Federal Agricultural Mortgage Corp (AGM) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation's third quarter 2005 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 Federal Agricultural Mortgage Corp. Thank you, sir, you may now begin.

Thank you. Good morning and welcome to Farmer Mac's third quarter 2005 earnings conference call. Before starting, I'd like to comment on forward-looking statements that may be made today.

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 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 and discussed in Farmer Mac's quarterly report on Form 10-Q for third quarter 2005, which was filed yesterday afternoon with the SEC, and in Farmer Mac's annual report on Form 10-K for the year ended December 31, 2004, which was filed with the SEC on March 16, 2005.

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.

Farmer Mac yesterday reported U.S. GAAP net income for third quarter 2005, of $7.6 million, or $0.67 per diluted share, compared to $8.2 million, or $0.72 per diluted share for second quarter 2005, and $8.6 million, or $0.70 per diluted share for third quarter 2004.

For the 9-months ended September 30, 2005, net income was $20.8 million, or $1.08 per diluted share, compared to $18.4 million, or $1.50 per diluted share for the 9-months ended September 30, 2004.

Core earnings were $9.3 million, or $0.82 per diluted share for third quarter 2005, compared to $6 million, or $0.52 per diluted share for second quarter 2005, and $5.4 million, or $0.44 per diluted share for third quarter 2004.

For the 9-months ended September 30, 2005, core earnings of $21.5 million, or $1.87 per diluted share, compared to $17.5 million or $1.43 per diluted share for the corresponding period of 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.

For complete information on Farmer Mac's performance for the quarter ended September 30, 2005, is set forth in the Form 10-Q, Farmer Mac filed yesterday with the SEC.

New business volume for third quarter 2005, was $183.8 million, up from $161.9 million in second quarter 2005, and $157.1 million in third quarter 2004.

Farmer Mac's new business with agricultural mortgage lenders continues to be slowed by high levels of available capital and liquidity of Ag lenders; alternative sources of funding and credit enhancement for Ag lenders; increased competition in the secondary market for agricultural mortgage loans; reduced growth rates in the agricultural mortgage market, due largely to the strong liquidity of many farmers and ranchers; and the lower rate of growth of the [for-credit] system mortgage portfolio are reducing their demand for standby.

Looking ahead, Farmer Mac is developing innovative ways to serve the financing needs of rural America and remains confident of opportunities for increased business volume and income growth, as a result of the Corporation's product development and customer service efforts.

In third quarter 2005, Farmer Mac agreed to purchase or issue standbys for loans secured by agricultural storage and processing facilities, aggregating approximately $32 million, primarily for ethanol processing facilities. As of September 30, 2005, approximately $7.4 million of those loans were not yet closed or dispersed by the lendor, so those events are expected to occur during fourth quarter 2005.

Farmer Mac entered into an alliance with the American Bankers Association, finalized October 31, 2005, under which Farmer Mac agreed to provide efficient access and improved prices to ABA member institutions and the ABA agreed to promote member participation in the Farmer Mac 1 Loan Purchase program.

Farmer Mac's satellite credit underwriting office in Ames, Iowa became fully functional. This office facilitates the use of Farmer Mac by Midwestern agricultural lenders and Farmer Mac's responsiveness to them.

Farmer Mac purchased $500 million of 3-year secured notes, issued by the National Rural Utilities Cooperative Finance Corporation, commonly known as CFC. The notes, which are mission related, non-program investments that comply perimeters established by Farmer Mac's regulated the Farm Credit Administration, FCA, are secured by mortgage indebted issued by CFC-member Rural Electric Distribution Cooperative, serving communities across rural America. The transaction provided CFC with a new source of equipment for its Rural Utility Cooperative members that serve rural communities and support agriculture in 47 States and advanced Farmer Mac's financial roll-in and commitment to rural America.

Farmer Mac has diversified its marketing focus to include large program transactions that emphasize high asset quality, with greater protection against adverse credit performance and commensurately lower compensation for the assumption of credit risks and administrative costs, resulting in marginal return on equity, equal to or better than the current net return on equity. Management expects those transactions to enhance Farmer Mac's mission accomplishment and net income.

