Federal Agricultural Mortgage Corp (AGM) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation Fourth Quarter 2004 Earnings Conference Call. (Caller Instructions.) It is now my pleasure to introduce your host, Mr. Henry Edelman, President and Chief Executive Officer of Federal Agricultural Mortgage Corporation.

Good morning. Thank you for joining us this morning. And I'd like to start off with some forward-looking statement observations that 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 development. 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 those 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 most recently filed Forms 10-K and 10-Q. 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.

An audio recording of this call will be available for two weeks on Farmer Mac's website beginning about two hours after the conclusion of this call.

Farmer Mac today reported U.S. GAAP net income of $9.8 million or 82 cents per diluted share for the fourth quarter 2004, compared to $8.6 million or 70 cents per diluted share for third quarter 2004 and $4.9 million or 40 cents per diluted share for fourth quarter 2003. For the year-ended December 31, 2004, net income was $28.2 million or $2.32 per diluted share, compared to $25 million or $2.08 per diluted share for the year-ended December 31, 2003. Core earnings were $9.9 million or 82 cents per diluted share for fourth quarter 2004, compared to $5.4 million or 44 cents per diluted share for third quarter 2004 and $5.8 million or 47 cents per diluted share for fourth quarter 2003. For the year-ended December 31, 2004, core earnings were $27.4 million or $2.25 per diluted share, compared to $23 million or $1.91 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 Farmer Mac's ongoing credit risk management and the strength of the U.S. agricultural economy. We are pleased that, as of December 31, 2004, 90-day delinquencies in Farmer Mac's portfolio remained at low levels, in terms of both dollars and percentages. Those delinquencies totaled $25.3 million, representing 0.55 percent of the portfolio compared to $30.1 million and 0.60 percent as of December 31, 2003, and $58.2 million or 1.21 percent as of December 31, 2002. Similarly, real estate owned was reduced to $3.8 million as of December 31, 2004, from $15.5 million as of December 31, 2003.

After careful evaluation of the overall improved credit quality of Farmer Mac's portfolio, the strong U.S. agricultural economy, the recent upward trends in agricultural land values and the year-over-year reduction in Farmer Mac's outstanding guarantees and commitments, Farmer Mac determined that the appropriate level of allowance for losses as of December 31, 2004 was $17.1 million. This resulted in the release of approximately $5.3 million in the allowance for losses in fourth quarter 2004, which was 28 cents per diluted share. As of December 31, 2004, the allowance for losses was 37 basis points relative to the outstanding Farmer Mac I portfolio, compared to $22.1 million and 44 basis points as of December 31, 2003, and $20 million, which was 42 basis points, as of December 31, 2002.

For fourth quarter 2004, new business volume was $117.4 million. As in recent quarters, Farmer Mac's new business was slow as a result of the increased liquidity of agricultural borrowers, the increased available capital and liquidity of agricultural lenders, and regulatory conditions. Looking forward, Farmer Mac's Board and Management are focused on the long-term growth of the business and the development of new ways to serve the financing needs of rural America.

For 2005, Farmer Mac remains confident of opportunities for growth and increased business volume, but the effect of any new business on earnings will depend on the timing and nature of the transactions. Farmer Mac's earnings are also affected by recoveries under representation and warranty claims and the receipt of yield maintenance payments. Taking account of all these variables, and the release of a portion of the allowance for losses in fourth quarter 2004, we anticipate core earnings for 2005 will be somewhat below the level achieved in 2004.

Net interest income was $8 million for fourth quarter 2004, compared to $8 million for third quarter 2004 and $9.1 million for fourth quarter 2003. The net interest yield was 88 basis points for fourth quarter 2004, compared to 84 basis points for third quarter 2004 and 91 basis points for fourth quarter 2003.

Guarantee and commitment fees were $5.2 million for fourth quarter 2004, compared to $5.3 million for third quarter 2004 and $5.4 million for fourth quarter 2003. Miscellaneous income for fourth quarter 2004 was $1.1 million, compared to $700,000 for third quarter 2004 and $100,000 for fourth quarter 2003. Of the $1.1 million of miscellaneous income in fourth quarter 2004, $1 million represented a recovery from a seller who breached the representations and warranties associated with the prior sale of agricultural mortgages to Farmer Mac. Farmer Mac has previously charged off that amount as losses on the related loans.

