Federal Agricultural Mortgage Corp (AGM) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience. We'd like to welcome you to the Federal Agricultural Mortgage Corporation third quarter, 2003, earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the teleconference, please press star zero on your telephone keypad. As a reminder, this teleconference 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. Sir, you may begin.

Thank you very much. Good morning. I'd like to start the call with a reference to forward-looking statements. In addition to historical information, this conference call may include forward-looking statements that reflect management's current expectations for Farmer Mac's future financial results, business prospects and business developments. Management's expectations for Farmer Mac's future necessarily involve assumptions, estimates, and the evaluation of risks and uncertainties. Various factors could cause actual results and events to differ materially from those expectations. Some of those factors are identified in our press release issued yesterday and are discussed in Farmer Mac's annual report on Form 10K for the year ended December 31st, 2002, and our quarterly report on Form 10Q for the quarter ended June 30th, 2003.

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

With that, let me turn to a few excerpts from our press release. Farmer Mac is reporting U.S. GAAP net income for third quarter, 2003, of $3.3m or 28 cents per diluted share compared to $8.4m or 70 cents per diluted share for second quarter, 2003, and $5m or 42 cents per diluted share for third quarter, 2002. For the nine months ended September 30th, 2003, net income was $20.1m or $1.68 per diluted share compared to $18.5m or $1.54 per diluted share for the nine months ended September 30th, 2002.

Farmer Mac's third quarter performance evidences the fundamental strength of its business model as it fulfills its congressionally mandated commission to serve farmers and ranchers throughout the United States. In addition to GAAP earnings, Farmer Mac reports its core earnings, a non-GAAP measure. That measure was developed by Farmer Mac to present net income available to common stockholders less the after-tax effects of unrealized gains and losses on financial derivatives resulting from the application of the derivative accounting standards and less after-tax net gains and losses on the repurchase of debt.

Core earnings were $5.5m or 46 cents per diluted share for third quarter, 2003, compared to $5.8m or 48 cents per diluted share for second quarter, 2003, and $5.9m or 49 cents per diluted share for third quarter, 2002. For the nine months ended September 30th, 2003, core earnings were $17.2m or $1.43 per diluted share compared to $17m or $1.41 per diluted share for the corresponding period in the prior year.

We're pleased by the continuing improvements in the performance of the portfolio of loans underlying our guarantees and stand bys. As a result of Farmer Mac's ongoing credit risk management efforts, 90-day delinquencies in our portfolio were at their lowest levels in more than two years, $47.1m, representing .98% of the portfolio as of September 30th, 2003, down from the September 30th, 2002, levels of $79.8m and 1.77% and the September 30th, 2001, level of $66.5m and 2%. Quarterly new business volume improved to $349.1m for third quarter, 2003, compared to $322.3m for second quarter and $267.5m for first quarter of this year.

Lender interest in Farmer Mac is producing a steady stream of new volume in the former Farmer Mac I and II individual loan purchases and additions to existing long-term standby purchasing. And prospects for larger portfolio transactions exist. We believe the recent release of the October 2003, GAO report on Farmer Mac has cleared the way for significant new marketing opportunities. Based upon these considerations, we believe that Farmer Mac's financial condition and business prospects are strong and that 2003 core earnings per diluted share will meet or exceed 2002 core earnings per diluted share of $1.90.

Core earnings, the measure most comparable to GAAP net income available to common stockholders, are not heavily influenced by unrealized gains or losses in the value of financial derivatives used to hedge interest rate risk in Farmer Mac's mortgage portfolio. Since the value of those financial derivatives is driven by fluctuations in interest rates that cannot be reliably predicted, Farmer Mac is unable to project GAAP net income available to common stockholders. Net interest income was $8.9m for third quarter, 2003, compared to $9.4m for second quarter, 2003, and $11.1m for third quarter, 2002. The net interest yield was 89 basis points for third quarter, 2003 compared to 92 basis points for second quarter, 2003, and 114 basis points for third quarter, 2002.

The net interest yields for third quarter, 2003; second quarter, 2003; and third quarter, 2002, included the benefits of yield maintenance payments of 11 basis points, 11 basis points again, and 15 basis points, respectively.

