Federal Agricultural Mortgage Corp (AGM) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. I'd like to thank you for waiting and welcome you to your conference call. Your lines will be in listen-only until we take questions later in the conference. We will explain how to ask a question at that time. Today's conference call is being recorded. I will turn over to your host Henry Edelman. Thank you for using Sprint. other than

Good morning and thank you for joining us on fourth quarter '02 earnings call this morning. I would like to start with a statement on 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 development. Management's expectations involve assumptions, estimates and the evaluation of risks and uncertainties. Various factors could cause events to differ materially from those expectations. They are listed in our earnings release. Forward-looking statements represent management's expectations as of this date. Farmer Mac undertakes no obligation to release revisions to forward-looking statements included herein to reflect events or circumstances after today or to reflect the occurrence of unanticipated events unless mandated by SEC.

Yesterday, Farmer Mac announced it had achieved net income for fourth quarter 2002 of $2.8 million or 23 cents per diluted share and net income of $21.3 million or $1.77 per diluted share for the year, excluding extraordinary gains and losses, net income was $4.1 million or 34 cents per diluted share and 20.4 million or $1.69 per diluted share for fourth quarter 2002 and year respectively.

In response to market increase today, Farmer Mac amplified its January 23rd, 2003, earnings release with the following statement:

Net income for fourth quarter 2002 included the effect of FAS 133, net reduction of 15 cents per diluted share. Excluding effects extraordinary items diluted operating per share, a non-GAAP measure for quarter were record 49 cents, increase over fourth quarter 2001 of 43 cents. Operating income reached record 5.9 million dollars for the fourth quarter 2002, and 22.9 million for the year. That was $1.90 per share, compared to 5.2 million dollars and 17.1 million dollars, which was $1.45 per share for the same period in 2001.

Later in this call, we will provide further information about the impact of FAS 133, which reduced net income by 1.8 million in the fourth quarter and 2.5m for the year.. Having said that, we apologize for the confusion that may have been caused by our release yesterday. We had been following guidance latest guidance from the SEC. However, yesterday the commission took further action and we are again providing the type of information on non-GAAP measures that we had in the past. We hope we have clarified things by our amplification this morning in the new release.

Now, let me turn back to yesterday's release. Farmer Mac solid fourth quarter performance confirms the soundness of its business approach and financial strength as it fulfills its Congressionally mandated mission to serve America’s farmers, ranchers and homeowners. We grew 2002 new business volume by $2 billion, 38% increase over 2001, and new annual record We are pleased with our business growth and financial performance during 2002, even though both were dampened by the effect of adverse publicity related to misinformation published by the media and on the Internet.

Customer interest in our business has picked up and earnings were helped by the receipt of low [inaudible] interest rate environment throughout 2002. As we look forward to 2003, we are seeing slower borrower prepayments which while representing expected reduction of income related to yield maintenance income that accompanies prepayments is positive indicator of longer term stream of future interest income.

Overall, we are gratified by the performance of the portfolio of loans underlying our guarantees and long-term stand by purchase commitment. As we have noted in the past, Farmer Mac anticipates fluctuations in loan delinquency in absolute dollars and percentage of the outstanding portfolio with higher levels likely at end of first and third quarter of each year due to semi-annual payment characteristics of most Farmer Mac loans. Delinquencies at end of the fourth quarter were lower than September 30th in dollar and percentage terms. On year-over-year basis, absolute dollar amount of delinquencies increased and percentage of delinquencies decreased, as expected. These trends resulted from maturation of significant segment of Farmer Mac portfolio into expected peak default years and growth of the loan portfolio. At the present time, our business prospects are picking up and the adverse publicity has diminished, which should allow continued growth of guaranteed volume and earnings. Farmer Mac performance for 2003 will depend on controlling expenses associated with the adverse publicity, while we continue our efforts to bring customer interest to higher levels.