Compensation and employee benefits for fourth quarter 2004 were $1.8 million, compared to $1.7 million for third quarter 2004 and $1.6 million for fourth quarter 2003. General and administrative expenses for fourth quarter 2004 were $2.9 million, compared to $2 million for third quarter 2004 and $2.1 million for fourth quarter 2003. The 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 FCA, as well as heightened focus on the regulatory environment for GSEs in general.

Farmer Mac's core capital totaled $237.7 million as of December 31, 2004, compared to $233.6 million as of December--pardon me, as of September 30, 2004, and $215.5 million as of December 31, 2003. Farmer Mac's core capital as of December 31, 2004 exceeded the statutory minimum capital requirement of $128.9 million by $108.8 million. Farmer Mac is required to meet the capital standards of a risk-based capital stress test promulgated by the FCA pursuant to federal statute. As of December 31, 2004, that test generated an estimated risk-based capital requirement of $34.7 million, compared to the risk-based capital requirement of $43.5 million as of September 30, 2004 and $38.8 million as of December 31, 2003.

Farmer Mac's regulatory capital of $254.8 million as of December 31, 2004 exceeded the RBC requirement by approximately $220.1 million. Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the amount required by the risk-based capital test. During fourth quarter 2004, Farmer Mac repurchased 228,297 shares of its Class C Non-Voting Common Stock, at an average price of $21.10 per share, pursuant to the Corporation's previously announced stock repurchase program. These repurchases reduced the Corporation's capital by approximately $4.8 million.

As of December 31, 2004, Farmer Mac's 90-day delinquencies totaled $25.3 million, representing 0.55 percent of the principal balance of all loans held and loans underlying post-'96 Act, Farmer Mac I Guaranteed Securities and standbys, compared to $30.1 million - 0.60 percent - as of December 31, 2003.

As of December 31, 2004, non-performing assets totaled $50.6 million, representing 1.09 percent of the principal balance of all loans held and loans underlying post-'96 Act, Farmer Mac I Guaranteed Securities and standbys, compared to $70 million, which was 1.39 percent as of December 31, 2003.

As of December 31, 2004, Farmer Mac had $3.8 million of real estate owned, compared to $7.3 million as of September 30, 2004, and $15.5 million as of December 31, 2003. During fourth quarter 2004, Farmer Mac charged off $100,000 of losses against the allowance for losses, compared to a charge off of $1.1 million in third quarter 2004, and $1.9 million in fourth quarter 2003. During fourth quarter 2004, Farmer Mac received $1 million from a seller for breach of representations and warranties associated with the prior sale of agricultural mortgage loans to Farmer Mac. This recovery is recorded as miscellaneous income on the Consolidated Statements of Operation. Farmer Mac had previously charged off this amount as losses on the related loans.

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 adequately covered by its allowance for losses. Farmer Mac measures its interest rate risk through several tests, including the sensitivity of its market value of equity and net interest income to uniform or parallel yield curve shocks. As of December 31, 2004, a parallel increase of 100 basis points across the entire U.S. Treasury yield curve would have increased MVE by 1.2 percent, while a parallel decrease of 100 basis points would have had a negligible effect on MVE. As of December 31, 2004, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter-term measure for interest rate risk, by 9.2 percent, while a parallel decrease of 100 basis points would have increased--decreased NII by 7.7 percent. Farmer Mac's duration gap, another measure of interest rate risk, was plus .4 months as of December 31, 2004.

Farmer Mac uses financial derivatives for hedging purposes, not for speculative purposes. All of Farmer Mac's financial derivative transactions are conducted through standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparties. As of December 31, 2004, Farmer Mac has no uncollateralized net exposure to any counterparty. Farmer Mac accounts for its financial derivative under FAS 133. During fourth quarter 2004, the decrease in net after-tax income resulting from FAS 133 was $100,000 and the net after-tax increase in accumulated other comprehensive income was $7.1 million.

