Federal Agricultural Mortgage Corp (AGM) 2002 Q3 法說會逐字稿

I'd like to welcome you to the conference call this morning with Mr. Henry Edelman. You will be in a listen only mode until we open it up for questions.

Good morning. Welcome to earnings release conference call. This morning, I have with me, Nancy Corsiglia, our Chief Financial Officer, Jerry Oslick our general Counsel, Tom Stenson our Vice President of Agricultural Finance and Tim Buzby our Comptroller. I would like to start off briefly with a statement on forward looking statements. In addition to historical information this conference call may include forward looking statements that reflect managements current expectations for 's future financial results, business prospects and business developments. Management's expectations for 's future necessarily involve assumptions, estimates and the evaluation of risks and uncertainties. Various factors could cause actual events or results to differ materially from those expectations. Some of the important factors that could cause 's actual results to differ materially would include uncertainties regarding the rate and direction of the development of the agricultural mortgage secondary market, the effect on the agricultural economy, resulting from low commodity prices, weak demand for agricultural product and crop damage from natural disasters, the effect on the agricultural economy for federal assistance provided in the farm bill enacted last spring, the possible effect of risk based capital requirement which could, under certain circumstances be in excess of the statutory minimum capital level. The possible establishment of additional statutory or regulatory restrictions on and the outcome pending analysis of by GAO, the general accounting office and 's continuing access to the debt market set favorable rates and terms. Other factors are discussed in 's annual report on form 10K for the year ended December 31, 2001 as filed with the FTC on March 27, 2002 and farther Mac's quarterly report on 10Q for the quarter ended June 30, 2002 as filed with the SEC on August 14th. Any forward looking statements made by FARMERMAC during this call represent management's expectations as of today. Farmer Mac undertakes no obligation to release publicly the results of any revisions such forward looking statements to reflect events or circumstances after today or to reflect the occurrence of unanticipated events except as otherwise mandated by the SEC. At this point, I also wanted to let the general counsel give his standard copyright warning.

Good morning, all participants in this conference call should be aware that it is being recorded by farmer Mac and is copyrighted material, no recording, broadcast or other distribution of this call or any part of the call is permitted without farmer Mac's permission. Your continued participation in this call implies your consent. And audio recording of this call will be available for replay on farmer Mac's website for two weeks after the call is concluded.

Thank you, Jerry. With that, let me turn to an introduction to the press with I'm not going to read the whole press release today. The federal agricultural mortgage corporation today announced that net income for 2002 was 5 million dollars or 42 cents per diluted share and 18.5 million dollars or $1.54 per diluted share for the year-to-date. Net income for 2002 included the effects of phase 133 which were net reduction of 7 cents per diluted share. Accordingly, diluted operating earnings per share a non-gap measure were a record 49 cents, a 17 percent increase over 2001 diluted operating earnings per share of 42 cents. Operating income, also a non-factor reached a record 5.9 million dollars for the 2002 and 17 million dollars for the year-to-date. Compared to 5 million dollars and 12.3 million dollars for the same period in 2001. Farmer Mac's strong performance continues to underscore the soundness of our business approach and financial strength as we fulfill our mission to serve America's farmers, ranchers and home owners. This quarter's volume of new business took our 2002 year-to-date volume above the 2001 full year results even though as anticipated, new business volume was less than in recent quarters the drop in new business volumes was a result of the normal seasonal slowdown in new agricultural mortgage loans anticipated in the of each year, compounded by the dampening effect on business of adverse media coverage during the Spring and Summer months. For the current quarter, our new business prospects have looked past that media coverage and we're seeing a resumption of normal interest in our business. This quarter's financial results demonstrate the annuity like revenue stream of our business model and the benefits of yield maintenance protection in a declining interest rate environment. These items mitigated the effect on our financial performance of the increased professional and regulatory fees incurred during the quarter. We're also pleased by the overall performance of our portfolio of loans underlying our guarantees and long term standby purchase commitments. As we've noted in the past, farmer Mac anticipates fluctuations in the delinquencies both in dollars and as a percentage of the outstanding portfolio. With higher levels likely at the end of the first and s of each year do you to the semi-annual payment characteristics of most farmer Mac mortgages. Consistent with that pattern, the seriously delinquent loans in the were slightly higher in dollars than they were at the close of the first quarter 2002 and in percentage terms below the levels at the close of the first quarter 2002 and of the first and s of 2001. These semi-annual trends are indicative of the positive results of ongoing loan services and loss mitigation efforts offset by the continued maturation of significant segments of farmer Mac's portfolio's guarantees and commitments into its peak default years and a weaker agricultural economy. We believe farmer Mac is on track to meet or exceed the market analyst's current projections for its financial performance in 2002. With that statement, we're going to open it up for questions and the format for questioning today will be that each institution will have or individual will have two questions taken one at a time from the cue and we're going to begin the questioning period now.

