Federal Agricultural Mortgage Corp (AGM) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Federal Agricultural Mortgage Corporation Q2 earnings conference call. At this time, all participants are in a listen-only mode. And a brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference please press star and zero on your telephone keypad. And as a reminder, this is conference is being recorded. It is now my pleasure to introduce your host, Mr. Henry Edelman, President and Chief Executive Officer of Federal Agricultural Mortgage Corporation. Thank you Mr. Edelman, you may begin.

Welcome to Farmer Mac second quarter earnings release conference call. I'm Henry Edelman and I have with me today our senior officers, our general counsel Jerry Oslick, Tom Stenson, our VP-AG Finance, Tim Buzby (ph) our VP Controller and our CFO Nancy Corsiglia.

Let me start very briefly with a statement about forward-looking statements. In addition to our historical information, this conference call may include certain forward-looking statements that reflect management's current expectation for Farmer Mac's future financial results, business prospects, and business developments. Management's expectation for Farmer Mac's future necessarily involve assumptions, estimates and the evaluation of risks and uncertainties.

Various factors identified in the press release issued last night could cause actual events or results to differ materially from those expectations. Some of the important factors that could cause Farmer Mac's actual results to differ materially from management's expectation are set forth in the press release and are discussed in our annual report on form 10-K for the year ended December 31, 2002 as filed with the SEC on March 27, 2003 and our quarterly report on form 10-Q for the quarter ended March 31, 2003, also filed with the SEC on May 15, 2003.

Any forward-looking statements made by Farmer Mac during this call represent management's expectations as of today. Farmer Mac undertakes no obligation to release publicly any results to revisions to such forward-looking statements to reflect events or circumstances after the date of this call total reflecting a current of unanticipated events except as otherwise mandated by the SEC.

An audio copy of the call will be available on Farmer Mac's Web site www.farmermac.com for approximately two weeks.

In fact, let me turn to the release itself. Farmer Mac net income for second quarter of 2003 was $8.4 million or 70 cents per diluted share compared to $8.4 million and 70 cents per diluted share for first quarter 2003 and $6.3 million, 52 cents per diluted share for second quarter 2002. Farmer Mac's second quarter performance is continuing evidence of its financial strength as it fulfills its congressionally mandated mission to serve American farmers, ranchers and rural homeowners.

We are pleased with our GAAP earnings. In addition, Farmer Mac focuses on core released which this press release is a non-GAAP measure developed by Farmer Mac to present net income available to common stockholders less the after tax effect of FAS 133 after tax net and gains on purchase of debt.

Quarter earnings were $5.8 million for second quarter 2003 compared to $5.9 million first quarter 2003 and $5.8 million for second quarter 2002. We are encouraged by the continuing improvement in the performance of the portfolio underlying our guarantees and long-term stand by purchase commitments. As of June 30, 2003, there were $51.3 million of 90-day delinquencies representing 1.06 ports of the portfolio versus $50.3 million and 1.12 % of the portfolio as of June 30, 2002.

Segments of the portfolio have aged into their expected peak loss years Farmer of Mac has enhanced its credit management efforts directed toward problem loan solving, servicing and loss mitigation. These efforts have been successful in leveling the amount of 90-day delinquencies in Farmer Mac's portfolio. Farmer Mac's financial performance was solid and progress continued on loan servicing. New business volume improved to $322.3 million for second quarter 2003 compared to $267.5 million for first quarter 2003, but still remained light compared to prior quarters.

We believe this is traceable to low demand in the agricultural mortgage market affecting all agricultural mortgage lenders and to residual effect bad publicity based on misinformation about Farmer Mac's disseminated in 2002. Nonetheless, lender interest in Farmer Mac has produced a steady stream of new volume in the form of Farmer Mac one and Farmer Mac two individual loan purchases and addition to standby arrangements and prospects for larger portfolio transactions continue to exist.

Second quarter 2003 financial results demonstrate the long-term stability of Farmer Mac business models based in large part on the annuity like income from guarantee and commitment fees. We believe that Farmer Mac's financial condition and business prospects are strong and that core earns per share in 2003 will exceed core earnings of 190 per share in 2002.

