Friday, May 10, 2013.  An audio recording of that call will be available on Farmer Mac's website for two weeks after the call is concluded.

The following table presents the quarterly net effective spread by business segment for first quarter 2013 and the previous eight quarters:

The following table presents core earnings reconciled to GAAP net income/(loss) available to common stockholders for first quarter 2013 and each of the quarters in 2012 and 2011:

SOURCE Farmer Mac