Okay. If there are any questions on the phone lines, please press star one on your touch tone phone. If your question has been asked you can press the pound key to remove yourself from the cue. Again, press star one if you have a question and we'll take the first one in just a moment. We have a question from Gary Gordon. Go ahead, sir.

Okay. Thank you. Henry, my questions on debt spreads or yield spreads both on your debt and your potential purchases obviously with turmoil in the bond markets and then as you said the negative media publicity where are your debt spreads today versus where they were a couple of months ago? And what are sort of the loan purchase opportunities versus normal?

As far as debt spreads we have recently begun to re-enter the medium term note market and we have achieved spreads very close to the home loan banks. We've done a limited amount of issuance as our needs have been limited. We have continued to access the discount note market at spreads comparable to Fannie MAE throughout the entire quarter. The second question regarding loan purchase opportunities.

Tom Stenson, you might want to mention a little bit about the student opportunities there.

Well, there are two sources of business for farmer Mac's one program. New loan originations and secondly portfolio transactions. The cycle as to new loan originations we're seeing a softening in the market, farmers traditionally acquire properties after harvest and prior to planting, that's the seasonality involved. And with the drought in much of the United States that you may have read about, farmers have taken a wait and see attitude towards acquisition. The second and last comment I would make about originations is that many farmers took advantage of the lower interest rates and already refinanced prior to the . As to the portfolio transaction opportunities we're seeing as we said in the release, renewed interest in those and we're optimistic going forward as to those opportunities and our ability to take advantage of them.

As to loan pricing, we continue to offer rates that reflect our expected funding costs in the market and we find that our rates are very competitive in terms of how lenders perceive the rates that we offer.

Whitney Tillson has a question, go ahead, please.

Hi, in the first quarter press release it said farmer Mac expects quarterly charge offs for loan losses to continue at their current level of approximately $850,000 for the next several quarters. In the second quarter Charge offs were $902,000 and then last quarter $1.5 million. Can you explain why the charge offs are so much higher than projected and what guidance you can give on this going forward?

Sure, we referred to net charge offs around if you look at the net number it's 1.2 million. And we consider that that's a slight variance up from where we would have expected to be, but it's not out of range in terms of our longer term expectations and I think that the best guidance we can give is that our initial statement that it would be fair to expect 750,000 to a million per quarter at the beginning of this year may reflect a range that would include this even though it's a little bit higher going forward in terms of guidance we do not expect significant changes from these levels. Next question, please?

I have a question from Ken Shubenstein. Go ahead, please.

In the last cue, you said that there's maybe a dampening effect on farmer Mac's business prospects over the near term which the corporation expects will be ameliorated by issuing the GAO report. Since the GAO report is potentially no going to be issued for at least one year, does that mean you expect that next year's business prospects to be continually be dampened by this?

I don't think that's necessarily the case, although it's possible. I think that we did give some guidance in this press release to the effect that people have had renewed interest in our business and they've looked past the media coverage. It may not take until the GAO report although I think the GAO report will certainly be an important benchmark when it comes through. Next question, please?