GAAP net income, the most comparable measure to core earning is heavily influenced by unrealized gains or losses in the financial derivatives used to hedge interest rate in Farmer Mac's mortgage portfolio. Since the value of those financial derivatives is driven by fluctuations in interest rate that can be not be reliably predicted, Farmer Mac is unable to project an outlook for GAAP net income for 2003. Farmer Mac reports its financial results in accordance with GAAP. In addition to GAAP measures Farmer Mac presents certain non-GAAP performance measures. Farmer Mac uses these non-GAAP performance measures to develop financial plans to measure corporate performance as set performance compensation.

They provide relatively less volatile, financial information and are a more accurate representation of Farmer Mac's economic performance, transaction economics, and business trends. Investors and the investment analyst community have previously used similar measures to evaluate Farmer Mac's historical and future performance. Farmer Mac disclosure of non-GAAP measures is not intended to replace GAAP information but rather to supplement it.

One such non-GAAP measure is core earnings which Farmer Mac developed to present net income available to common stockholders less the after-tax effect of FAS 133 and less after tax net gains and losses on the repurchase of debt that prior to January 1, 2003, were reported as extraordinary items.

Due in part to the favorable effect of FAS 133, Farmer Mac's GAAP net income available to common stockholders increased to $8.4 million for second quarter 2003 compared to $6.3 million for second quarter 2002 while it's less volatile core earnings were $5.8 million for both second quarter 2003 and second quarter 2002.

The reconciliation of GAAP net income available to common stockholders to core earnings is presented in the Corporation's press release issued last night. The components of our financial statements are spelled out in the press release and we will take questions about that release and second quarter results shortly.

I would like to cover a few points before opening for questions. First, with respect to capital, Farmer Mac's core capital totaled $202.9 million as of June 30, 2003 compared to $192.4 million as of March 31, 2003 and $176 million as of June 30, 2002. The regulatory methodology for calculating core capital excludes the effects of FAS 115 and FAS 133 which are reported on the Farmer Mac's balance sheet as accumulated other comprehensive income or loss.

Farmer Mac's core capital as of June 30, 2003 exceeded the statutory minimum capital requirement of $138.8 million by $64.1 million.

Farmer Mac is also required to meet the capital standards of a risk based capital stress test promulgated by the Farm Credit Administration. The RBC test as it's called determines the amount of regulatory capital that is core capital plus allowances for losses.

Farmer Mac would need to maintain positive capital during a ten year stress period while incurring credit loss that is equivalent to the highest historical two year agricultural mortgage loss rate an interest rate shock at the lesser of 600 basis points or 50% of the ten year U.S. treasure rate. The RBC test then adds the resulting capital requirement, a 30 % premium for management and operational risk.

As of June 30, 2003 the RBC test generated an estimated RBC requirement of $50.4 million. Farmer Mac's regulatory capital of $224.8 million exceeded that amount by approximately $174.4 million. The $7.5 million decrease in the risk based capital requirement for 57.9 million as of March 31, 2003 was a result of changes in the interest environment and the aging of Farmer Mac's loan portfolio.

Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the amount required by the RBC test. Farmer Mac measured its interest rate drift through several tests including the sensitivity of market value of equity and net interest income to uniform or parallel yield curve shock.

As of June 30, 2003, a parallel increase of 100 basis points crossed the entire U.S. treasury yield curve would have increased MVE by one-and-a-half percent while a parallel decrease of 100 basis points would have decreased MVE by 2.9%.

As of June 30, 2003, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter term measure of interest rate risk, by 6.6% while a parallel decrease of a 100 basis points would have decreased NII by 7%. Farmer Mac also measured the sensitivity of both MVE and NII to a variety of nonparallel interest rate shock. As of June 30,2003, Farmer Mac MVE and NII were less sensitive to those nonparallel shock than to parallel shock. Farmer Mac's duration gap, another measure of interest rate risk was minus 1.2 months.

The economic effects of derivatives including interest rate swaps are including in the MVE, NII and duration gap analysis. Farmer Mac uses derivatives for hedging purposes, not for speculative purposes.

