The Federal Agricultural Mortgage Corporation has reported strong first quarter 2012 results, as increased earnings benefited from growth in program assets and credit quality remained high. Farmer Mac's core earnings, a non-GAAP measure, for first quarter 2012 were $11.8 million ($1.08 per diluted common share), up from $9.1 million ($0.85 per diluted common share) in first quarter 2011. Core earnings for first quarter 2012 benefited from higher net interest income of $34.2 million, compared to $27.0 million in first quarter 2011. That increase in income was partially offset by net provisions for losses of $0.5 million in first quarter 2012, compared to a release from the allowance for losses of $0.7 million in the same period in 2011.
Farmer Mac's GAAP net income attributable to common stockholders was $22.2 million ($2.04 per diluted common share) for the three months ended March 31, 2012, compared to $18.3 million ($1.72 per diluted common share) for the same period in 2011. The increase in GAAP net income was primarily attributable to higher net interest income. GAAP net income exceeded core earnings in both periods due to periodic increases in the fair values of financial derivatives. Farmer Mac uses financial derivatives, primarily interest rate swaps, to mitigate its exposure to interest rate risk and achieve an overall lower effective cost of borrowing. These financial derivatives are not designated in hedge relationships for accounting purposes. Therefore, as changes in long-term interest rates affect the fair values of the financial derivatives, those fair value changes are recorded in earnings, while much of the offsetting changes in the fair values of related assets and liabilities are not recorded in earnings. Farmer Mac excludes these fair value fluctuations from its core earnings.
Farmer Mac President and Chief Executive Officer Michael Gerber stated, "Our first quarter results continued the momentum Farmer Mac has built over the past several years. GAAP and core earnings were strong, portfolio assets increased, and we doubled the quarterly dividend on our common stock. Solid new business volume across all product lines raised the aggregate outstanding program volume to $12.1 billion as of March 31, 2012. Portfolio credit quality also remains high, supported by a generally healthy agricultural economy, as 90-day delinquencies at quarter-end were down compared to first quarter 2011. Farmer Mac is well-positioned to continue to help meet the credit needs of Rural America and to build value for shareholders."
For first quarter 2012, Farmer Mac's net effective interest spread was $25.6 million (94 basis points), compared to $19.6 million (94 basis points) in the same quarter 2011. This increase in dollars was a result of net interest income earned on new on-balance sheet program assets added throughout 2011 and first quarter 2012.
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 $5.9 million for first quarter 2012, compared to $6.4 million for first quarter 2011. The decrease in guarantee and commitment fees was primarily attributable to the maturity of a $475.0 million AgVantage security during 2011 that was not replaced with new business last year.
During first quarter 2012, Farmer Mac added $616.2 million of new program volume. Specifically, Farmer Mac:
purchased $110.5 million of newly originated Farmer Mac I eligible loans;
added $179.6 million of Farmer Mac I eligible loans under LTSPCs;
purchased $200.0 million of Farmer Mac I AgVantage securities;
purchased $24.4 million of loans under the Rural Utilities program; and
purchased $101.7 million of Farmer Mac II USDA-guaranteed portions.
Farmer Mac's outstanding program volume was $12.1 billion as of March 31, 2012, an increase of $153.1 million from December 31, 2011, as new volume exceeded maturities and principal paydowns on existing program assets.
In the Farmer Mac I agricultural portfolio (excluding AgVantage securities), 90-day delinquencies were $53.1 million (1.21 percent of the portfolio) as of March 31, 2012, compared to $40.6 million (0.93 percent of the portfolio) as of December 31, 2011, and $57.3 million (1.33 percent of the portfolio) as of March 31, 2011. The increase in delinquencies from year-end is consistent with the historical trend of Farmer Mac's 90-day delinquencies fluctuating from quarter to quarter, with higher levels generally observed at the end of the first and third quarters of each year. As of March 31, 2012 and 2011, there were no ethanol loans in the 90-day delinquencies. Farmer Mac recorded provisions of $0.5 million to the allowance for losses during the three months ended March 31, 2012, compared to a net release of $0.7 million for the same period 2011.
When analyzing the overall risk profile of its program business, Farmer Mac takes into account more than the Farmer Mac I agricultural loan delinquency percentages provided above. The total program business also includes AgVantage securities and rural utilities loans, neither of which have any delinquencies, and the USDA Guaranteed Securities and USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities, which are backed by the full faith and credit of the United States. Across Farmer Mac's entire program business, the 90-day delinquencies represented 0.44 percent of total program business as of March 31, 2012, compared to 0.34 percent as of December 31, 2011 and 0.48 percent as of March 31, 2011.
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, 2012, Farmer Mac's core capital totaled $497.7 million and exceeded its statutory minimum capital requirement of $360.6 million by $137.1 million. As of March 31, 2012, Farmer Mac's risk-based capital stress test generated a risk-based capital requirement of $34.7 million. Farmer Mac's regulatory capital of $515.7 million exceeded that amount by approximately $481.0 million.
As prescribed by FCA regulations, Farmer Mac is required to maintain a minimum of 60 days of liquidity. As of March 31, 2012, Farmer Mac had 131 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 2012 is set forth in the Form 10-Q filed by Farmer Mac earlier today with the Securities and Exchange Commission (SEC).