Farmer Mac Reports Second Quarter 2013 Results

WASHINGTON, Aug. 8, 2013 /PRNewswire/ -- The Federal Agricultural Mortgage Corporation (Farmer Mac; NYSE: AGM and AGM.A) today announced its second quarter 2013 results, which included portfolio growth, the continuation of good credit quality, and increases in core earnings and GAAP net income.  Farmer Mac's second quarter 2013 core earnings, a non-GAAP measure, were $16.5 million ($1.48 per diluted common share), compared to $12.9 million ($1.17 per diluted common share) for second quarter 2012.  Core earnings benefited from credit-related gains of $0.7 million ($0.5 million after tax), a gain of $3.1 million (offset by capital loss carryforwards) on the sale of an investment security, and gains on the sale of real estate owned (REO) of $1.1 million ($0.7 million after tax).  

Farmer Mac's GAAP net income attributable to common stockholders for second quarter 2013 was $27.7 million ($2.48 per diluted common share), compared to a loss of $4.3 million ($0.41 per diluted common share) for the same period in 2012.  The GAAP net loss in second quarter 2012 and the significant increase in GAAP net income in second quarter 2013 were almost entirely attributable to the effects of fair value changes on financial derivatives and hedged assets.  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 those 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 June 30, 2013, Farmer Mac recorded unrealized fair value gains on financial derivatives and hedging activities of $17.0 million ($11.0 million after tax), compared to unrealized losses of $21.6 million ($14.0 million after tax) for the three months ended June 30, 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 reduced in future periods, especially once comparisons are no longer made to periods before the adoption of hedge accounting.

Outstanding business volume grew to a new high of $13.6 billion as of June 30, 2013, compared to $13.0 billion as of December 31, 2012 and $12.3 billion as of June 30, 2012.  New business volume for second quarter 2013 was $646.8 million, including purchases of $200.0 million in AgVantage securities and $226.1 million of newly originated Farm & Ranch loans.

"Farmer Mac's outstanding business volume increased for the seventh straight quarter, as we added a net $158 million on $647 million of new business, driven by double-digit growth in Farm & Ranch loan purchases," stated Farmer Mac's President and Chief Executive Officer Timothy Buzby.  "Core earnings also rose due to strong credit performance and some realized gains we earned this quarter.  Despite a general market environment that has seen spread compression and some recent rate volatility, our diversified portfolio of business is performing well, providing attractive growth opportunities, high quality credit, and an increasing base of retained earnings.  We continue to provide outstanding service to borrowers and lenders across rural America and are proud of the results we have been able to achieve for our shareholders."

Business Results 

For second quarter 2013, Farmer Mac's net effective interest spread was $26.1 million (87 basis points), compared to $27.2 million (99 basis points) for second quarter 2012.  The decrease in net effective spread was due to lower rates on loans, Farmer Mac Guaranteed Securities, and USDA Guaranteed Securities, combined with short-term funding rates that did not decline during the first six months of 2013 compared to 2012.  Advantageous short-term funding levels relative to LIBOR available to Farmer Mac in late 2011 and early 2012 returned to levels more consistent with historical averages in first quarter 2013 and remained stable through second quarter 2013, which contributed to some of this spread compression.  The decrease in net effective spread dollars was partially offset by increased amounts of interest-earning assets held on balance sheet.  Net effective spread by business segment for second quarter 2013 was $16.3 million (130 basis points) for Farm & Ranch, $2.7 million (68 basis points) for USDA Guarantees, $3.0 million (46 basis points) for Rural Utilities, and $4.0 million (58 basis points) for Corporate investment activity.  Notably, net effective spread for Farm & Ranch grew $276 thousand in second quarter 2013 over first quarter 2013, as $172.4 million net growth in loan volume outweighed an overall 2 basis point contraction in spread. 

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 $6.8 million for second quarter 2013, compared to $6.1 million for second quarter 2012. 

Business Volume

Farmer Mac added $646.8 million of new business volume during second quarter 2013, with contributions across business lines and products.  Specifically, Farmer Mac:

• purchased $226.1 million of newly originated Farm & Ranch loans;
• added $99.5 million of Farm & Ranch loans under LTSPCs;
• purchased $200.0 million of Farm & Ranch AgVantage securities;
• purchased $110.9 million of USDA Guaranteed Securities; and 
• purchased $10.2 million of Rural Utilities loans.

Farmer Mac's outstanding business volume was $13.6 billion as of June 30, 2013, an increase of $580.3 million from December 31, 2012, as new volume exceeded maturities and principal paydowns on existing business volume.  Demand has continued to remain strong for Farmer Mac's longer-term, fixed-rate loan products in the Farm & Ranch line of business, which drove a 56% increase in Farm & Ranch loan purchases in second quarter 2013 compared to second 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.  Principal paydowns and maturities in second quarter 2013 included $200 million related to Farm & Ranch AgVantage securities. 

Credit Quality 

The loans in Farmer Mac's three lines of business continued to perform well during second quarter 2013.  In the Farm & Ranch portfolio, 90-day delinquencies were $33.9 million (0.69 percent of the non-AgVantage Farm & Ranch portfolio) as of June 30, 2013, compared to $33.3 million (0.70 percent) as of December 31, 2012 and $47.0 million (1.07 percent) as of June 30, 2012.  The delinquencies are almost unchanged from year-end, which is consistent with the periodic payment dates of most of the loans in the Farm & Ranch portfolio.  Higher levels of delinquencies are 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 releases of $0.7 million to the allowance for losses during the three months ended June 30, 2013, compared to net provisions of $0.2 million for the same period in June 30, 2012.  The releases of losses in second quarter 2013 were primarily attributable to the release of specific reserves for two loans that paid off during the quarter.

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 0.25 percent of total volume as of June 30, 2013, compared to 0.26 percent as of December 31, 2012 and 0.38 percent as of June 30, 2012. 

The agricultural sector remained profitable across a variety of industries through 2012 and the first half of 2013.  The drought conditions that adversely affected many corn and other feed grain producers during 2012 have continued to have no measurable impact on the credit quality of Farmer Mac's portfolio as of the end of second 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 areas primarily affected by the drought in 2012 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 June 30, 2013, Farmer Mac's core capital totaled $563.6 million and exceeded its statutory minimum capital requirement of $384.5 million by $179.1 million.  As of June 30, 2013, Farmer Mac's risk-based capital stress test generated a risk-based capital requirement of $123.6 million.  Farmer Mac's regulatory capital of $577.1 million exceeded that amount by approximately $453.5 million. 

As prescribed by FCA regulations, Farmer Mac is required to maintain a minimum of 60 days of liquidity.  As of June 30, 2013, Farmer Mac had 178 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, which are not expected to have a cumulative net impact on GAAP earnings if the financial instruments are held to maturity, as is generally expected.  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 Farmer Mac'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 intended to supplement GAAP information and not to replace 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 about Farmer Mac's performance for second quarter 2013 is set forth in Farmer Mac's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed 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, such as programs affecting USDA-guaranteed loans or agricultural inspection, or 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 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 June 30, 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 second 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, August 9, 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 sets forth information regarding outstanding volume in each of Farmer Mac's three lines of business as of the dates indicated:

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

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

SOURCE Farmer Mac