Federal Agricultural Mortgage Corp (AGM) 2003 Q4 法說會逐字稿

Thank you for your patience. Good morning ladies and gentlemen and welcome to the Farmer Mac's Fourth Quarter 2003 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Henry Edelman, President and Chief Executive Officer of Farmer Mac Corporation.

Morning. Welcome to Farmer Mac's Earnings Conference Call, and I'd just like to start the call off with the legal formality of the discussion of forward-looking statements.

In addition to historical information, this earnings call will include forward-looking statements that reflect management's current expectations for Farmer Mac future financial results, business prospects and business development. Management's expectations for Farmer Mac'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.

The important factors that could cause Farmer Mac's actual results to materially differ from management expectations are set forth more fully in the release and I will not go through them all at this time, but I would refer you to them. Those statements represent our expectations and we undertake no obligation to release publicly the results of any revisions to the forward-looking statements included in this discussion to reflect events or circumstances after today or to reflect the occurrence of unanticipated events, except as otherwise mandated by the SEC.

With that, let me turn to the release itself. Farmer Mac today reported U.S. GAAP net income for fourth quarter 2003 of $4.9 million, or 40 cents per diluted share, compared to $3.3 million, or 28 cents per diluted share for third quarter 2003, and $2.8 million, or 23 cents per diluted share for fourth quarter 2002.

For the year ended December 31st, 2003, net income was $25.1 million or $2.08 per diluted share compared to $21.3 million or $1.77 per diluted share for the year ended December 31st, 2002.

Farmer Mac reports its core earnings, a non-GAAP measure, in addition to GAAP earnings. That measure was developed by Farmer Mac to present net income available to common stock holders, less the after-tax effects of unrealized gains and losses on financial derivatives, resulting from the application of the derivative accounting standards, and less the after-tax net gains and losses on the repurchase of debt.

Core earnings were $5.8 million or 47 cents per diluted share for fourth quarter 2003, compared to $5.5 million or 46 cents per diluted share for third quarter 2003, and $5.9 million or 49 cents per diluted share for fourth quarter 2002.

For the year ended December 31st, 2003, core earnings were $23 million or $1.91 per diluted share compared to $22.9 million or $1.90 per diluted share for the year ended December 31st, 2002.

Farmer Mac's financial results reflect the fundamental strength of its business model as it fulfills its congressionally-mandated mission to serve America's farmers, ranchers and rural homeowners. We are pleased by the continued improvements in the performance of loans underlying our guarantees and standbys.

As of December 31st, 2003, 90-day delinquencies in Farmer Mac's portfolio were at their lowest levels in more than two years, as a result of our ongoing credit risk management discussed later in the release, aided by increasing strength in the U.S. agricultural economy.

As of December 31st, 2003, those delinquencies totaled $29.6 million, representing 0.59% of the portfolio, down from $58.2 million and 1.21% as of December 31st, 2002, and 54.5 million and 1.59% as of December 31st, 2001.

Continuing lender interest in Farmer Mac produced new Farmer Mac one and two business volumes through loan purchases in addition to existing long-term standby purchase commitments.

New business volume was $288.2 million for fourth quarter 2003, bringing total volume for the year to $1.2 billion. Recent business activity has been affected adversely by slower loan growth in the agricultural mortgage market and increased regulatory pressure on government-sponsored enterprises, including Farmer Mac.

Marketing initiatives we launched last quarter are generating promising business opportunities for the current year. New and expanded business relationships, including a strategic alliance, product enhancement, and new security structures are underway.

Based on these ongoing developments, and on improving credit quality, we believe that Farmer Mac's financial condition is strong and expect that 2004 core earnings per diluted share will exceed the 2003 level by as much as 10%.

The GAAP measure most comparable to core earnings is net income available to stockholders. Unlike core earnings, however, the GAAP measure is heavily influenced by unrealized gains or losses of the value of financial derivatives used to hedge interest rate risk in Farmer Mac's mortgage portfolio, because the value of those financial derivatives is driven by fluctuations in interest rates that cannot be reliably predicted, Farmer Mac does not project GAAP net income available to common stockholders.

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 the latter measures to develop financial plans, to gauge corporate performance and to set incentive compensation.

They more accurately represent Farmer Mac's economic performance, transaction economics and business trends. Investors and the investment analyst community have previously viewed similar measures to evaluate Farmer Mac's historical and future performance. Farmer Mac's disclosure of non-GAAP measures is not intended to replace GAAP information, but rather to supplement it.

Core earnings is one such non-GAAP measure that Farmer Mac developed to present net income available to common stockholders less the after-tax effect of unrealized gains and losses on financial derivatives resulting from FAS 133, and the after-tax net gains and losses on the repurchase of debt that prior to January 1st, 2003 we reported under GAAP as extraordinary items.