We will need to meet increased regulatory fees established in 2002 and associated compliance costs. While Farmer Mac's financial condition and business prospects are solid, current circumstances make it too early to comment on the market analysts current projection for financial performance in 2003. Net interest income was $8.7 million for fourth quarter 2002, and 35 million for the year, compared to $7.2 million and 26.9 million for the same period in 2001. The net interest yield, which does not include guarantee fees for loans purchased prior to April 1, 2001, the effective date of FAS 140,was 88 basis points for fourth quarter 2002, each even with fourth quarter 2001. Net interest yield for fourth quarter 2002 and 2001 included benefits of yield maintenance payments of 5 basis points and 4 basis points respectively. The effect of FAS 140 for fourth quarter 2002 was reclassification of 1.1 million, which is 11 basis points-- guarantee fee income as interest income, compared to immaterial amount for fourth quarter 2001 Adjusted to eliminate effect of yield maintenance and effective FAS 140, net interest yield for fourth quarter 2002 year ended December 31st 2002 were 72 basis points and 78 basis points respectively. Those figures compare to 84 basis points and 80 basis points for fourth quarter 2001 and year ended December 31, 2001, respectively.

Guarantee fees, include commitment fees, were 5.1 million for fourth quarter 2002 and 19.3 million for the year, both new records. This compares to 4.5 million and 15.8 million for the fourth quarter 2001 and year ended December 31, 2001, respectively. Beginning with fourth quarter 2002, Farmer Mac has segregated provision for losses into two components for presentation in the consolidated statement for operation. Provisions for loan losses which records probable losses on loans held for investment and presented as reduction for net interest income, had provision for losses which reports probable losses on loans underlying Farmer Mac guaranteed securities and long-term standbys and presented as component of operating expense. Prior period information has been reclassified to conform to previous presentation. Operating expenses for fourth quarter 2002 totaled $4.2m and is compared to 4.1 for fourth quarter 2001. Quarterly operating expenses are in line with fourth quarter 2001, they reflect decrease of third quarter 2002 operating expenses of 5.6 million. That decrease in operating expenses compared with third quarter 2002 primarily reflects decrease in legal and consulting fees as adverse publicity about Farmer Mac diminished more quickly than anticipated. Actual cost incurred for associated legal and consulting fees for third quarter 2002 were approximately $300,000 less than expected.

Events associated with that adverse publicity could cause Farmer Mac to incur higher than expected legal fees in future quarters. Management expects general and administrative expenses per quarter in 2003 to range between 1 million and 1.2 million dollars. Net change in operating expenses in fourth quarter 2002, compared to fourth quarter 2001, reflects increase in regulatory fees partially offset by decreases in compensation and general and administrative cost.

Farm Credit Administration has advised Farmer Mac regulatory assessment for October 1, 2002, through September 30th, 2003, will be estimated 1.4 million, an increase from $700,000 estimate from October 1, 2001, through September 30th, 2002, during which actual costs incurred were more than $900,000. Operating expenses as percentage of total revenue, excluding gains and losses on financial derivates and trading assets were 31% for the fourth quarter 2002. Compared to 37% in third quarter 2002, and 36% for fourth quarter 2001.

The provision for income tax totaled 1.9 million for fourth quarter 2002 and 9.3 million for the year. compared to 2.3 m and 8.4 million dollars for the same period in 2001. The decrease in Farmer Mac's effective tax rate from 33.1% in 2001, to 29.9% in 2002, reflects effect of certain tax advantage divestment(ph) securities. During fourth quarter 2002, Farmer Mac recognized net after tax extraordinary loss of 1.3 million dollars resulting from repurchase of $41m of outstanding Farmer Mac debt. As with previous repurchases during 2002, debt securities repurchased were replaced with new funding to the same maturity date at more attractive interest rates; this preserves asset liability match and reduces future interest expense.

The combined net after-tax extraordinary gain resulting from repurchase of Farmer Mac debt throughout 2002 was $900,000. Farmer Mac core capital totaled $184 million as of December 31, 2002, compared to $126 million as of December 31, 2001, $181 million as of September 30th, 2002.

