Federal Agricultural Mortgage Corp (AGM) 2016 Q4 法說會逐字稿

Good morning and welcome to the Farmer Mac fourth-quarter and full-year 2016 Investor Conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Tim Buzby. Please go ahead.

Thank you. Good morning, I'm Tim Buzby, Farmer Mac's President and CEO. Farmer Mac is pleased to welcome you to our 2016 fourth-quarter and year-end Investor Conference call.

We have posted a slide deck to our website that we will refer to throughout today's call. Information for where these slides can be found is included in this morning's press release.

Before I begin, I will ask Steve Mullery, Farmer Mac's General Counsel, to comment on forward-looking statements that Management may make today, as well as Farmer Mac's use of non-GAAP financial measures.

Thanks, Tim. Some of the statements made on this conference call may constitute forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance. We do not undertake any obligation to update these statements after the date of this call. We caution you that forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied by the forward-looking statements. In evaluating Farmer Mac, you should consider these risks and uncertainties, as well as those described in our 2016 annual report on Form 10-K which was filed with the SEC this morning.

In the analysis of its financial information, Farmer Mac sometimes uses measures of financial performance that are not presented in accordance with Generally Accepted Accounting Principles in the United States which we refer to as non-GAAP measures. The three non-GAAP measures that Farmer Mac uses are core earnings, core earnings per share, and net effect of spread. Farmer Mac uses these non-GAAP financial measures to measure corporate, economic performance and develop financial plans because in Management's view they are useful, alternative measures for understanding Farmer Mac's economic performance, transaction economics, and business trends. These non-GAAP financial measures may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of these non-GAAP 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. Disclosures and reconciliations of these non-GAAP measures can be found in the Form 10-K and the earnings release posted on Farmer Mac's website, www.farmermac.com, under the Financial Information portion of the investor section. A recording of this call will be available on our website for two weeks starting later today.

Thank you, Steve. Farmer Mac had a great year in 2016, across multiple fronts as our asset growth and financial results confirm. As you may have read in this morning's earnings release, and which can be seen on slide 5, we announced a $0.10 per share increase in our quarterly common stock dividend to $0.36 per share which reflects nearly a 40% increase. The increased quarterly dividend amount equates to $1.44 per share per year.

As you recall last March, Farmer Mac announced a new common stock dividend policy with our goal being to increase our dividend payout ratio of our core earnings to approximately 30% over time. Last year, we increased our common stock dividend by 63%, and with our 38% increase this year, we believe we are on track to reach our targeted 30% core earnings payout in 2018.

For the past six years, Farmer Mac has increased its quarterly common stock dividend with more significant increases in the last two years. We believe these dividends are supported by our earnings potential and overall capital position and are representative of Farmer Mac's commitment to enhancing stockholder value over the long term. However, as always, the declaration of payment of future common stock dividends are at the discretion of Farmer Mac's Board of Directors and depend upon many factors, including Farmer Mac's financial condition, actual Results of Operations and earnings, capital needs of Farmer Mac's business, regulatory requirements, and other factors that Farmer Mac's Board deems relevant.

Turning back to our results for the year, we grew our outstanding business volume by over $1.5 billion and our core earnings by more than 14%. Our net effective spread percentage stabilized early in 2016 and increased steadily over the course of the year.

Regarding credit quality, we are beginning to see the early stages of the normalization in certain metrics that we have been anticipating as part of the current agricultural credit cycle. The modest deterioration in certain metrics over the course of 2016 are within our expectations.

We continue to believe these metrics will gradually revert to more historical norms. Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of our portfolio which we believe is adequately collateralized.

Turning to slide 6, Farmer Mac ended 2016 with outstanding business volume of $17.4 billion. We added $4.4 billion of new business during the year, resulting in net growth of $1.5 billion, or 9% after maturities and repayments. The increase in outstanding business line was driven by broad-based portfolio growth across most of our products and lines of business, including farm & ranch loans, AgVantage securities, Rural Utilities loans, under standby purchase commitments, and USDA securities.