Due in part to the effects of FAS 133, Farmer Mac's GAAP net income available to common stockholders increased to $4.9 million for fourth quarter 2003, compared to $2.8 million for fourth quarter 2002, while as core earnings were 5.8 million for fourth quarter 2003 compared to $5.9 million for fourth quarter 2002. The reconciliation of GAAP net income available to common stockholders to core earnings is set forth in the release.

Let me turn to capital for a moment. Farmer Mac's core capital of $216.5 million as of December 31st, 2003 exceeded the statutory minimum capital requirement of $142 million by 73.5 million.

As of December 31st, 2003, the risk-based capital test generated an estimated risk-based capital requirement of $38.8 million. Farmer Mac's regulatory capital of $239 million, as of December 31st, 2003, exceeded the RBC requirement by approximately $200.2 million.

Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the amount determined under the RBC test.

As of December 31st, 2003, Farmer Mac's 90-day delinquency totaled $29.6 million representing .59% of the principle balance of all loans held and loans underlying post-1996 act, Farmer Mac won guaranteed securities of stand-bys, compared to $58.2 million, which was 1.21% as of December 31st, 2002. The 90-day delinquencies are loans 90 days or past due, in foreclosure, restructured after delinquency, or in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

As of December 31st, 2003, non-performing assets totaled $67.6 million, representing 1.35% of the principle balance of all loans held and underlying post-1996 act guaranteed standby, compared to 75.3 million, which was 1.56% as of December 31st, 2002. Non-performing assets are loans 90 days or more past due, in foreclosure, restructured delinquency, in bankruptcy ,or real estate-owned REO.

The principle balance of non-performing assets includes the group of loans that are current under the original loan terms or a court-approved bankruptcy plan, though the borrowers on those loans have filed for bankruptcy protection. And certain segments of the portfolio that have cycled through foreclosure and into the ROE asset category, which completes the involuntary loan liquidation process.

Prior to acquisition of property securing a loan, Farmer Mac devises a liquidation strategy that results in either an immediate sale or retention pending later sale. Farmer Mac evaluates these and other alternatives based upon the economics of the transactions and the requirements as well for law.

As of December 31st, 2003, Farmer Mac analyzed the following three categories of assets for impairment, based on the fair value of the underlying collateral.

First, $67.6 million of non-performing assets, second, the 37.4 million of loans for which Farmer Mac has adjusted the timing of borrowers' payment schedules within the past three years, but still expect to collect all amounts due and has not made economic concessions. And third, the additional $65.3 million of performing loans is prospect may have inherent credit issues.

Of that $170.3 million total of assets and analyzed, 152.1 million were adequately collateralized. For the 18.2 million that were not adequately collateralized, individual collateral shortfalls totaled $3.8 million, accordingly Farmer Mac allocated specific allowances in that amount to those under-collateralized assets as of December 31st, 2003.

After the allocation of specific allowances from the total allowance for losses of $23.5 million, non-specific or general allowances and the contingent obligation for inherent probable losses were $19.7 million.

During fourth quarter 2003, Farmer Mac charged off $1.7 million in losses against the allowance for losses and recovered $200,000 of losses previously charged off. Farmer Mac's total provision for losses was $2.2 million for fourth quarter 2003, compared to $2.1 million for third quarter 2003, and $2.1 million for fourth quarter 2002.

As of December 31st, 2003, Farmer Mac's allowances for losses and contingent obligation for probable losses totaled $23.5 million, or 47 basis points of the outstanding balance of loans held and loans underlying post-1996 act guarantees of standby, compared to $22.7 million, which was 47 basis points as of September 30th, 2003, and $20 million, which was 42 basis points as of December 31st, 2002.

Based on Farmer Mac's analysis of its entire portfolio, individual loan-by-loan analyses and loan collection experience, Farmer Mac believes specific and inherent probable losses are covered adequately by its allowance for losses. Farmer Mac measures its interest rate risk through several test, including the sensitivity of its market value of equity and net interest income to uniform or parallel yield curve shock.

As of December 31st, 2003, a parallel increase of 100 basis points across the entire U.S. treasury yield curve would have increased MVE by four-tenths of one percent, while a parallel decrease of 100 basis points would have had no affect on MVE. As of December 31st, 2003, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter term measure of interest rate risk by 5.6%, while a parallel decrease of 100 basis points would have decreased NII by 9.4%.

Farmer Mac's duration gap, another measure of interest rate risk was minus 0.1 month as of December 31st, 2003.

That concludes my formal remarks. An audio recording of the call today will be available for two weeks on our Web site at farmermac.com after this call concludes. At this time, I'd like to open for questions, please.