Net interest income for the quarter was $7.9 million, compared to $8.1 million for second quarter 200, and $8 million for third quarter 2004. The net interest was 79 basis points for third quarter 2005, compared to 88 basis points for second quarter 2005, and 84 basis points for third quarter 2004.

Farmer Mac classifies the net interest income and expense realized on financial derivatives that are not in fair value or cash flow hedge relationships, as gains and losses on financial derivatives. This classification resulted in reductions of the net interest yield of 2 basis points, 4 basis points, and 5 basis points for second quarter 2005, second quarter 2004 and third quarter 2004 respectively.

The net interest yields for third quarter 2005, second quarter 2005, and third quarter 2004, included the benefits of yield maintenance payments of 3 basis points, 16 basis points, and 9 basis points respectively.

Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans. Because the timing and size of these payments vary greatly, variations should not be considered indicative of positive or negative trends to gauge future financial results.

For third quarter 2005, yield maintenance payments increased net income by $0.2 million, or $0.02 per diluted share, compared to $1 million, or $0.09 per diluted share for second quarter 2005, and $1.1 million, or $0.09 per diluted share the third quarter 2004.

Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risks on loans underlying Farmer Mac guaranteed securities and standbys, were $4.8 million for third quarter 2005, compared to $4.9 million for second quarter 2005, and 5.3 million for third quarter 2004.

Compensation and employee benefits for third quarter 2005, were $2.2 million, compared to 1.9 million for second quarter 2005, and 1.7 million for third quarter 2004. General and administrative expenses for third quarter 200,5 were $2.6 million, compared to 2.3 million for second quarter 2005, and 2 million for third quarter 2004.

Farmer Mac's core capital totaled $240.2 million as of September 30, 2005, compared to $238.2 million as of June 30, 2005, and $233.6 million as of September 30, 2004.

Farmer Mac's core capital as of September 30, 2005, exceeded the statutory minimum capital requirement of $139.1 million by $101.1 million. Farmer Mac is required to meet the capital standards of the risk-based capital stress tests promulgated by the FCA, so called the RBC tests, pursuant to federal statutes. As of September 30th, 2005, the RBC test generated an estimated risk-based capital requirement of $45.6 million, compared to the risk-based capital requirement of $49.6 million of June 30, 2005, and $43.5 million as of September 30, 2004.

Farmer Mac's regulatory capital of $251.1 million as of September 30, 2005, exceeded the RBC requirements by approximately $205.5 million. Farmer Mac is required to hold capital at the higher statutory minimum capital requirement or the amount required by the RBC test.

During third quarter 2005, Farmer Mac repurchased 191,810 shares of its Class C non-voting common stock, at an average price of $24.56 per share, pursuant to the Corporation's previously announced stock repurchase program. These repurchases reduced the Corporation's capital by approximately $4.7 million. During the 9-months ended September 30, 2005, Farmer Mac repurchased 756,252 shares of its Class C non-voting common stock at an average price of $20.70, which reduced the Corporation's capital by approximately $15.7 million.

Farmer Mac has repurchased the maximum number of shares authorized under the program, thereby terminating the program according to its terms. Farmer Mac's Board has authorized its Finance Committee to evaluate and at its discretion, implement a new program to repurchase additional shares of Class C non-voting common stock.

As of September 30, 2005, Farmer Mac's 90-day delinquencies totaled $40.6 million, representing .95% of the principal balance of all loans held and loans underlying, post Farm Credit System Reform Act, 1996 Act, Farmer Mac One guaranteed securities and standby, compared to $47.6 million, or 1.01% as of September 30, 2004.

As of September 30, 2005, non-performing assets totaled $64.2 million, representing 1.5% of the principal balance of all loans held and loans underlying post-'96 Act Farmer Mac One guaranteed securities and standby, compared to $75 million, or 1.58% as of September 30, 2004.

As of September 30th, 2005, Farmer Mac had $1.8 million of real estate owned, compared to $3.6 million as of June 30, 2005, and $7.3 million as of September 30, 2004.

During third quarter 2005, Farmer Mac completed the planned migration of its methodology for determining its allowance for loss away from one based on a loan pool simulation and guarantee fee model, to one based on its own historical portfolio losses during some credit trends. Farmer Mac reported the effect of that change as a change in accounting estimates as of September 30, 2005.