Our Farm & Ranch loan purchases were more than $966 million in 2016 which was a 30% increase from the amount purchased in 2015. This was primarily due to an increase in borrower demand for long-term real estate financing, as farmers use equity in farm land assets to increase sources of operating capital with an increase in the average size of loans purchased. We also added nearly $400 million of Farm & Ranch loans under standby purchase commitments which reflected a modest decrease in demand among farm credit system institutions for this product.

In our Institutional Credit line of business, we purchased over $2 billion of AgVantage securities over the course of 2016 which resulted in net growth of $563 million for the year. This increase was primarily driven by new business from two of our longstanding customers, Rabo AgriFinance and the national Rural Utilities Cooperative finance Corporation also known as CFC. These two partners increased their business with Farmer Mac by $300 million and $210 million, respectively, in 2016. We also achieved a 100% refinance rate with all of our maturing AgVantage securities in 2016.

In our Rural Utilities line of business in second-quarter 2016, we executed our second large standby purchase commitment providing credit protection on a pool of $421 million of loans held by CFC. Our USDA guarantees line of business also performed well, as we purchased $481 million in 2016 compared to $377 million in 2015. This growth reflected an increase in lender usage of USDA guaranteed loan programs due to available federal funding for those programs.

Farmer Mac's net effective spread for 2016 decreased by 1 basis point on a percentage basis due primarily to a higher average balance of lower earning investment securities compared to 2015 but grew in dollar terms due to substantial growth and outstanding business volume. Overall, spreads improved throughout 2016, mostly due to a reduction in our cash balances, changes in our funding strategy, and some general improvements in the LIBOR-based funding market.

The credit quality of our portfolio deteriorated moderately over the course of 2016 as measured by some metrics but still remains near historically favorable levels. As of December 31, 2016, 90-day delinquencies improved compared to the end of 2015, but the total allowance for losses in the substandard assets increased from year-end 2015 to year-end 2016.

With that as background, I'd like to turn to Dale Lynch, our Chief Financial Officer, to cover our financial results in more detail. Dale?

Thanks, Tim. Our 2016 results reflect Farmer Mac's commitment to growing, developing new customers, innovating our product set, and delivering upon our mission throughout market cycles. As Tim mentioned, we grew to a record outstanding business line of up $17.4 billion by year-end. This growth was driven primarily from net growth in Farm & Ranch loans, AgVantage securities, the addition of rural utility loans under standby purchase commitments, and net growth USDA guaranteed loans.

Additionally, our spreads firmed and improved to both dollar and percentage terms over the course of 2016. Spreads on new assets generally remained stable, and our funding costs on LIBOR-based assets have improved due to changes in our funding strategy and some general improvements in the LIBOR market. As Tim mentioned earlier, we are beginning to see signs of credit normalization that we've been anticipating as part of the normal agricultural credit cycle.

Turning now to the financials. As you can see on slide 7, core earnings for 2016 were $53.8 million, or $5.01 per diluted common share compared to $47 million, or $4.15 per share in 2015. A $6.8 million increase in core earnings for 2016 was primarily attributable to higher total revenues which included the following. A $3.6 million after-tax increase in net effective spread, a $1.3 million after-tax increase in guarantee and commitment fee income, and a $0.4 million after-tax decrease in hedging costs. Also contributing to the increase was a $3.5 million after-tax decrease in preferred dividend expense, resulting from the redemption of all outstanding shares of Farmer Mac 2 LLC preferred stock in first-quarter 2015.

The increase in 2016 core earnings was offset in part by several factors. Credit-related expenses increased $0.5 million after-tax, resulting from net provisions to the allowance for losses of $0.6 million after-tax in 2016, compared to net provisions of $0.1 million after-tax in 2015. Operating expenses also increased by $1.8 million after-tax driven by higher G&A expenses and higher comp and benefits expenses.

The $1.3 million after-tax increase in G&A expenses was attributable primarily to higher consulting fees and information services expenses related to corporate strategic initiatives, continued technology and business infrastructure investments, and expenses related to business development efforts. The $0.5 million after-tax increase in comp and benefits expenses was due primarily to an increase in headcount as well as increases in the employee health insurance costs.