For third quarter, 2003, the effect of yield maintenance payments on net income and diluted earnings per share were $.7m or .6 cents per diluted share respectively compared to $.8m or 6 cents per diluted share for second quarter, 2003, and $.9m or 8 cents per diluted share for third quarter, 2002. Guaranty and commitment fees were $5.1m for third quarter, 2003, compared to $5.1m for second quarter, 2003, and $4.9m for third quarter, 2002.

Turning to operating expenses, our general and administrative expenses for third quarter, 2003, were $1.6m compared to $1.2m for second quarter, 2003, and $2.2m for third quarter, 2002. For the nine months ended September 30th, 2003, general and administrative expenses were $3.9m compared to $4.8m for the nine months ended September 30th, 2002. Farmer Mac expects to continue to reduce those expenses during the next 12 months, reflecting declining needs for the services of outside consultants retained in connection with adverse publicity and misinformation about the corporation disseminated in 2002 and with the October 2003, GAO report.

Farmer Mac's core capital totaled $206.4m as of September 30th, 2003, compared to $202.9m as of June 30th, 2003, and $181.1m as of September 30th, 2002. The regulatory methodology for calculating core capital excludes the effects of FAS 115 and 133.

Farmer Mac's core capital as of September 30th, 2003, exceeded the statutory minimum capital requirement of $137.7m by $68.7m. As of September 30th, 2003, the risk-based capital test generated an estimated risk-based capital requirement of $45.5m. Farmer Mac's regulatory capital of $229.1m as of September 30th, 2003, exceeded that amount by approximately $183.6m.

As of September 30th, 2003, Farmer Mac's 90-day delinquencies totaled $47.1m, representing .98% of the principle balance of all loans held and loans underlying post-1996 AMBS and standbys, compared to $79.8m and $1.77% respectively as of September 30th, 2002. The 90-day delinquencies are loans 90 days or more past due, in foreclosure, restructured after delinquency or in bankruptcy, excluding loans performing under either the original loan terms or a court-approved bankruptcy plan.

As of September 30th, 2003, non-performing assets totaled $84.6m, representing 1.74% of the principle balance of all loans held and loans underlying post-1996 AMBS and standbys, compared to $91.3m which was 2.03% as of September 30th, 2002. Non-performing assets are loans 90 days or more past due, in foreclosure or structured after delinquency, in bankruptcy for REO.

As of September 30th, 2003, Farmer Mac had $16.4m of REO compared to $17.2m as of June 30th, 2003, and $3.7m as of September 30th, 2002. Farmer Mac analyzes each asset in its portfolio of non-performing assets to measure impairments based on the fair market value of the underlying collateral. As of September 30th, 2003, Farmer Mac's analysis of its $84.6m of non-performing assets and their updated appraisals or other collateral valuations indicated that $68.0m of non-performing assets were adequately collateralized. On the remaining $16.6m of non-performing assets, loan-by-loan analyses, considering updated collateral values, indicated individual collateral shortfalls that totaled $3.4m.

According, Farmer Mac allocated specific allowances of $3.4m to these loans. As of September 30th, 2003, after the allocation of specific allowance of its under-collateralized loans, Farmer Mac had remaining non-specific or general allowances and contingent obligations for inherent probable losses of $19.4m with the total allowance for losses at $22.7m. Based on Farmer Mac's analysis of its entire portfolio, individual loan-by-loan analyses and loan collection experience, Farmer Mac believes that specific and inherent probable losses are covered adequately by its allowance for loss.

Farmer Mac measure it interest rate risk through several tests, including the sensitivity of market value of equity and net interest income to uniform or parallel yield curve shock. As of September 30th, 2003, the parallel increase of 100 basis points across the entire treasury yield curve would have increased MVE by .7% while the parallel decrease of 100 basis points would have decreased MVE by 1.5%. As of September 30th, 2003, a parallel increase of 100 basis points would have increased Farmer Mac's net interest income, a shorter-term measure of interest rate risk, by 2.3%, while a parallel decrease of 100 basis points would have decreased NII by 4.7%.

