Federal Agricultural Mortgage Corp (AGM) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation's third quarter 2006 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 Corporation. Thank you Mr. Edelman, you may begin.

Thank you and good morning. Welcome to Farmer Mac's third quarter 2006 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 to differ materially from the expectations as expressed or implied by forward-looking statements made today. Some of these factors are identified and discussed in Farmer Mac's quarterly report on form 10-Q for the third quarter 2006 and in Farmer Mac's annual report on amended form 10-K for 2005 both of which were filed yesterday afternoon with the SEC. 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 law.

Yesterday, Farmer Mac reported both its restatement of financial results and its results for third quarter 2006. The corporation filed an amended form 10-K for 2005 with the SEC, an amended form 10-Q for first and second quarters 2006, correcting Farmer Mac accounting for financial derivatives under FAS 133. At the same time, the corporation filed its form 10-Q for third quarter 2006.

In third quarter 2006, Farmer Mac achieved $1.3 billion of new business, bringing its total outstanding volume to $7.1 billion. Our record quarterly volume and cumulative outstanding, the latter at 33% increase during the last nine months, were attributable principally to new marketing strategies first announced last November. Those strategies have resulted in large program transactions that emphasize high asset quality. These volume achievements also serve as important measures of the increased liquidity and lend capacity Farmer Mac is providing to the agricultural mortgage lenders who extend credit to rural America. In a broader sense, these achievements confirmed our confidence in Farmer Mac's ability to develop and execute new strategies for effective use of its statutory authority and in it's opportunity for increased business volume and income growth.

For third quarter Farmer Mac reported $6.3 million of GAAP net loss, the result of FAS 133 accounting losses on financial derivatives. This was in contrast to Farmer Mac's restated results for first and second quarters 2006 in which substantial gains on financial derivatives brought GAAP net income to $15.1 million and $13.4 million respectively. Thus, for the first nine months of 2006 GAAP net income was $22.2 million.

Farmer Mac announced yesterday the timely completion of its previously reported financial restatements. The restatement of the corporation's financial results eliminated hedge accounting for financial derivatives used to hedge interest rate risk. Farmer Mac's financial derivatives transactions have created effective economic hedges for the related assets and liabilities although FAS 133 accounting does not reflect the total economics of thus transactions.

Consequently, despite the volatility in GAAP earnings caused by accounting for financial derivatives, the restatement had no effect on core earnings or cash flows and an insignificant effect on Farmer Mac's financial position. Specifically, as of June 30, 2006 the net effect of the restatement on stockholders' equity was a decrease of $3.5 million resulting for the mark to mark on our financial derivatives that will be recovered as those derivatives mature. In addition, the restatement resulted in GAAP net income of $47 million of $4.09 per diluted share for 2005 compared to the previously reported $27.3 million or $2.37 per diluted share. Now that we've concluded the restatement process, we are confident there is no effect on Farmer Mac's business model or its ability to carry out its business development plan.

Turning to a non-GAAP performance measure, Farmer Mac reports its financial results in accordance with GAAP. In addition to GAAP measures Farmer Mac presents core earnings, a non-GAAP performance measure. Core earnings are net income available to common stockholders plus the after tax effect of unrealized gains and losses on financial derivatives resulting from the application of FAS 133. The GAAP measure most comparable to core earnings, net income available to common stockholders. Unlike core earnings, however, GAAP net income is made more volatile by unrealized gains or losses in the value of financial derivatives used to hedge Farmer Mac interest rates. Therefore, Farmer Mac uses core earnings to develop financial planning, to measure corporate economic performance, and to set incentive compensations because in management's view, core earnings better represents Farmer Mac economic performance and business trends. Investors and the investment analyst community have previously relied upon similar measures to evaluate the historical and projected future performance of Farmer Mac and comparable companies. Farmer Mac disclosure of this non-GAAP measure is not intended to replace GAAP information but rather to supplement it.

Core earnings were $6.5 million or $0.58 per diluted share for third quarter 2006 compared to $6.3 million or $0.56 per diluted share for second quarter 2006 and $9.3 million or $0.82 per diluted share for third quarter 2005. For the first nine months of 2006, core earnings were $19 million or $1.69 per diluted share compared to $21.5 million or $1.87 per diluted share for the corresponding period in the prior year. As stated previously, Farmer Mac's core earnings were unaffected by the restatement of its historical financial results and reflects the growth in Farmer Mac's business. In comparing 2006 core earnings to 2005 core earnings, for the three and nine months ended September 30, 2005, core earnings included the after-tax benefit of the change in accounting estimate related to the allowance for losses of $3.1 million. .Also, for the three and nine months ended September 30, 2006, core earnings included the after tax expense for stock options of $500,000 and $1.1 million respectively in accordance with FAS 123R.

Turning next to stock repurchases during third quarter 2006, Farmer Mac repurchased 384,900 shares of its Class C non-voting common stock at an average price of $26.98 per share – to the corporation's previously announced stock repurchase program. These repurchases reduce the corporation's capital by approximately $10.4 million. On net interest yield for the first nine months of 2006, Farmer Mac's effective net interest yield was 64 basis point compared to 65 basis points for the first nine months of 2005. Interest rate risk, Farmer Mac measures this through several tests including the sensitivity of its market value of equity and net interest income to uniform or parallel yield curve shock. As of September 30, 2006, a parallel increase of 100 basis points across the entire US Treasury yield curve will decrease MVE by 1.7% while a parallel decrease of 100 basis points would've increased MVE by 0.1%. As of September 30, 2006, a parallel increase of 100 basis points would've increased Farmer Mac's NII, a shorter term interest rate risk by 1.6% while a parallel decrease of 100 basis points would've decrease NII by 3.5%. Farmer Mac's duration gap, another measure of interest risk was plus 0.6 months as of September 30, 2006. All these measures confirm the effectiveness of Farmer Mac's use of financial derivatives to hedge its interest rate risk notwithstanding the volatility they add to GAAP net income. More complete information on the corporation's restatement of its financial results is set forth in the amended form 10-K and forms 10-Q Farmer Mac filed yesterday with the SEC. For complete information on the corporation's performance for the quarter ended September 30, 2006 is set forth in the form 10-Q Farmer Mac filed yesterday with the SEC.

Thank you. We'll now open the call to questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. To allow everyone the opportunity to ask a question, your time will be limited to one question. [OPERATOR INSTRUCTIONS] Our first question comes from Mark Mulholland with Matthew 25 Fund. Please state your question.

Hi, Henry. It's Mark Mulholland.

Good morning.

Good morning. Henry, on the increase in loan portfolio, which is great, I really – you're doing a great job there. But it's the – where will that start showing up on the income statement. Is that going to be – I notice most of it's off balance sheet. So will that be under guarantee fees or will that be - ?

It will be under guarantee fees, Mark.

Okay.

[OPERATOR INSTRUCTIONS] Our next question comes from Mark Mulholland with Matthew 25 Fund. Please state your question.

Hi, Henry. It's just a continuation of the first part there.

Sure.

The first, the quarter to third quarter it looks like it was a little bit above the first six months average on the guarantee fees. Is that just a timing – is that from when you booked these new loans or booked these new securities?

Yes. It is. As these things are booked, they don't initially issue – pardon me, initially generate guarantee fees but as payments come up on the mortgages, those guarantee fees are generated and it's a timing delay.

Thank you.

[OPERATOR INSTRUCTIONS] Mr. Edelman, I am not receiving any questions at this time.

Alright. Well, thank you all very much for attending the call this morning and we appreciate it, appreciate your continued interest in Farmer Mac and look forward to speaking with you again soon. Thank you. Goodbye.

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