Farmer Mac's fourth-quarter 2016 core earnings were $13.9 million, or $1.30 per diluted common share, compared to $13.1 million, or $1.17 per diluted share in fourth-quarter 2015. The $0.8 million increase in core earnings from the year-ago quarter was driven by a $2.5 million after-tax increase in total revenues led by a $1.3 million after-tax increase in net effective spread.

The increase was offset in part by a $0.3 million after-tax increase in credit costs, a $0.7 million after-tax increase in G&A expenses, and a $0.4 million after-tax increase in comp and benefits. The increases in G&A expenses and comp and benefits expenses compared to fourth-quarter 2015 were attributable to the same reasons described previously explaining increases in these two items between full-year 2015 and full-year 2016.

Turning now to GAAP net income, 2016 net income attributable to common stockholders was $64.2 million, or $5.97 per diluted common share, compared to $47.4 million, or $4.19 per diluted share for 2015. The $16.8 million increase in net income attributable to common stockholders for 2016 was driven by an increase of $9.4 million after-tax increase in interest income and the effects of unrealized fair value changes on financial derivatives and hedged assets which was an $8.9 million after-tax gain in 2016 compared to a $7.1 million after-tax gain in 2015.

Also contributing to the year-over-year increase was the absence in 2016 of a $6.2 million after-tax loss recorded in first-quarter 2015 resulting from the write-off of deferred issuance costs upon the redemption of the Farmer Mac 2 preferred stock mentioned earlier and a $3.5 million after-tax dividend expense recorded during first quarter of 2015 on that preferred stock. The overall increase in 2016 GAAP net income was offset in part by a $3.1 million after-tax increase in noninterest expense, driven primarily by higher G&A expenses, higher comp and employee benefits expenses, and a decrease in the reserve -- in the release for reserve for losses.

Turning now to spreads on slide 8. Farmer Mac's net effective spread for 2016 was $125.1 million, or 86 basis points, compared to $119.4 million, or 87 basis points in 2015. The contraction in net effective spread in percentage terms is primarily attributable to the following; a higher average balance on lower earning investment securities in 2016 compared to 2015, a tighter spread on a large AgVantage security that was refinancing in first quarter of 2016 at a short maturity in spread than the original security, and an increase in net yield adjustments for the amortization of purchase premiums on certain Farm & Ranch loans in 2016 as compared to 2015.

This contraction was offset in part by a lower average balance in cash and equivalents, primarily during the second half of 2016. The year-over-year increase in net effective spread in dollars was attributable to growth in outstanding business volumes.

Net effective spread for fourth-quarter 2016 was $31.9 million, or 89 basis points, compared to $29.9 million, or 85 basis points in fourth-quarter 2015. The increase in net effective spread in percentage terms in fourth-quarter 2016 compared to the previous year's fourth quarter was due primarily to a reduction in our cash and equivalents balances and improvements in our LIBOR-based funding costs. The increase was offset in part due to an increase in sidebar investment portfolio. The increase in dollar terms in fourth-quarter 2016 compared to the year-ago quarter was due to growth in outstanding business volume and improvements in our LIBOR-based funding costs.

Net effective spreads for our four lines of business for fourth-quarter 2016 and fourth-quarter 2015 were as follows; $10.3 million, or 178 basis points for Farm & Ranch compared to $9.4 million, or 172 basis points in fourth-quarter 2015; $5.3 million, or 108 basis points, for USDA guarantees, compared to $4.5 million, or 96 basis points; $2.6 million, or 105 basis points for Rural Utilities, compared to $2.8 million, or 114 basis points; and, $11.6 million, or 78 basis points, for Institutional Credit compared to $10.9 million, or 80 basis points.

Turning now to credit on slide 9. As of December 31, 2016, the total allowance for losses was $7.4 million, or 12 basis points of the $6.1 million Farm & Ranch portfolio, compared to $6.6 million, or 11 basis points of the Farm & Ranch portfolio as of December 31, 2015. The net provisions to the total allowance for losses recorded during 2016 were attributable to an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans, downgrades in risk ratings for certain loans, and an increase in specific allowance for on-balance sheet impaired loans resulting from an increase in the outstanding balance of such loans. Farmer Mac recorded $0.1 million of charge-offs to its allowance for loan losses during 2016.