Guy spire has a question. Go ahead, please

Yes. I'm looking at page 11 of your release and pages 11 and 12. On page 11 you show your guarantee fees in the of 2002 as being 4.8 million versus the same quarter last year of 4.1 million. If I look on page 12 at your total guaranteed outstanding guarantees, the total column, it's the fifth column along, and I compare the same two dates, I see that you're over since of 2001, your guaranteed loans outstanding have increased by 30 percent, but the guarantee fees under each of those quarters only increased by about 17 percent, that implies to me that you're charging a lower guarantee fee. Is that true?

No, it's the effect of FAZ 140, Guy. The new loans that we're acquiring past 4/1/01 are accounted for as loans and therefore that guarantee fee is in the NII. Tim, would you like to add anything to that?

Yeah, I would refer you, Guy, to page 6 and 7 of the interest rate risk section of the press release where we discuss the effects of FAZ 140 and the amount of guarantee fees which because of 140 or reported as part of net interest income.

David Egan has a question. Go ahead, please.

Hi. I just wanted to get a little update on the investigation by your regulator, the farm credit administration and when you think it will be complete and whether you have any feedback or anything you can share with us on your view of the outcome.

Let me recharactarize that. It's not an investigation. It's their annual examination. And by regulation, we're not permitted to discuss the examination process. Thank you. Next question, please?

Whitney Tillson has a question. Go ahead.

Just a second question. In the press release you said the drop in new business volume was partly due to a normal seasonal slowdown in agri cultural mortgage loans and I've gone back and looked at previous s and I can't find any evidence of this seasonal slowdown historically. Previously, I noticed your total book of business grew by about half of one percent sequentially in the it was 6.7 percent and 16.7 percent sequential growth in the previous two s. So can you explain that?

Sure. There are other factors in particular in 2000, , we did a large deal, a $250 million insurance company transaction which had a significant impact on the numbers. But when you look at the flow of new loans, the is the slowest. And there are some transactions in portfolios that will offer opportunities in that quarter, but when we look at the actual flow, particularly in the cash window, we do see that cycle. Next question, please?

I have a question from Ken Shubenstein, go ahead please.

In the press release, you said that the farm credit administration's regulatory assessment would double next year. I understand the SEC can increase this either due to increased supervision cost or because farmer Mac's risk assessment has gone up. Can you tell us which it is, please?

They have not advised us. Right now, our general counsel wants to clarify that.

There is no increase for risk assessment.

I'm sorry please repeat that.

There is no increase for risk assessment.

So it's increased supervision cost by default then.

It is whatever additional personnel they may have brought in to their to the division and their assumption of what their costs will be.

Thank you, Jerry. Next question, please?

The next question comes from Ari Shuset.

One of the criticisms that's been floating around is whether or not farmer Mac has been working outside of its charter, specifically in the stand by program. Is this part of what you're referring to when you referred to the dampening effect of the media publicity? Are people waiting to see whether or not the FCA comes down on your stand by program? Is that what you're referring to? And if you could comment on, you know, what the issues are as you see them in terms of the legitimacy of farmer Mac being involved in the stand by program?

Well, I think that the answer to the second half of your question will answer the first half as well. Jerry, our general counselor can make a statement on the legal aspects. Go ahead, Jerry.

Yes, the farm credit administration has known of the stand by program and relationship it creates between farm credit system institutions and farmer Mac for four years now. They examined the farm credit system institutions and farmer Mac on regular basis. In all that time, the agency has given no indication that it believes farmer Mac is operating outside of its legal authority.

And we also have the opinion of our outside counsel to the same effect. I think that the answer to that question really also feeds into the fact that we have not seen any diminution of interest in doing business with farmer Mac on behalf institutions who would be effected by that for the very reason that Jerry stated. Thank you. Next question, please?

I have a question from Guy Spire. Go ahead, please.