Regulatory actions continued to affect Farmer Mac's business outlook. FCA is the federal regulator of both Farmer Mac and the primary lenders in the Farm Credit System. During second quarter 2004, FCA published a proposed regulation related to Farmer Mac's investments and liquidity. Farmer Mac expects to be able to comply with the regulation if it is adopted in its current form though our analysis indicates that it could limit future increases in Farmer Mac's non-program investment portfolio and the related net interest income. The Corporation disagrees with certain aspects of the proposed regulation and submitted comments on the proposal to FCA accordingly.

During third quarter 2004, FCA published a proposed 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 Farm Credit institutions, a major segment of Farmer Mac's customer base. That proposed regulation would have an effective date 18 months after the final regulation is published. As set forth in prior disclosures, Farmer Mac disagrees with the proposed regulation as it would affect the Corporation, and has submitted a comment letter to FCA setting forth its position.

That concludes my formal remarks and I'd like to now open the meeting for questions.

Thank you, sir. (Caller Instructions.) Our first question will be coming from Erik Wautheston of UBS.

Hi. Good morning.

Good morning.

Henry, you've indicated in your remarks that you think that the growth outlook for 25--oh, I'm sorry, for 2005--still is one in which you can identify some opportunities. Can you maybe provide some color on where you think those opportunities are going to come from, whether it's in the portfolio business or the standby business? And what economic circumstances, whether it's the interest rate environment or something else, that will compel growth that we haven't seen last year?

Sure. I think that you put your finger on it. The shift in the yield curve and the general increases in rates in the interest rate environment should increase the amount of long-term refinancing in agricultural mortgages. And that, in turn, should create business opportunities for us two ways. First, lenders who cannot match funds at the longer maturity would have an opportunity to do so. They would have an opportunity to make such loans if they were to use Farmer Mac. So we see some potential there. We also believe that increased volume overall among lenders that have capital constraints would prompt business with Farmer Mac for capital relief. We think that, right now, the strategy for us is to continue to explore portfolio opportunities with our existing clients who have done transactions with us of that nature in the past. And also, to explore relationships with new lenders, which we are doing.

We are also increasing our focus on a segment of the market, which is agribusiness that has shown some greater receptivity to Farmer Mac's securitization and guarantees recently. And Farmer Mac continues to adjust its product line to reflect the changes in the interest rate environment.

Looking at the market this year, it's difficult to predict the timing of interest rate shifts and the immediate effect on Farmer Mac. Also, I think that the regulatory environment is an important factor. We believe that the Farm Credit System has slowed its growth probably because of past limitations on its ability to do syndications. And to the extent that those opportunities were permitted under the regulatory regime, it would also increase Farmer Mac's business potential.

Mr. Stenson, do you have anything to--our Vice President of Ag Finance--do you have anything to add to that?

Perhaps just briefly, Henry. In the form of agribusiness loans, which we define as value-added, so those growers who seek greater returns do a further bit of storage or processing or marketing of the product. And that--we have seen increased demand for our services in that arena. So that's the only thing I would add, Henry.

Thank you, Tom. Next question, please?

(Caller Instructions.) We have another follow-up question coming from Erik Wautheston of UBS.

And in terms of--Henry, you indicated in your remarks that you've written comment letters on the proposed FCA regulations. But is there--do you have other forms of recourse with regard to those proposed regulations, or how does that work?

There are always other legal forms of recourse. But as a general proposition, we think that the FCA is a reasonable regulator and we wouldn't have to resort to those.

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

Hi, Henry.

Good morning. How are you today?

Fine, thanks. Henry, can you make any comment about the--actually going forward with getting the credit rating?

Well, I think that the best comment is what we put in our 10-Q, which is that while Farmer Mac intends--by the way, that was our last 10-Q. While Farmer Mac intends to obtain a rating, we believe that it would be prudent to wait to pursue the rating until after FCA has concluded its consideration of the two proposed FCA regs that are now pending. So I think we still are in that position.

Okay. Thank you.

Thank you.

Sir, there are no more questions in the queue at this time.

Thank you all very much for joining us this morning, and we look forward to talking to you again on our next release. Thank you.

Thank you, ladies and gentlemen, for your participation in today's teleconference. You may disconnect your lines at this time. And have a wonderful day.