All of Farmer Mac's derivative transaction are conducted through standardized collateralized agreements that limit Farmer Mac's potential credit exposure to any counter party. As of June 30, 2003, Farmer Mac had no one collateralized net exposure to any counter party. Farmer Mac accounts for its derivatives under FAS 133, which became effective January 1, 2001. The implementation of FAS 133 resulted in significant accounting changes to both to consolidate statements of operations and balance sheets.

During second quarter 2003, the increase in net after tax income resulting from FAS 133 was $2.6 million. and the net after tax decrease in accumulated other comprehensive income was $6.5 million. During the first quarter of 2003, the increase in net after tax income resulting from FAS 133 was $2.5 million and the net after tax increase in accumulated other comprehensive income was $1.1 million. For second quarter 2002, the decreases in net after tax income and accumulated other comprehensive income resulting from FAS 133 were $0.1 million and $14.6 million respectively. The accumulated other comprehensive income is not a component of Farmer Mac's regulatory capital.

With those remarks, I would like to open the call up to a question and answer period.

Certainly. Excuse me, ladies and gentlemen, at this time we will be conducting a question and answer session. To allow everyone the opportunity to ask a question, your time will be limited to one question. If you would like to ask, please press star, 1 on your telephone keypad at this time. A confirmation tone will indicate that your line has been placed in the question queue. To remove your question from the queue, please press star, 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Please hold while we poll for questions.

Our first question is coming from Reiffis Davenport (ph) of Guardian (ph). Please pose your question.

Hi. I joined the call a little late so I apologize if I missed some of this. First of all, with respect to the GAO report, is there any news on that front? And secondly, I notice in your release, you were talking about basically the Gotham effect on your portfolio growth. Do you-any of your clients actually mention that they have concerns about what that that may have to say about you as a reason for not giving you business? Thanks.

OK. As GAO, we know they're working on their report, we have a regular dialogue with them as to when any substantive issues it will address, but we can't really say anything more at this time. We have not been told when the report will come out. We are optimistic it will come out in the relatively near future, but beyond that, we don't know. We continue to believe that it will be a fair report, and we look forward to publication of that report. Turning to what you refer to as the Gotham effect.

I think that what has been the essence of this, is the level of confusion in the market that was created by the false and misleading statements that were made by various short sellers and repeated and sometimes initiated in the media which raised some concerns on the part of our counter parties, our business clients as well and we're seeing that going down, but we think that the publication of the GAO report should really deal with those questions definitively and the focus has shifted from Gotham to GAO really and from the negative to the (inaudible). But we appreciate people bearing with us while we await the outcome from GAO. Next question, please.

Thank you, as a reminder, if you have a question please press star, 1 on your telephone keypad at this time. Our next question is coming from David Foster of Body Brown Management. Please state your question.

Hai, Henry and Nancy. Just one question. With rates having backed up almost 100 basis points in the last month, I'm referring to like the ten year treasury, what effect do you think that will have on the availability of blocks and mortgage loans owned by banks and others? I know that Fanny and Freddie believe they're going to be able to build their portfolio as banks begin to sell mortgage-backed securities due to higher rates. I'm just wondering, will you see a similar response, do you think?

We are anticipating that we will see a similar response, although it may not be identical. There are a fair number of lenders who have adjustable rate mortgages out borrowers and to the extent that those borrowers begin to sense that it's time to lock in long-term fixed rates, there's a natural opportunity for the lenders to move the business to Farmer Mac and of course that's one of the our key marketing points. Tom Stenson, our Vice President-Ag Finance, might want to add a little bit of his own personal experience to what I've just said to that.

Well, Henry, I think you've capsulized it for our understating the market A lot of farmers have chosen to be short and to take advantage of the low rates. As the curve shifts, that same farmer will perceive the opportunity to go long. His local community bank will have fewer options for him in the long side of things and that will migrate business our way.

Next question, please.

Mr. Edelman, there are no further questions at this time.

All right, well, we appreciate everyone's participation today. And everyone's continuing interest in Farmer Mac and we look forward to talking with you next quarter. Thank you very much.

Thank you very much ladies and gentlemen. This concludes today's teleconference. Thank you for your participation and you may disconnect your lines at this time.