Federal Agricultural Mortgage Corp (AGM) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation second-quarter 2004 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. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Henry Edelman, President and Chief Executive Officer of the Federal Agricultural Mortgage Corporation. Mr. Edelman, you may begin.

Good morning. Welcome to the conference call. I would like to just make a brief statement about forward-looking statements before I begin. In addition to the historical information, this conference call may include forward-looking statements that reflect management's current expectations for Farmer Mac's future business results and financial results, business prospects and business developments. Management's expectations for the Corporation's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors could cause Farmer Mac's actual results or events to differ materially from the expectations as expressed or implied by the forward-looking statements.

Some of these factors are identified in our press release issued today which was filed on Form 8-K this morning with the SEC and are discussed in Farmer Mac's annual report on Form 10-K for the year ended December 31, 2003, which was filed with the SEC on March 15, 2004, and Farmer Mac's quarterly report on Form 10-Q for the quarter ended March 31, 2004 which was filed with the SEC on May 10, 2004. Any forward-looking statements made by Farmer Mac during this call represent management's current expectations. Farmer Mac undertakes no obligation to release publicly the results of revisions to any such forward-looking statements to reflect any future events or circumstances except as otherwise mandated by the SEC.

The Federal Agricultural Mortgage Corporation today reported U.S. GAAP net income for second-quarter 2004 of 2.0 million or 16 cents per diluted share compared to $7.8 million or 64 cents per share for first quarter 2004 and 8.4 million or 70 cents per diluted share for second quarter 2003.

For the six months ended June 30, 2004 net income was $9.8 million or 80 cents per diluted share compared with $16.8 million or $1.40 per share for the 6 months ended June 30, 2003. Core earnings were at $6.2 million or 51 cents per diluted share for second quarter 2004 compared to $5.9 million or 48 cents per diluted share for first quarter 2004, and $5.8 million or 48 cents per diluted share for second quarter 2003.

For the six months ended June 30, 2004 core earnings were $12.1 million or 99 cents per diluted share compared with $11.7 million or 97 cents per diluted share for the corresponding period in the prior year. Farmer Mac reports it's core earnings in non GAAP measures in addition to GAAP earnings. Core earnings was developed by Farmer Mac to present net income available to common stockholders less the after tax effect of unrealized gains and losses on financial derivatives resulting from the application of the derivative account standard.

Farmer Mac's new business volume for second quarter 2004 was $189.3 million. While Farmer Mac's new business has been slowed by economic factors including the increased liquidity of agricultural borrowers and the increased available capital and liquidity of agricultural lenders, Farmer Mac sees developing opportunities for longer-term business prospects including a strategic alliance, product enhancements and refined security structures which could result in renewed growth for Farmer Mac. The positive trends of the performance of the portfolio of loans underlying our guarantees and standbys continues.

Taking into account our expectation of ninety-day delinquencies will fluctuate from quarter to quarter with higher levels likely at the end of the first and third quarters of each year corresponding to the semiannual payment characteristics of many Farmer Mac 1 loans, we are pleased that at June 30, 2004 ninety-day delinquencies in Farmer Mac's portfolio were at their lowest second-quarter levels in three years in terms of both dollars and percentages. This underscores the effectiveness of Farmer Mac's ongoing credit risk management and the strength of the U.S. agricultural economy.

As of June 30, 2004 those delinquencies totaled $32.8 million, representing .68 percent of the portfolio, down from $51.3 million and 1.06 percent as of June 30, 2003 and $50.3 million and 1.12 percent as of June 30, 2002. (ph) Likewise, real estate owned was reduced to $9.2 million as of June 30, 2004 from $17.2 million as of June 30, 2003. Other factors affecting the business outlook are regulatory actions by the Farm Credit Administration, the Federal regulator of both Farmer Mac and the primary lenders in the Farm Credit System, and the Farm Credit System Insurance Corporation, the U.S. Government controlled corporation managed by a three member Board of Directors, composed of the members of the FCA Board which may diminish Farmer Mac's business prospects.

Statements by either FCA or FCSIC or both have cautioned other entities that they regulate about doing business with GSE's including Farmer Mac and have raised objections to FCS institutions’ use of Farmer Mac swaps. More recently FCA proposed a regulation that if adopted as proposed could adversely affect Farmer Mac's business by establishing a new risk weight allocation of capital, applicable to Farmer Mac transactions with FCS institutions, a major segment of Farmer Mac's customer base.

Farmer Mac disagrees with the proposed regulation as it would affect Farmer Mac viewing it as inconsistent with regulations currently in effect at other federal regulators with respect to secondary market GSEs, and not in the best interest of America's farmers, ranchers or rural homeowners, the constituency Farmer Mac was mandated by Congress to serve. And therefore it is hoped that this proposed regulation will not be adopted in its current form.

Notwithstanding the demonstrated apparent strength of the loans underlying our guarantees and standbys, and the annuity like nature of our income stream, Farmer Mac's reduced business volumes and current market and regulatory conditions lead us now to believe corporation's 2004 core earnings per diluted share will be at approximately the same level as in 2003. That concludes my formal remarks, and I would like to open it up to question at this time.

I guess there is one other thing I would like to summarize our position. Where we are right now is that our performance has shown significant improvements on the credit side. Our year-over-year decline in delinquencies and REOs has been very striking; delinquencies are down 36 percent with no ninety-day delinquencies in 2002, '03 and '04 cohort origination years and REO, real estate owned, down 47 percent.

