Federal Agricultural Mortgage Corp (AGM) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Federal Agriculture Mortgage Corporation fourth-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 Agriculture Mortgage Corporation. Thank you, sir. You may begin.

Thank you. Good morning and welcome to Farmer Mac's fourth-quarter and calendar year 2005 earnings conference call.

Before we start, 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 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 annual report on Form 10-K for the year ended December 31, 2005, which was also filed with the SEC yesterday. 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.

A recording of this call will be available on Farmer Mac's Web site approximately two hours after the conclusion.

Farmer Mac yesterday reported U.S. GAAP net income for the year ended 2005 and fourth quarter 2005. For the year ended December 31, 2005, GAAP net income was $27.3 million or $2.37 per diluted share, compared to $28.2 million or 2.32 per diluted share for the year ended December 31, 2004. For fourth quarter 2005, GAAP net income was $6.5 million or $0.57 per diluted share, compared to $7.6 million or $0.67 per diluted share for third quarter 2005 and 9.8 million or $0.82 per diluted share for fourth quarter 2004.

For the year ended December 31, 2005, core earnings were $28.7 million or $2.50 per diluted share, compared to 27.4 million or 2.25 per diluted share for the year ended December 31, 2004. Core earnings were $7.2 million or $0.63 per diluted share for fourth quarter 2005, compared to $9.3 million or $0.82 per diluted share for third quarter 2005 and $9.9 million or $0.82 per diluted share for fourth quarter 2004.

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.

Farmer Mac's strategic diversification of its marketing focus is beginning to produce tangible results. For fourth quarter 2005, new business volume was $330.5 million, which accounted for 43% of the year's $771.7 million of new volume and was nearly three times the 117.4 million of new volume in the corresponding quarter of 2004.

In January 2006, business volume continued to improve, as Farmer Mac, in an advantage transaction, issued its guarantee of $5 million of five-year mortgage-backed notes. The increases in business volume in the fourth quarter 2005 and January 2006 were attributable principally to Farmer Mac's diversification of 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 risk and administrative costs, resulting in marginal returns on equity equal to or better than the current net return on equity.

Notwithstanding those indications of recovering business volume, Farmer Mac's new business continues to be constrained by market and regulatory factors mentioned in earlier announcements and disclosures. Looking forward, Farmer Mac will continue to focus on the long-term growth of the business and the development of innovative ways to serve the financing needs of rural America and remains confident of opportunities for growth and increased business volume.

The portfolio of loans underlying Farmer Mac's guarantees and standbys continues to perform well, with 90-day delinquencies in Farmer Mac's portfolio remaining at low levels in terms of both dollars and percentages. This underscores both the effectiveness of Farmer Mac's ongoing credit risk management and the strength of the U.S. agricultural economy. Accordingly, Farmer Mac determined that the appropriate level of allowance for losses, as of December 31, 2005, was $8.7 million, reflecting the overall credit quality of its portfolio and the recent upward trends in agricultural land values. This resulted in the release of approximately $2.2 million from the allowance for losses in fourth quarter 2005, benefiting earnings by $0.13 per share.

By way of comparison, Farmer Mac released $5.6 million from the allowance for losses in third quarter 2005 and $5.3 million in fourth quarter 2004. Earnings per share benefited from those releases by $0.32 and $0.29, respectively.

More complete information on Farmer Mac's performance for the quarter and year ended December 31, 2005 is set forth in the Form 10-K Farmer Mac filed yesterday with the SEC.

Net interest income was $9.4 million for the quarter -- fourth quarter of '05, compared to $7.9 million for third quarter 2005 and $8 million for fourth quarter 2004. The net interest yield was 91 basis points for fourth quarter 2005, compared to 79 basis points for third quarter 2005 and 88 basis points for fourth quarter 2004. Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac guaranteed securities and standby commitments were $4.9 million for fourth quarter 2005, compared to $4.8 million for third quarter 2005 and $5.2 million for fourth quarter 2004.