90-day delinquencies were $21 million, or 34 basis points of the Farm & Ranch portfolio, as of year-end 2016 compared to $32.1 million, or 56 basis points in the year-ago quarter. For Farmer Mac's other lines of business, there are currently no delinquent AgVantage securities or rural utility loans held or underlying standby purchase commitments, and the USDA securities are backed by the full faith and credit of the United States. As a result, across all of Farmer Mac's four lines of business, the overall level of 90-day delinquency is comprised entirely of Farm & Ranch loans, which is 0.12% of total volume as of December 31, 2016 compared to 0.2% in the year-ago quarter.

Another indicator that Farmer Mac considers in analyzing the credit quality of its Farm & Ranch portfolio is substandard assets -- both in dollars and as a percentage of our outstanding Farm & Ranch portfolio. Assets categorized as substandard have a well-defined weakness or weaknesses, and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected. As of December 31, 2016, Farmer Mac's substandard assets were $165.2 million, or 2.7% of the Farm & Ranch portfolio, compared to $104 million -- $104.5 million, or 1.8% of the Farm & Ranch portfolio as of the prior year-end. Those substandard assets were comprised of 287 loans as of December 31, 2016 compared to 234 loans as of year-end 2016 -- 2015, excuse me.

Of the $60.7 million year-over-year increase in substandard assets in the Farm & Ranch portfolio, Farmer Mac believes that approximately two-thirds of the increase suggests a modest deterioration in the agricultural credit environment, likely resulting from lower farm incomes and declining land values in some regions due to lower prices for certain commodities. Specifically, lower prices for feed grains and oil seeds in the Midwest region were the primary drivers of this deterioration.

We expect that over time Farmer Mac's credit metrics will revert to -- closer to historical averages due to macro economic factors and the cyclical nature of the ag economy. We believe this began in second-half 2016.

Farmer Mac expects that its 90-day delinquency rate will eventually revert closer to its historical average of approximately 1% of the Farm & Ranch portfolio, and that its substandard average percentage will eventually revert closer to its historical average of approximately 4%. On balance, we believe a reversion closer to these averages is healthy, and that Farmer Mac's business can benefit through higher volumes and potentially wider spreads in such an environment.

Farmer Mac believes that its portfolio is sufficiently diversified, both geographically and by commodity, and that its portfolio has been underwritten to high credit quality standards. Accordingly, we believe that our portfolio is well positioned to endure reasonably foreseeable volatility in farm land values and commodity prices. We also continue to closely monitor sector profitability, economic conditions, and agricultural land value in geographic trends to tailor underwriting practices to changing conditions.

Now, turning to business volume. As you can see on slide 10, we added more than $768 million in new business in fourth-quarter 2016. Looking at the specifics for the quarter, we added the following new business volume; $247 million of AgVantage securities purchased backed by Farm & Ranch loans, $244 million in Farm & Ranch land purchases, $129 million of USDA securities, $117 million of Farm & Ranch standby purchase commitments, $20 million of Rural Utilities standby purchase agreements, and finally, $11 million in Rural Utilities loans purchases. After maturities and repayments, our net offsetting business volume increased $152 million during fourth-quarter 2016.

Turning now to capital on slide 11. Farmer Mac's $610 million of core capital as of year-end 2016 exceeded its statutory minimum capital requirement of $467 million by $143 million, or 31%, this compares to core capital of $564 million, or $102 million of capital above the minimum as of December 31, 2015. The increase in core capital from year-end 2015 was primarily due to an increase in retained earnings and a decrease in the amount of cash and equivalents needed to manage Farmer Mac's liquidity position in 2016.

In terms of liquidity, Farmer Mac had 165 days of liquidity as of the end of fourth-quarter 2016, compared to the minimum regulatory requirement of 90 days. More complete information about Farmer Mac's performance for full-year and fourth-quarter 2016 will be set forth in a 10-K we filed today with the SEC.