Farmer Mac's new methodology for determining its allowance for losses incorporates the Corporation's proprietary automated loans classification system. That system scores loans on the basis of criteria such as historical repayment performance, loan fees, loan size and loan-to-value ratio.

For the purposes of the loss allowance methodology, the loan in the Farmer Mac portfolio of loans had loans underlying post-'96 Act Farmer Mac one guaranteed securities and standbys have been scored and classified for each calendar quarter since first quarter 2000. The new allowance methodology captures the migration of loan scores across concurrent and overlapping 3-year time [horizons]. Lost rates are calculated separately within each loan classification for loans underlying standbys as well as loans underlying post-1996 Act Farmer Mac One Guaranteed Securities.

The calculated loss rates are applied to the current classification distribution of Farmer Mac's portfolio to estimate inherent losses on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future.

Farmer Mac determined that the appropriate level of allowance for losses, as of September 30, 2005, was $10.9 million. This resulted in the release of approximately $5.6 million from the allowance for losses in the third quarter 2005. Of the $5.6 million of the allowance released in the third quarter 2005, $4.8 million was related to a change in accounting estimates.

As of September 30, 2005, the allowance for losses was $10.9 million and 25 basis points, relative to the outstanding Farmer Mac One portfolio, compared to $16.1 million and 37 basis points, as of June 30, 2005, and $22.5 million and 47 basis points as of September 30, 2004.

During third quarter 2005, Farmer Mac charged off $105,000 of losses against the allowance for losses, and has $554,000 in recoveries. The net recoveries is $449,000.

During third quarter 2004, Farmer Mac charged off $1.1 million in losses against the allowance for losses and had $128,000 of recovery, for net charge-offs of $1 million.

Farmer Mac measures its interest rate risks through several tests, including the sensitivity of its market value of equity and net interest income, to uniform or parallel yield curve [shots]. As of September 30, 2005, a parallel increase of 100 basis points across the entire US Treasury yield curve would have decreased MVE by 2.7%, while a parallel decrease of 100 basis points would have increased MVE by 0.9%.

As of September 30, 2005, parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter-term measure of interest rate risk, by 1.4%, while a parallel decrease of 100 basis points would have decreased NII by 0.4%. Farmer Mac's duration gap, another measure of interest rate risk, was plus-1.3 months as of September 30, 2005.

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 counter party. As of June 30, 2005, Farmer Mac had no un-collateralized net exposure to any counter parties.

On September 30, 2005, the final regulations relating to Farmer Mac's investments and liquidity became effective. [The] FCA included several of the revisions to the proposed regulations suggested by Farmer Mac and comments to the proposal and Farmer Mac expects to be able to comply with the regulations in accordance with the timeframes established in the regulations. Farmer Mac is required to comply with the liquidity provisions of the regulations by September 30, 2007.

At its October 13, 2005, meeting, the FCA Board approved a proposed rule that would revise certain FCA regulations governing the risk-based capital applicable to Farmer Mac. FCA announced its proposed rule will be published in the Federal Register for a 90-day comment period. As of November 9th, that publication had not occurred.

FCA's announcement of the proposed rule stated that it is designed to update Farmer Mac's risk-based capital strength test to reflect the evolution of the Corporation's loan portfolio and the practices of other leading financial institutions. The FCA Board is currently scheduled to consider a final rule for the Farmer Mac risk-based capital stress test in September 2006.

Farmer Mac has not completed its analysis of the proposed rule, but believes that the proposal, if adopted in its proposed form and under current economic conditions and the state of the Corporation's portfolio, would increase the Corporation's risk-based capital requirements from the current level to a higher level that would be close to the statutory minimum capital requirements.

In that regard, FCA has estimated that had the proposed rule been effective at the time, the risk-based capital requirement as of June 30, 2005, would have been $123.5 million, compared to the $49.6 million risk-based capital requirement under the current risk-based capital stress test.

As of that date, Farmer Mac's regulatory capital was $254.3 million. As part of the formal rule-making process, Farmer Mac will provide written comments on the proposed regulation to FCA within the public comment period.

Thank you. That concludes my formal remarks and I'd like to open up for questions now.

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[OPERATOR INSTRUCTIONS]

If there are no questions, we thank you all for listening in this morning and look forward to speaking with you again in January. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.