Federal Agricultural Mortgage Corp (AGM) 2004 Q3 法說會逐字稿

(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.

Good morning and welcome to Farmer Mac's third quarter earnings call and I would like to talk with you today about forward-looking statements in addition to historical information, this conference call may include forward-looking statements and reflect management's current expectations for Farmer Mac's future financial results, business prospects, and business development. Management's expectation 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 yesterday 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 2003 and Farmer Mac's Quarterly Report on Form 10-Q for the second quarter of 2004. Any forward-looking statements made by Farmer Mac's during this call represent management's current expectations and 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. An audio recording of this call will be available for 2 weeks on Farmer Mac's website, www.farmermac.com, after the call is concluded.

Returning to the press release first, the Federal Agricultural Mortgage Corporation today reported U.S. GAAP net income for third quarter 2004 of $8.6 million or 70 cents per diluted share, compared to $2.0 million or 16 cents per diluted share for second quarter 2004 and $3.3 million or 28 cents per diluted share for third quarter 2003. For the nine months ended September 30, 2004, net income was $18.4 million or $1.50 per diluted share, compared to $20.1 million or $1.68 per diluted share for the nine months ended September 30, 2003. Core earnings were $5.4 million or 44 cents per diluted share for the third quarter 2004, compared to $6.2 million or 51 cents per diluted share for second quarter 2004 and $5.5 million or 46 cents per diluted share for third quarter 2003.

For the nine months ended September 30, 2004, core earnings were $17.5 million or $1.43 per diluted share, compared to $17.2 million or $1.43 per diluted share for the corresponding period in the prior year. Farmer Mac reports its core earnings, a non-GAAP measure, in addition to GAAP earnings. Farmer Mac uses the core earnings measure 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. The portfolio of loans underlying Farmer Mac's guarantees and standbys continues to perform well, underscoring the effectiveness of our ongoing credit risk management and the strength of the U.S. agricultural economy. We are pleased that, as of September 30, 2004, 90-day delinquencies in Farmer Mac's portfolio remained at low levels, in terms of both dollars and percentages. Those delinquencies totaled $47.6 million, representing 1.01 percent of the portfolio, compared to $47.1 million and 0.98 percent of portfolio as of September 30, 2003, and $79.8 million and 1.77 percent as of September 30, 2002. Real estate owned was reduced to $7.3 million as of September 30, 2004, from $16.4 million as of September 30, 2003. For third quarter 2004, new business volume was $145.3 million.

As in recent quarters, Farmer Mac's new business continue to be slowed by certain economic factors, particularly the increased liquidity of agricultural borrowers, the increased available capital and liquidity of agricultural lenders, and regulatory conditions. Looking ahead, Farmer Mac is implementing a new strategic alliance and sees additional longer-term opportunities that could lead to more vigorous growth in business volume. The annuity-like nature of our income streams and the demonstrated credit strength of the loans underlying our guarantees and standby, though offset by Farmer Mac's reduced business volume, increased expenses, and current market and regulatory conditions, lead us to continue to believe the Corporation's 2004 core earnings per diluted share will be at approximately the same level as in 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 the latter measures to develop financial plans, to gauge corporate performance and to set incentive compensation because, in management's view, the non-GAAP measures more accurately represent Farmer Mac's economic performance, transaction economics and business trends. Investors and the investment analyst community have previously relied upon 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 effects of unrealized gains and losses on financial derivatives resulting from FAS 133. The GAAP measure most comparable to core earnings is net income available to common stockholders. Unlike core earnings, however, the GAAP measure is 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. Due in part to the effects of FAS 133, Farmer Mac's GAAP net income available to stockholders increased to $8.6 million for third quarter 2004, compared to $3.3 million for third quarter 2003, while its core earnings were $5.4 million in third quarter 2004, compared to $5.5 million for third quarter 2003. Because the effects of financial derivatives under FAS 133 included in the GAAP measure are driven by fluctuations in interest rates that cannot reliably be predicted, Farmer Mac does not project GAAP net income available to common stockholders.