And, with that, I'll turn it back to you, Tim.

Thanks, Dale. Our management team is proud of the results achieved during the year. Outstanding business volume is at an all-time high, and our financial performance is strong.

As the agricultural economy enters its fourth year of adjustment to lower commodity prices, the overall business climate for Farmer Mac remains positive. A year ago at this time, we told you that we believe the relative demand for Farmer Mac's products could increase as credit becomes somewhat tighter, and that is just what occurred through the course of 2016.

Our capital base is strong and growing, providing plenty of capacity for future growth. We believe our dividend policy has helped enhance stockholder value.

We believe the most important asset at Farmer Mac is the strength of our people. It is their talents that we believe leads directly to the strength of our business and financial results. Over the past several years, Farmer Mac has brought in new personnel to fill key positions, created new positions, and significantly expanded investment in the technology and capacity to better grow our business and more fully deliver upon our mission.

Farmer Mac continues to communicate the value of our products and solutions to current and prospective customers. We continue to sign up new lenders for our loan purchase and credit protection products. We see strong interest for our AgVantage family of products including new business opportunities to provide wholesale funding to financial funds that originate and invest in agricultural mortgages.

We continue to grow our farm equity AgVantage product and look forward to working with new customers in this area. Over the last year, Farmer Mac has significantly increased its profile and name recognition as a leading national expert in agriculture. We believe this will help as we seek to bring new capital to agricultural and rural communities.

At this time, we would be happy to answer any questions you may have.

(Operator Instructions)

Eric Hagen, KBW.

Thanks. Good morning and congrats on a solid year.

Morning.

How much market share do you think you can capture if the stress in the ag market persists? Specifically, if we get, say, another couple years of weak farm land values? And, along those same lines, how sensitive you think loan growth is in the system? Real estate loan growth that is to both real estate loan values and commodity prices this year?

Broadly with respect to market share, I think you've seen our growth over the past several years, and that trajectory we expect will continue or perhaps could increase in a slightly stressed environment which is what we have been seeing over the past year. So, from that perspective, we do feel strongly that all different aspects -- or different lines of business that we have do have the opportunity to grow both in terms of outstanding amounts and market share. Overall, to speak to the real estate market in general, you've seen softening land values, but you've seen a lot of purchase activity and financing opportunities. As farmers experience stress, a lot of times they will use assets that are unencumbered to borrow funds, and we've seen that they are in order to raise capital for their operations, they are levering some of their real estate. We obviously take into consideration the reasons for that and underwrite the loans very carefully so that we believe we continue to be well collateralized even if land values were to continue to fall or fall further from here.

Just one benchmark, too, to Tim's point is, if you look at the growth in the mortgage market, it's in the 8%, 9% area I would estimate. And, the Farmer Mac's loan portfolio we grew, I think, 17% on a net basis right now. So, hard to translate that exactly into a market share number, but we are growing at twice the industry rate right now on a net basis.

Right. Okay. That's helpful. I know you generally stay neutral the direction of rates until you match fund the portfolio, but have you sensed any change in demand from investors with regard to where along the yield curve you actually issue your own debt? And, most importantly, has any preference for certain maturities impacted your outlook for net spreads going forward?

I think this year was actually pretty interesting from I'd argue the balance of the loan products that we're seeing in terms of demand. In previous years, when rates would increase we would see a large spike in demand for our 15-year fixed-rate products. This year, we're seeing a pretty balanced demand from our LIBOR floaters through the 10/1 ARM product and including the various amortization schedules of our 15-year fixed-rate loans. Pretty balanced demand across the curve so that's good for us. In terms of our funding profile, we have -- we do match fund in terms of duration and convexity. At Farmer Mac, one of the efforts that we take very seriously here is our fixed income Investor Relations efforts, and we have people out marketing our debt 150 days a year. So, I think we have found our funding costs in the market have been exceptional, and our funding costs in a 10-year, for example, from the low 40-basis-point spread to Treasuries whereas several years ago that could've been 55 or 60 basis points. We've seen our funding costs come in 15 to 20 basis points. That is one anecdotal example on our term debt. So, I think from a funding perspective, things look good currently, and a demand perspective -- we like the balance across our product curve.