On the regulatory front we intend to work constructively with the FCA to advance the accomplishment of our congressional mission. Farmer Mac will submit comments on proposed (indiscernible) regulations seeking withdrawal or modification to provisions relating to Farmer Mac. If the proposed regulation is adopted in a form that requires a rating Farmer Mac will have approximately two years in which to obtain one. On an ongoing basis Farmer Mac has and will continue to evaluate the benefits of obtaining a rating and will continue to do so whether or not the regulation is adopted in its present form.

We are confident of Farmer Mac's financial strength based on its financial and its status as a GSE, and would expect the rating to reflect those attributes. We think that for year 2004 we will earn as much as we did in '03 despite slower business and greater expenses demonstrating how financially stable Farmer Mac truly is during a period of slow growth. The prospects of longer term growth include opportunities that do not portent on the outcome of the risk weight regulations and our relationship with just the Farm Credit System. Farmer Mac's franchise is much broader than that, and its dedication to America's farmers, ranchers and rural homeowners places it in a position where it continues to provide great value to the agricultural sector and will be able to do so in the future. Thank you, and now I would like to turn it over to your questions.

(OPERATOR INSTRUCTIONS) Eric Wasserstrom of UBS.

Good morning Henry. It looked like your net interest margin was down a little bit over 1Q, could you just comment on what was driving that and also the uplift to the margin as rates go up over this year?

Nancy Corsiglia, would you want to address that?

There are a couple of things driving net interest margin. We have always said there could be fluctuations within a range. We have seen the discount notes -- the LIBOR spread affect that somewhat, and it tends to fluctuate so that has been one effect. We have also issued, as you probably have seen some 530 million of floating-rate debt to extend the liquidity of our balance sheet. Floating-rate debt is somewhat more expensive. There is a few basis points associated with floating-rate debt. And there are some temporary phenomenon that Tim Buzby will mention.

One item relates to the accounting on the recognition of interest income, at times when because of the semi-annual and annual pay characteristics of our loans and the recognition of income on delinquent loans or nonperforming loans, that causes quarter to quarter fluctuation. So that did have some impact on the second quarter.

(OPERATOR INSTRUCTIONS) Andrew Rockschafen of Greenlight.

Good morning. Just one question, I guess given the hupla here, why not just get a credit rating up front and then relatedly, if you were to get a credit rating, what could the impact be on the economics? So I can understand what the range of possibilities is?

Farmer Mac would get a credit rating if it felt it was desirable and necessary to do so. At this time there has really been no advantage for us in the capital markets in obtaining a credit rating. If this rate were to go through in its current form we would certainly feel that we would have to proceed, however the outcome of this is approximately two years away. We do not feel any immediate pressure to get a credit rating right now, and there is no certainty as to the need to do so. Clearly we have reasons to disagree with the need for a credit rating based upon just this regulation and our approach is to look at it from a total business perspective. We of course always evaluate those benefits as I mentioned earlier and we will continue to do so whether the regulation is adopted in its present form or not.

Michael Flynn (ph), Victory Capital Management.

Good morning, Henry. You referred today to a possibility of a strategic alliance, the first time that we've heard of such a possibility. Can you make any comment in terms of what sort of a strategic alliance might happen?

We are working with agricultural lenders and an organization that would serve as a conduit so that we would be able to reach out to more smaller agricultural lending institutions, particularly in the Midwest, but also throughout the country to provide greater access for those institutions to the Farmer Mac program. There is a clear benefit in having a conduit operating working with them and having representatives on the ground walking them through the loan origination process, or in some cases providing them with loan origination assistance. Tom Stenson is on the line, he is our VP Ag Finance. Tom, you might want to comment on this?

Good morning. I am on a remote connection here, but Henry hit the high points. An affinity such as this that provides the benefit of having people on the ground closer to the lenders and the ability to work then with those lenders, interpretation and the constructive assistance that would flow more loans into the Farmer Mac 1 cash window. Some of the affinity partners that we have in mind and are working with offer value added products beyond the Farmer Mac traditional product, which also has interests for those lenders. An example would be leasing of farm equipment and structures. And that has benefit, as well. So from a variety of fronts it is an interesting and exciting opportunity that we are currently working on and will be the remainder of this year and next.

Eric Wasserstrom of UBS.

In terms of the rating, I would think that with your strong capital position and sort of GSE status (indiscernible) seems to be strong. Would you agree with that?

We don't express opinions on those things although we're certainly confident in Farmer Mac's strength, we don't anticipate the rating agencies. We note that Farmer Mac is a GSE and that we do have what we consider to be very strong performance in our business, and we certainly are very positive about the whole process of obtaining a rating if we have to do so for business reasons.

(OPERATOR INSTRUCTIONS) We show no further questions at this time. I would like to turn the floor back over to Mr. Edelman for any further comments.

We appreciate everyone's interest in the call today. And I want to emphasize that management continues to feel very positive about the longer-term growth prospects at Farmer Mac. And although we see the regulatory issues that has arisen as a matter that we need to direct our attention to, Farmer Mac has many ways of doing business. And we are confident that we will be able to work constructively with the FCA on these current regulatory issues. Thank you all very much, and we appreciate your interest in Farmer Mac.

This concludes today's conference. Thank you for your participation, and have a good day.