Later in this call, we'll provide additional information about the impact of FAS 133, which increased GAAP net income available to common stockholders by $3.2 million in third quarter 2004. Net interest income, which does not include guarantee fees from loans purchased and retained prior to April 1, 2001 was $8 million for third quarter 2004, compared to $7.8 million for second quarter 2004 and $8.9 million for third quarter 2003. The net interest yield was 84 basis points for third quarter 2004, compared to 81 basis points for second quarter 2004 and 89 basis points for third quarter 2003. The effect of FAS 140 for third quarter 2004 was the reclassification of guarantee fee as interest income in the amount of $1 million, 10 basis points compared to $1.1 million, 11 basis points in each of second quarter 2004 and third quarter 2003.

Guarantee and commitment fees were $5.3 million for third quarter 2004, compared to $5.3 million for second quarter 2004 and $5.1 million for third quarter 2003. As discussed earlier $1million of guarantee fee income was classified as interest income in third quarter 2004, compared to $1.1 million in each of second quarter 2004 and third quarter 2003. Compensation and employee benefits for third quarter 2004 were $1.7 million, compared to $1.7 million for second quarter 2004 and $1.6 million for third quarter 2003. General and administrative expenses for third quarter 2004 were $2 million, compared to $1.8 million for second quarter 2004 and $1.6 million for third quarter 2003.

The year-to-year increases in compensation and employee benefits and general and administrative expenses were due, in large part, to greater staffing levels necessary for increased corporate governance and regulatory compliance activities, including requirements of the Sarbanes-Oxley Act of 2002 and the Farm Credit Administration as well as heightened focus on the regulatory environment for government-sponsored enterprise in general. Regulatory fees for third quarter of 2004 were $0.5 million, compared to $0.6 million for second quarter of 2004, and $400,000 for third quarter of 2003. FCA's regulatory fees charged to Farmer Mac for the federal fiscal year ended September 30, 2004 were $2.0 million, and FCA has advised the Corporation that its fees for the federal fiscal year ended September 30, 2005 will be $2.3 million. Farmer Mac expects all of the above-mentioned expenses to continue at or above current levels through 2005.

Farmer Mac's core capital totaled $233.6 million as of September 30, 2004, compared to $226.3 million as of June 30, 2004, and $206.4 million as of September 30, 2003. Farmer Mac's core capital as of September 30, 2004 exceeded the statutory minimum capital requirement of $128.1 million by $105.5 million. Farmer Mac is required to meet the capital standards of a risk-based capital stress test promulgated by FCA. As of September 30, 2004, the RBC test generated an estimated risk-based capital requirement of $43.5 million, compared to the risk-based capital requirement of $49.3 million as of June 30, 2004.

Farmer Mac's regulatory capital of $256.1 million as of September 30, 2004 exceeded the RBC requirement by approximately $212.6 million. Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the amount required by the RBC test. During third quarter 2004, Farmer Mac repurchased 70,951 shares of its Class C Non-Voting Common Stock, at an average price of $19.88 per share, pursuant to the Corporation's previously announced stock repurchase program. These repurchases reduced the Corporation's capital by approximately $1.4 million.

As of September 30, 2004, Farmer Mac's 90-day delinquencies totaled $47.6 million, representing 1.01 percent of the principal balance of all loans held and loans underlying post-1996 act, Farmer Mac I Guaranteed Securities and standby's, compared to $47.1 million -- 0.98 percent -- as of September 30, 2003.

As of September 30, 2004, non-performing assets totaled $75.0 million, representing 1.58 percent of the principal balance of all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and standbys, compared to $84.6 million -- 1.74 percent -- as of September 30, 2003.