Thank you sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question will be coming from Eric Wasserstrom of UBS.

Thanks. Good morning Henry.

Morning Eric.

Having just been instructed that I have time for one question, I'd like to ask two questions, the first is, could you - some of the statements you made about growth challenges had to do with the specifics of the agricultural marketplace currently, as well as GSC pressure. When we look at the other GSCs of course, they had tremendous growth in the first three quarters of the year and then followed by more recently in the fourth quarter, a period of shrinkage, which in our view, seems to be more a function of just unattractive mortgage-to-debt spread than of regulatory pressure. Can you reconcile that with your own view of what's occurring?

I think that the agricultural economy is a factor that does not bear upon the residential market, and the fact that farmers in particular have received government payments over the last year has dampened that interest of that market so that although it is growing, it is growing more slowly.

Tom Stenson, do you want to add something to that.

Well that's our observation Henry is the market is growing, but it's growing at a slower rate. The farmers as well have enjoyed the benefits of the current farm plan, from a policy standpoint, the feed, grain and cotton growers particularly have reaped significant influxes of revenue profits in their operations and that is impacting their demand for mortgages as well.

Thank you.

Thank you gentlemen. Our next question is coming from Jerry Benson (ph) of Level Global.

Hi guys, congratulations on a good quarter.

Thank you.

Just wanted to see if you had mentioned that you expect core EPS growth up to 10% in 2004, and I was wondering if I could get some color on some of the assumptions you're making to get to that 10% or up to 10% number.

Yes, we are looking at our, first of all, core earnings and looking at the stability of our income, which is essentially based on the ongoing portfolio of guarantees outstanding, and so allowing for a certain amount of amortization and pre-payment of that, we start off with a baseline. Looking beyond that baseline, we have expectations for growth this year, and that growth is based upon indications we have of what the market is going to be doing this year, plus new initiatives that we started last quarter that are beginning to come into focus in the current quarter, and that are showing us potential for opportunities during 2004.

And those increases are offset somewhat by increased costs that we've discussed in the report, so that that nets us to this, approximately, up to 10% estimation that we have at this time. And again, we try to be conservative in these things in as much as we do not currently have an analyst covering Farmer Mac, we feel that it's the role of the company to be conservative and to try to under promise and over deliver.

Thank you sir. Our next question is coming from Rufus Davenport of Guardian.

Hi. Give me a second here, couple of questions, one, or one question in two parts, I should say. One, could you discuss some more about, in greater detail the marketing initiatives that you're going to have in place to help stimulate loan growth. And secondly, is it fair to say that your loan growth is still suffering some after-effects from the whole Gotham (ph) and CBO (ph) issues that you went through last year? Thanks.

I'll take that as a complicated, but interesting question. The way to handle that, I think is to say first of all, yes there is a certain amount of overlap from some of the adverse publicity, but on the other hand, we think that these GAO reports clarified a lot of matters and should have satisfied many of the people who had questions.

If I could turn to Tom Stenson again and ask him to comment on a little bit more of what we do in the way of marketing.

Well, thank you Henry. What we are continuing to do and always looking across the landscape to try and read the market and the demands of ranchers and farmers, and in that process, continuing to look for how we might reach and serve their needs. We have, as we've gone forward, been able to identify some opportunities exist, either by commodity group or by geographic differences, regional differences, because not all farmers and ranchers in any given region are like another.

Within that context, we've identified some potential business partners, with whom we think we could grow some additional market. It's yet indeterminate as to what that may be, but we are about that and translating that into volume.

OK, next question.

Thank you gentlemen. Our next question is coming from Andrew Roffensteiffen (ph) of Green Light Capital.

Hey, good morning guys.

Morning.

One question. On the press release, I guess in the description of the three groups of assets that are reviewed, I guess in the reserve discussion, these are the, I lost my question, the 65 million of assets that you think may have some inherent risk, how should we think about those in terms, how they compare to the current non-performing assets and is there a chance we have to take additional reserves or do we feel the general reserve in place today is enough to handle even those assets?

Those assets have been identified as having characteristics that we feel they are on an internal type of watch list. For instance, they might be in a particular commodity, which is currently under stress, because we've identified them as an asset to be monitored individually.

As far as the reserves go, those assets are identified one by one for the need for a specific reserve that would result from a collateral shortfall. In the case where there is not a specifically identified reserve for those loans, they are covered by the general reserve.

Thank you. Next question please.

Our next question is coming from Michael Flynn (ph) of Victory Capital Management.

Good morning. Can you hear me?

Yes sir.

Henry, the reserves, I don't see them laid out in the 18-pages released here. Are they laid out somewhere?

I'll let Tom go ahead with that one. Go ahead Tom.