The regulatory methodology for calculating core capital excludes the effect of FAS 115 and FAS 133, which are reported on Farmer Mac's balance sheet as accumulated other comprehensive income. Farmer Mac's core capital as of December 31, 2002, exceeded the statutory capital minimum requirement of 137.1 million by 46.9 million dollars. The corporation is required to meet the capital standards of risk-based capital stress test promulgated by the Farm Credit Administration, the so-called risk-base capital or RBC test. That test determines the amount of regulatory capital, core capital, plus allowances for losses, that Farmer Mac would need to maintain positive capital during a 10-year period, while incurring credit losses equivalent to the highest historical agriculture two year agricultural mortgage loss rate and interest rate shock at the lesser of 600 basis points or 50% of the 10-year US Treasury rate. The RBC test adds the resulting capital requirement, an additional 30% for management and operational risk. As of December 31, 2002, the RBC test generated regulatory capital requirement of 73.4 million dollars. Farmer Mac's regulatory capital of 204 million exceeded that amount by 130.6 million dollars. The 14 million dollar increase in the risk base capital requirement from September 30th, 2002, when it was 59.4 million to December 31, 2002, was result of the growth of Farmer Mac's loan portfolio.

The corporation is required to hold capital at the higher of the statutory minimum capital requirement or amount required by the RBC test. Average return on common equity, including excluding extraordinary items was 10.6% for fourth quarter 2002, compared to 16.6% for fourth quarter 2001. The effect of FAS 133 and FAS 115, reduced average return on common equity by 5.4%, for fourth quarter 2002, and 1 half of 1% for fourth quarter 2001.

As of December 31, 2002, Farmer Mac won loans purchased, guaranteed or committed to be purchased under long-term standby program, since the enactment in 1996 of changes to Farmer Mac statutory charter both on and off balance sheet that were 90 days or more passed due in foreclosure, and bankruptcy, including loans forming under original terms of the loan or an approved bankruptcy plan and real estate owned represented 1.54% of the current outstanding principal balance of all post-'96 act loans and totaled 74.1 million dollars, including 12.9 million of loans performing under the original terms of the loan or approved bankruptcy plan.

This compare to 2.03%, which was $91.3 million, including 6.7 million of performing loans in bankruptcy, as of September 30, 2002, and 1.70%, which is 59.8 million including 1.9 million of performing loans in bankruptcy as of December 31, 2001. The year-over-year increase in dollars of delinquency reflects the continued maturation of segment of Farmer Mac's portfolio into expected peak default years. The year-over-year decline in ratio of delinquency to outstanding guarantees and commitments reflects growth of the portfolio. Farmer Mac conducts loan by loan analysis of delinquencies to update or discount the value of the collateral supporting each individual loan relative to the total amount due, including principle, interest and expenses. In the event revised collateral value does not support the total amount due, Farmer Mac allocates specific allowance to the loan.

Farmer Mac charges off losses against allowance for losses when management believes the loss has occurred but no later than when the corporation takes possession of the property. As of December 31, 2002, Farmer Mac’s loan by loan analysis of collateral value for 74.1 million of delinquent loans indicated 62 million of the delinquent loans were adequately collateralized and 12.1 million had sufficient collateral to cover principle, interest and the related expenses. Farmer Mac has specifically allocated 2 million dollars of the advance to those allowance -- to those under collateralized loans. As of December 31, 2002, after the allocation of specific allowances for losses to those under collateralized loans Farmer Mac had additional general allowances for losses of 18.0 million, bringing total allowances to 20 million.

Based Farmer Mac’s loan-by-loan analyses, loan collection experienced and continuing provisions for allowance for losses, Farmer Mac believes ongoing losses will be covered by the allowance for loss. During fourth quarter 2002, Farmer Mac charged off 1.3 million in losses against the allowance for loss. In certain collateral liquidation scenarios, Farmer Mac may recover amounts previously charged off or incurred additional loss if liquidation proceeds vary from previous estimates. Farmer Mac's total provision for losses was 2.1 million for fourth quarter 2002 compared to 2 million from third quarter 2002 and 2 million for fourth quarter 2001.

As of December 31, 2002, Farmer Mac's allowance for losses totaled $20 million or 42 basis points on the outstanding post 1996 Act loan, compared to 19million dollars, which had been 42 basis points as of September 30th, 2002, and 15.9 million and 45 basis points as of December 31, 2001.