As of September 30, 2004, Farmer Mac had $7.3 million of real estate owned, compared to $9.2 million as of June 30, 2004, and $16.4 million as of September 30, 2003. As of September 30, 2004, Farmer Mac analyzed its non-performing, previously delinquent, and restructured assets for impairment based on the fair value of the underlying collateral. Of those assets, $126.6 million were found to be collateralized adequately and $11.5 million of assets were found not to be collateralized adequately, with individual collateral shortfalls totaling in the aggregate of $1.3 million. Accordingly, Farmer Mac allocated specific allowances of $1.3 million to those under-collateralized assets as of September 30, 2004. After the allocation of specific allowances from the total allowance for losses of $22.5 million, the non-specific or general allowance and the contingent obligation for inherent probable losses totaled $21.2 million.

During third quarter 2004, Farmer Mac charged off $1.1 million in losses against the allowance for losses, compared to $2.0 million in second quarter 2004, and $1.3 million in third quarter 2003. Based on our analysis of the 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 losses. Farmer Mac measured interstate risks with several tests, including the sensitivity of its market value of equity and net interest income to uniform or parallel yields curve shock. As of September 30, 2004 the parallel increase of 100 basis points across the entire US treasury yield curve would have decreased MVE by one-half percent. While the parallel decrease of 100 basis points would have decreased MVE by 1 percent. As of September 30, 2004 parallel increase of 100 basis points would have increased Farmer Mac's net interest income, shorter-term measure of interest rate risks by 9.4 percent. While a parallel decreased in basis points would have decreased NII by 7.6 percent. Farmer Mac's duration gap another measure of interest rate risk was minus. 2 months as of September 30, 2004.

The economic effect of financial derivatives including interest rates swap, are included in the MVE, NII and duration gap analysis. Farmer Mac used this financial derivatives for hedging purposes, not for speculatory purposes. All of Farmer Mac derivatives transactions are conducted through standard collateralized agreement that limit Farmer Mac's potential credit exposure to any counter-party. As of September 30, 2004, Farmer Mac had no uncollateralized net exposure to any counter-party.

Regulatory actions continued to affect Farmer Mac's business outlook, have statements by FCA and the Farm Credit System Insurance Corporation continued to dampen business prospects. During the second quarter of 2004, FCA published the proposed regulations related to Farmer Mac's investments and liquidity. While Farmer Mac expects to be able to comply with the regulations if it was adopted in its current form. The Corporation disagreed with certain aspects of the proposed regulations and submitted comment on the proposal to FCA accordingly.

On August 5, 2004, FCA published a proposed regulations that if adopted as proposed, could adversely affect Farmer Mac's business by establishing a new risk way allocation of capital applicable to Farmer Mac transactions with farm crediting too s taggering Farmer Mac's customer base. That proposed regulation is subject to a 90-day public comment period and as drafted would have an effective date 18 months after the final regulation is published. As set forth in our prior disclosures, Farmer Mac disagrees with the proposed regulations as it would affect the corporation and intends to submit a comment letter to FCA setting forth its position. Thank you, this concludes my prepared comments and I'd like to open the call up now for questions.

(OPERATOR INSTRUCTIONS) Eric Wasserstrom, UBS.

Good morning Henry, this is Lusch George. Could you give us update on any progress that maybe in terms of getting a grading, how that's going?

We are working on that process and at the same time we have found that the tendency of the 2 FCA regulations is an impediment to the analysis and we believe that the best way to pursue the grading is to wait for those pending proposed regulations to be resolved. So, although we're working on the process, I think that the final outcome is going to be delayed and influenced by that regulatory process.

And actually when is that -- when do you expect those to get resolved? Is there any time frame for that?

We do not know at this time when those regulations will be resolved by the regulator. We have put comments in on one of them and the comment period doesn't close until next week for the other, and we expect to be a -- at time several months after the closure of the comment period before those regulations are acted upon.

Sir, there are no further questions in the queue.

All right. Thank you all very much for being on the call with us this morning and we look forward to talking to you again in several months. And as you know, we are working very hard on business growth and we're looking forward to speaking with you about development in that area, in particular in several months.

Ladies and gentlemen, this does concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.