Right. One more if you don't mind from me. In the past, you've addressed some seasonality in the business with regard to the concentration of your loan repayments taking place in January. Maybe you can guide us a bit as to how those figures [printed] in the early part of the year? And, whether there was any uptick in delinquencies versus the fourth quarter? Excuse me.

We will disclose the delinquencies as of the end of first quarter in May when we issue our press release. We do continue to see that cyclicality. If you look back historically, you will see that the March 31 delinquencies are typically the highest followed by the third quarter delinquencies, and we expect that will continue. We have seen increases in substandard assets which we have disclosed in a little bit of an increase in our allowance so that's indicative of activities in the portfolio. But, we have to wait until May for any predictions, or actually, the results.

All right. Thanks. Appreciate it.

Thanks.

Scott Valentin, Compass Point. Please go ahead with your question.

Thank you. Thanks for taking my question. Just with regard to the USDA securities, I saw they were moved from available for sale to held in maturity. Is that [ensuring] risk Management purposes?

So, keep in mind from an economic perspective, Farmer Mac is match-funded. We duration convexity match all of our assets. As you know, from a GAAP accounting perspective, Farmer Mac does not fair value the debt on its balance sheet so optically when you look at our GAAP equity on our balance sheet, some of the assets are fair valued either through the income statement or through the balance sheet. You could see increases or decreases in our GAAP equity, and the reality is when we look at the economic stress test, we are very tightly matched. I think we disclosed a 300-basis-point shock to our interest rates resulted in an [MVE] change of something in the order of 10% areas -- 10% or 11%. So, we're pretty tightly matched. But, the transfer from the USDA is from [AFS] to HTM was very consistent with what the GAAP requirements are. One, we have the ability to hold them to maturity, and two, we have the intent to hold them to maturity. The fact that they weren't as an HTM was somewhat of a legacy as a result of the financial crisis eight years or nine years ago or whatever it was. This is really just a reflective update. This should have been as an HTM asset for a long time, and we finally moved it there. But, it does optically, to your point, reduce the volatility of the GAAP equity on our balance sheet.

That's helpful. I appreciate that. And then, as you point out in the credit slide, delinquencies were down year-over-year. Substandard classifications are up. Just wondering how we should think about provision expense moving forward? Is that going to be more driven by the substandard assets? Or, should we follow more the delinquencies?

I would probably point to the substandard assets. That's a larger swath of the portfolio. There are a lot of metrics that go into the classification of an asset under that regime whereas the delinquencies is just whether or not the payment showed up. So, that's kind of a lagging indicator as well of issues in the portfolio. Obviously, keep an eye on both, but the substandard assets went up and as did the allowance for losses. So, that leads to more provisions whereas the delinquencies went down. I think again, keep an eye on all the metrics, but the substandard assets is probably going to be more correlated to increases in provisions for losses.

Okay, thanks. Another question just with the dollar becoming a little bit stronger here -- potentially strengthening more if the Fed raises rates at a faster pace than expected. Is that part of what you see adding to stress for the agricultural economy?

There are a lot of factors and a lot of different commodities and a lot of things that come into play whether it's global trade, overall level of rates, commodity prices, land values. All those things have impacts on the portfolio broadly, even more so on the macro economic statistics that you might see come out of USDA. A lot of times I try not to get too overwhelmed by all the data and information at the global and macro economic levels and pay more close attention to the things that we see in our portfolio and what we're hearing anecdotally. So, while all of those things will have an impact, ultimately, in the fullness of time, we try not to get too far looking out too far as to what ifs and what could happen and take a look at what we're hearing in the industry.

Okay, fair enough. And then, just on the net effective spread. I think it was up 3 basis points from the September quarter, but the Farm & Ranch yields were down about 12 basis points. It looks like they spike up in the third quarter and came back down. Was there something in the September quarter that drove that Farm & Ranch yield up that wasn't there in the fourth quarter?