Farmer Mac measures interest rate risks through several tests, including sensitivity of market value or equity or MVE (ph) and NII to uniform or parallel yield curve shock. As of December 31, 2002, parallel increase of 100 basis points across the US Treasury yield curve would have increased MVE by 5.9% while parallel decrease of 100 basis point decreased MVE by 7.1%. As of December 31, 2002, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter term measure of interest rate risk, by 6.8%, while parallel decrease of 100 basis points would have decreased NII by 6.7%. Farmer Mac also measures sensitivity of both MVE and NII to a variety of nonparallel interest rate shocks. Farmer Mac’s MVE and NII were less sensitive to nonparallel shocks than to parallel shocks.

Finally, Farmer Mac's duration gap. The static measure of interest rate risk was minus 3.6 months as of December 31, 2002. The economic effects of derivatives, including interest rate swaps, are included in the MVE, NII and duration gap analysis. Farmer Mac’s principle use of derivatives is alternative to traditional debt issuance in which it enters into contracts to pay fixed rates of interests and receive floating rates of interest in counter parties. These so-called floating to fixed interest rate swaps are used to adjust characteristics of Farmer Mac’s short-term debt to match more closely with cash flow and duration characteristics of longer term mortgage assets, thereby reducing interest rate risks and also to derive overall lower effective fixed rate cost of borrowing than otherwise possible in the conventional debt market.

As of December 31, 2002, Farmer Mac had $714.1 million [inaudible] amount floating to fixed rate interest rate swaps for terms ranging from 2 to 15 years. In addition, Farmer Mac enters into interest rate swaps to adjust the characteristics of assets to match more closely the cash flow and duration characteristics of shorter term financing, thereby reducing interest rate risk. As of December 31, 2002, Farmer Mac had 369.8 million dollars of interest rate swaps.

Farmer Mac uses derivatives for hedging, not for speculative purposes. All of Farmer Mac derivative transactions are conducted through standard, collateralized agreements that limits Farmer Mac's potential credit exposure to counter parties. As of December 31, 2002, Farmer Mac had no uncollateralized net exposure to any counter party. Farmer Mac accounts for its derivative under FAS 133, effective January 1, 2001. The implementation of FAS 133 resulted in significant accounting changes to both consolidated statements of operation and balance sheet.

During fourth quarter 2002, the reduction in net after-tax income resulting from FAS 133 was 1.8 million and the net after-tax decrease in accumulated other comprehensive income was 16.9 million dollars. For fourth quarter 2001, the increases in net after-tax income and accumulated other comprehensive income resulting from FAS 133 were 200,000 dollars and 7.6 million dollars, respectively. Accumulated other comprehensive income is not a component of Farmer Mac’s regular core capital. That concludes my formal statement. I would like to open up to questions at this time. Please.

Thank you. Those of you who have questions at this time, please press * followed by 1 on your touchtone phone. Your name will be placed in the queue until you are announced. You can remove yourself from the queue by pressing the pound sign. Again, press * followed by 1 if you have questioned at this time. It will be a few moment for the questions.

Our next question comes from Andrew Ricenshopper's line. Go ahead, please.

Hi. (audio cut out) Just a moment, please.

Hello.

We apologize for the delay. The question is for Oran McCleski's line. Can you hear?

Can I get your year-end cash flow from operations and your cash flow from financing figures?

We won't have that until we do our K.

Okay. This may be in the same category. The amount of loans in guarantees represented by permanent plannings, do you have that percentage or number?

That will also come up in the K.

That's it. Thank you.

Sorry not to have it now. Will provide it in the K.

We have Mr. (inaudible) back. Go ahead, please.

On the delinquent loans, 74 million, as of the end of the fourth quarter, what is the breakdown of delinquencies related to on-balance sheet related to the loans and securities versus standby purchase off the balance sheet?

We don't break them out, because we see the risk as being homogeneous.

No further questions at this time.

All right. Thank you all very much for participating in the call this morning. We look forward to speaking with you in a few more months. Thank you.

(Normal Termination.)

The call ended at 11:26.