Farmer Mac's core capital totaled $244.8 million as of December 31, 2005 compared to $240.2 million as of September 30, 2005 and 237.7 million as of December 31, 2004. Farmer Mac's core capital, as of December 31, 2005, exceeded the statutory minimum capital of requirement of $142.4 million by 102.4 million. Farmer Mac is required to meet the capital standards of the risk-based capital stress test promulgated by the FCA pursuant to federal statute. As of December 31, 2005, the RBC test generated an estimated risk-based capital requirement of $32.4 million, compared to the risk-based capital requirement of $45.6 million as of September 30, 2005 and $37.1 million as of December 31, 2004. Farmer Mac's regulatory capital of $253.4 million as of December 31, 2005 exceeded the RBC requirement by approximately $221 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.

In the November 17, 2005 issue of the Federal Register, FCA published for public comment a proposed rule that would revise certain FCA regulations governing the risk-based capital test applicable to Farmer Mac. The public comment period for that proposed rule will close April 17, 2006. 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.

During fourth quarter 2005, Farmer Mac repurchased 43,950 shares of its Class C nonvoting common stock at an average price of $27.97 per share, pursuant to the Corporation's previously announced stock repurchase program. These repurchases reduced the Corporation's capital by approximately $1.2 million. During the year ended December 31, 2005, Farmer Mac repurchased 800,202 shares of its Class C nonvoting common stock at an average price of $21.10 per share, reducing the Corporation's capital by approximately $16.9 million. These repurchases and additional repurchases of 299,248 shares during 2004, increased diluted earnings per share for 2005 and 2004 of all classes of Farmer Mac's common stock by $0.21 and $0.02, respective.

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, 2005, the parallel increase of 100 basis points across the entire U.S. Treasury yield curve would have decreased MVE by 1.4%, while a parallel decrease of 100 basis points would have no material impact on MVE. As of December 31, 2005, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter-term measure of interest rate risk, by 4.7%, while a parallel decrease of 100 basis points would have decreased NII by 4.7%.

Farmer Mac's duration gap, another measure of interest rate risk, was 1/2 months as of December 31, 2005.

I would like, at this point, to correct a statement that I made earlier. In January of 2006, Farmer Mac's business volume continued to improve as Farmer Mac, in an advantage transaction, issued its guarantee of 500, not 5 million, but 500 million of five-year mortgage-backed notes.

At this point, I would like to conclude my formal remarks and open the call to questions.

(OPERATOR INSTRUCTIONS). Mark Mulholland, Matthew 25 Fund.

Henry? Before my question, I wanted to thank you for the sizable stock buyback. But I have a question. On the reserve for loan loss or default, you had reduced that figure I think (indiscernible) just trying to get sort of like down to 8.2 or 8.8 million. Is that correct?

Yes.

Is that some -- to me, it would seem like it would be more conservative, even if you are over-reserved, just to leave it alone. But is that something you are required to do, or is it?

We follow FAS 5 and based on FAS 5, we made that decision. We don't make these decisions on some sort of a big-picture estimate but rather on careful and thoughtful application of the accounting rules, which would not permit us to make the kinds of judgments that you are suggesting, as appropriate as they may seem in some ways.

(OPERATOR INSTRUCTIONS). Sir, I have no questions in queue. Mr. Mark Mulholland, Matthew 25 Fund, has another question.

Thanks, guys. If I'm reading it right, at the end of the year between like loans, guarantees, LTSPCs, you had -- for the year actually, we went down like roughly like 200 million. Is that correct?

Yes.

But is it safe to add in that 500 million? I mean, obviously, I don't know what kind of run-offs or prepayments you have, but that would actually -- if you include January's $500 million, that would actually bring you higher than we were at 12-31-04?

Yes. When you include the January of volume, that's correct. It would be approximately 5.8 million -- billion, as we've put that number in our press release, in connection with the transaction in January.

Is it 5.8 or 4.8?

It is 5.8 billion with that.

Sir, I have no further questions in queue.

All right. Well, thank you all very much for joining us this morning. We appreciate your interest in Farmer Mac and we look forward to our next call, which will be our first quarter '06 call in May. Thank you very much.

This concludes today's conference. Thank you for your participation.