They are not laid out in detail. They will be broken out in detail in our 10-K that will be published in several weeks. However, you can look on the balance sheet and see certain pieces of those. One would be the allowance for loan losses, which is approximately $7.4 million, and the reserve for losses is approximately 13.2 million, as well as the valuation allowance on the REO properties of approximately $200,000. There is also an additional piece of the allowance for losses that is included within the guarantee and commitment obligation, which that fourth piece would give you the amount that comes to the total of $23.5 million.

Thank you, gentlemen. Our next question is coming from Mark Mulholland of Matthew 25 Fund.

Hi, Mr. Edelman.

Good morning.

Good morning. I think it was Tom Stenson was talking about the marketing program?

Yes.

And I might have misunderstood it, but his words to me sounds more like he had said something about regions and commodity, classes. But isn't your marketing more directly to the lenders?

It is, yes.

OK, I was wondering, like, I guess on that marketing question, I was just curious - I got the impression that the issues with Gotham did hold up, at least some of the lenders want to find out how you guys would stand after that report. But I guess in a way I was hoping to see some kind of an improvement in the lenders willing to use you guys.

Have you seen that? That's really, I guess --

Yes, this is Tom Stenson once again. We continue to - you're right, we do market to lenders of all descriptions. That tends to be, by number of lenders, lenders, regulated institutions that are both local and regional based, although we have some that are national banks. That was the basis for the comment as to the regionalism earlier.

Within that, we continually work with lenders to cause them to want to go through the sign-up process. We have a regimen of evaluating lenders' capabilities for doing business with us, the skill sets they bring to that process. And in that context, there have been an increasing number of lenders stepping forward to become approved sellers to the Farmer Mac program.

But what we've learned, certainly, is that one, an institution signing on to become a lender, a seller to Farmer Mac, does not beget, early-on, volume, necessarily. It may or may or may not.

And we are having lenders signing on to our various programs and stepping out in that manner.

Thank you, Tom.

Our next question is a follow up question from Eric Wasserstrom of UBS.

All right, thanks. My other question had to do with the capital levels. You know, you seem to be building pretty significant excess capital. Are there any plans for that or are you primarily keeping your powder dry, or what's the intention there?

Right now, we think that that net capital will be necessary for future growth, and also it gives us a certain amount of a buffer in establishing the amount of capital that we hold relative to both statutory minimum capital and regulatory risk-based capital, because we must hold the higher of those two, and although the statutory minimum is a specific amount - that is, 75 basis points for off-book guarantees, and 2.75 percentage points for on-book assets of all types. The fact is that the risk-based capital model is dynamic and it does depend upon many other factors, including the types of loans and interest rate environment that we're presented with. And therefore, we think it's appropriate to maintain a certain buffer above both of those levels.

Without that buffer, we would not have the ability to grow.

Thank you, gentlemen. We have another follow up question from Rufus Davenport of Guardian.

Hi, another two-parter. One, there was a fairly large jump in your regulatory fee assessments. Is that going to be permanent, or is there any shot that that comes down as the environment around you stabilizes a little bit? And secondly, is 1.6 million a quarter a good run rate for your corporate and benefits?

OK, as to the regulatory fees, we are disappointed that they represent such a high percentage of our revenues. We understand the current regulatory environment. At the same time, as we go forward, we would hope to see that percentage go down.

Now, let me turn to the second part of your question, and give you Tim Buzby (ph).

Yes, the 1.6 million for compensation employee benefits for a quarterly number, I would say that's a reasonable expectation going forward. It could vary slightly up or down, depending on growth in the company and things of that nature. So we would expect that over time, that number will be increasing, but for the current scenario, that is a pretty good estimate.

Thank you. Our last question is a follow up question from Mark Mulholland of Matthew 25 Fund.

Mr. Edelman, this will be for Mr. Stenson again.

It's just that on the answer you gave me about the -- you are signing off institutions even though they don't immediately bring business. Are you able to say you have any institutions you increased, that you have a relationship with, in '03 compared to '02.

I'm sorry, say again, please.

Oh, he can't say it again, he's cut off.

One moment sir.

The growth based on our customer base from '03 and growing with those customers, yes, and what one of those - or a lot more than one in fact, are alluded to in the release as to growing opportunities that are taking on potentially an affinity of joint marketing and creation of products that are responsive, as I said earlier, to lender demand, particularly from regional areas. So yes, growth with customer base of '03 is definite and firm.

I would just add to what Tom said, that we do have a lot of repeat business. We generally tend to expand relationships once we establish them, and we look forward to continuing to do that.

Gentlemen, we have no further questions in the queue. Do you have any closing comments?

I appreciate everyone's participation today and look forward to talking to you in a couple of months, and encourage any of you who wish to call us to please do so. Thank you.

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