It was a follow-up to my previous question. So the interest income or the guarantee fees are reduced but the loans on your balance sheet have increased significantly. They're a significant portion of your balance sheet. At what point does this change the nature of the institution? At what point do you start looking more like a bank than a GSE? Because your mission is to securitize and create a secondary market and presumably if they're characterize as loans they can hardly be a secondary market for both.

Very briefly, Guy, the answer here is they are characterized for loans for accounting purposes, however they are Agriculture mortgage backed securities in terms of the structure under which we hold them on our books. Farmer Mac has its guarantee on them and our guarantee is backed by the United States treasury and therefore we consider those to be AMBS for all relevant legal purposes even though they are indeed loans for accounting purposes. Let me let Tim Buzby add anything he wants to that.

I think that summary is a good one. Again, as of April 1, 2001, loans that are purchased prior to that or subsequent to that date, although they are legally securities, Farmer Mac, for legal purposes, they are accounted for as loans for accounting purposes, that does not change our business and does not change our outlook as a secondary market. We are the secondary market for agricultural mortgage loans and we buy loans and that is how we're carrying out our mandates. Thank you. Next question, please?

The next question comes from David Einhorn, go ahead, sir?

Good morning, guys. Could you comment on the charge offs that came in ahead of the guidance? What was the increase in the charge offs, the reason for that? And secondly, given that the charge offs came in ahead of the guidance, why did didn't that require additional reserves to be put up?

Tim Buzby, go ahead.

I think we addressed that in a prior question the issue of the charge offs and any guidance we had given as well as future guidance. With respect to the need for additional provisions for loss, the actual occurrence of a charge off, recognition of a loss on the accounting books does not under gap require additional provisions from that standpoint.

I'm sorry, I don't hear anything else. Next question, please?

Your next question comes from Matthew Mark. Go ahead.

Two questions. One just to follow up that one. Can you just go into a little bit more detail why the additional charge offs don't mandate additional reserves under gap?

Under gap, the recognition of loss reserves is for estimated probable losses. The actual charge off is for when an identified loss has occurred. You'll also notice in the press release we discussed the allocation of reserves for specific reserves which is in a situation where we have a collateral deficiency that we've identified on a particular loan we are guaranteeing. When that charge off actually does occur that specific reserve is removed and charge off is recognized. The process for providing reserves is not impacted by the recognition of that loss for a loan that is run through this process and been charged off. Next question?

Next question from Ari Shushet. Go ahead.

I wonder if you can refresh us, I know that your saying that your comfortable with the analyst guidance for Q4, have you made the same comments about fiscal year '03? And if not, when will you be giving guidance on those number numbers?

We generally don't give guidance on those numbers until we get into the year. So we would expect to give guidance on the '03 number at the next conference call in January.

Our next question comes again from David Einhorn.

I thought I would try again. Can you explain why the charge offs were higher than what the guidance was?

We consider these slightly higher level of charge offs, again, net charge offs, net after recovery, not to be very significant. It's a variance of approximately $200,000 above the high side of $1 million that we previously gave as guidance. Remember, our portfolio of guarantees has increased over the time frame. And our provisions still exceeded the charge offs. Next question, please?

Our next question comes from Matthew Mark.

Here's my second one. The risk based capital requirements went down and press release talks about the impact of lower interest rates and the increased material in the investment portfolio. Can you provide a little bit more color there and walk through the way that calculation impacted you especially on the maturity of the portfolio?

I think the essence of it is in what we said in the press release. Namely that as our portfolio of guarantees and commitments matures, the probability of loss from a loan diminishes and therefore the maturation of our portfolio has a factor in the reduction of our RVC. The other factor is that because the RBC model looks to the ten year treasury and says that it takes half of that number or 600 basis points, whichever is the lesser and uses an up/down shock in the model as treasury rates went down in this quarter, the impact of the shift in rates went down. So you take those two factors and you add a 30 percent operational risk component and that together brings you to the change in the RBC. Thanks.

Thank you. I'm told we have no more questions. So I appreciate all of your participation and look forward to talking with you in January.