Two things. Keep in mind that in those segment spreads that you see, there is going to be certain noise. For example, in Q3 in the Farm & Ranch segment, we had a pretty significant influx of cash interest income. In other words, loan was on nonaccrual, but when we get a payment, we book it, right. And so, those are haphazard. Those aren't by definition recurring because they are not on accrual. We had a large influx on a large long that hadn't paid for some period of time. I think it was as much as $800,000 or $900,000 pretax in Q3, and that did not reoccur in fourth quarter. So, that explains the 12-basis-point decline from Q3 to Q4 in Farm & Ranch.

As far as the overall spreads picking up in Q4 versus Q3, driving factor of that was a couple of things. Primarily, we decreased our cash and equivalents balances very significantly from Q3 to Q4. And, that alone probably had as much as a 4-basis-point impact, and we did complete some attractive AgVantage bonds in the fourth quarter as well that were well priced and accretive. But, it was primarily the decrease in cash balances that drove the overall increase in spreads in Q4.

Thanks very much.

(Operator Instructions)

Brian Hollenden, Sidoti.

Good morning. Thanks for taking my call.

Morning.

With the significant dividend increase, does this imply a lower long-term volume growth outlook compared to the past few years?

No, I think, overall, when we look at our levels of capital that we have and run our stress test, and we look at our regulatory capital metrics we project out where we think our capital is put best to use. We also concentrate on providing stockholder value, so overall, we think we are well capitalized and the intent is to return some of that value to stockholders. At the same time, we do consider there to be a lot of growth opportunities. I think the first question was asked about what do we see? And, I think opportunity is the best way to classify that. We do not anticipate any reduction in growth, and therefore, that's the reason that we're increasing the dividend. It's actually the opposite.

If you looked at us versus other financials, banks -- banks pay out 30% to 40% of their earnings every year on average in common stock dividends. And, prior to this change, we were paying out low teens -- 12%, 13%. So, we viewed ourselves as being probably on the lowest end of what a financial may pay out. So, we wanted to put our dividend yield back in the context of other financials. And, keep in mind that we're still self-funding. Even with these higher dividend amounts, we're building excess capital. We can self-fund growth at rates that are reasonably far greater than we're currently booking. So, we're not growth-constrained. We're building equity capital while at the same time also paying out a higher proportion of those earnings every year.

Thanks. Can you talk about the business development efforts to grow volume? Or, maybe potentially give us a range of net volume you expect to add in 2017? Even if it's a broad range?

Well, I won't make any predictions. I can say our business development efforts happen every single day, every week. A lot of people on the road. A lot of people that we've dedicated to just that. If you look back and you see the growth that we've had over the past several years, we're very pleased with that growth and hope that we can replicate similar types of growth in the future. Absent any specific predictions, I think you can probably take a look and recognize that we feel good about the business that we've put in place and feel good where we're headed and expect growth to continue.

And then, maybe one final question. With the continued mix shift toward lower spread volume, would you expect spreads to remain under 90 basis points in 2017 as a whole?

Well, if you're looking at the balance sheet in total, when you look at spreads as a percentage, it is different than spreads per dollar. Dale referred earlier to a higher increase in cash balances, which brings down the spread as a percentage, but we do make a modest, small return on cash and other investments that we have. A lot of times within different segments of the business, we charge different spreads based on the risk profile of the assets and of the line of business. So, again, when you mix all those different things together, some times you can see 1 basis point or 2 up for the quarter. 1 basis point or 2 down for the quarter. I think overall though in a credit environment where there is a little bit more stress and other things, I think there is a little more opportunity for us to earn spreads there. We don't expect that spreads overall will be going down significantly. That said, there are times when we can do a large transaction of [several hundred] million dollars, and it can bring down the overall spread. We don't view that as a bad thing. That's a good thing. So, again, a lot of moving parts there.

All right. Thank you.

This concludes the question-and-answer session. I like to turn the conference back over to Tim Buzby for closing remarks.

Thank you all for listening and participating this morning. We look forward to our next call to report first-quarter 2017 results in May. Thank you.

The conference is concluded. Thank you for attending today's presentation. You may now disconnect.