Farmer Mac's duration gap, another important measure or interest rate risk, was minus .7 months as of September 30th, 2003. The economic effects of derivatives, including interest rate swaps, are included in the MVE, NII and duration gap analyses. Farmer Mac uses derivatives for hedging purposes, not for speculative purposes. All of Farmer Mac's derivative transactions are conducted through standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counter party.

That concludes my formal remarks. I want you to know that there will be an audio recording of the call available in about two hours and it will remain on our Web site for approximately two weeks after the conclusion of this call. And that concludes my formal remarks. I'd like to open the call now for questions.

Thank you, sir. [instructions for callers]

Our first question is coming from Jordan Heimowitz [ph] of Level Advisers [ph]. Please state your question.

Hey, guys. Can you hear me OK?

Yes. Fine, thanks.

Good. Congratulations on a good quarter. I have a couple questions. I would assume that, you know, this investigation of the GAO which seems to be pretty- exonerated you except for some, you know, management issues and corporate governance, has really impacted your business and people doing business with you. Would that be a fair statement?

I would say that the best way to characterize it is that the GAO report just came out last week and its tendency was certainly restraining our marketing activities and therefore Farmer Mac's growth. Now that the report is out and has cleared the air on the six issues raised by the Senate requestors, we've stepped up our marketing activities and we're moving ahead with business that had awaited the outcome of that report. Nothing in that report should prevent us from getting back to our prior growth rates.

And your prior growth rate has been 15 to 20% over the four- to five-year period post the96 act. So, I mean it may not happen in the next few weeks or even months, but there's no reason you shouldn't be able to resume that growth track over the next five years. Would you agree with that?

I think over the next five years, that's a very fair statement.

OK. And are you at this time - you know, everyone's been scared to pick up coverage of you guys because of the GAO report and yadda, yadda, yadda. Are you going to actively pursue, you know, sell side coverage at this point, or has there been any interest in that?

Yes, we are actively pursuing it.

Super. Thank you very much, Henry. Congratulations on having this albatross lifted across your neck and good work.

Thank you very much.

[caller instructions]

Our next question is coming from Justin Hughes [ph] of Havdi [ph].

Good morning, Henry.

Good morning, Justin.

Just wanted to ask a little bit about the credit quality. You know, a huge improvement this quarter and I know a lot is subject to seasonality. But what do you attribute the improvement to? Is it a seasoning of the portfolio? Is it farmland values which, from what I understand, have improved, or just the overall farm economy this year?

I'm going to let Tom Stenson respond on that one.

Well, I think if you go back and look at our disclosures of prior periods, you'll see not only seasonality but a certain commodity group concentration in what had been our delinquencies, and you've been able to follow the bankruptcy disclosure totals as well. So a couple things have happened and that is that the farmers who were in bankruptcy - their plans have worked as they've continued through the process of reorganization and come out of that bankruptcy, sometimes as a result of selling assets and curing their defaults with Farmer Mac. So this process has worked through with the defaults that we had from prior periods and we're starting to see the benefits of our hard work and working with those farmers in the past several months and years.

Thanks, Tom.

Gentlemen, our next question is coming from John Body [ph] of [Body Brown].

Hi, Henry. It's actually David Foster [ph] with [Body Brown]. I was just curious. In the press release it stated that you converted a long-term standby credit into a Farmer Mac guaranteed security. I wondered if you could just explain, first, what's the size of that credit and maybe discuss a little bit the reserve you set up for it.

Sure. Well, first of all, the size is slightly over $700m and that went from a standby structure to an AMBS, and what that permitted us to do, of course, was to issue a Farmer Mac guaranteed security to the participant who had previously had a standby. It has no affect on our reserves because, of course, the economic risk was essentially the same before and after, just a matter of comparable structures.

Thank you, gentlemen. [caller instructions] Gentlemen, there are no further questions at this time.

All right. Well, thank you all very much. We're going to be able to give some better guidance for 2004 in January based on the activities that we are enthusiastically engaged in right now on the marketing and business fronts, and so we look forward to talking with you then. Thank you all very much. We appreciate your participation in the call and look forward to talking with you in January.

This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.