Federal Agricultural Mortgage Corp (AGM) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Federal Agricultural Mortgage corporation first quarter 2007 earnings conference call. All participants are in a listen-only mode. A 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 for Federal Agricultural Mortgage Corporation. Thank you. Mr. Edelman, you may begin.

Thank you. Good morning, and welcome to Farmer Mac's first quarter 2007 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 or events 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 and events are identified in our press release issued yesterday and discussed in Farmer Mac's quarterly report on Form 10-Q for the first quarter of 2007 and in Farmer Mac's annual report on Form 10-K for 2006. The Form 10-Q and a Form 8-K containing the press release were filed yesterday afternoon with the SEC. The Form 10-K was filed with the SEC on March 15th, 2007. 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 any 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 website approximately 2 hours after the conclusion of the call.

Farmer Mac yesterday reported strong first quarter results which, with the addition of business completed in April 2007, brought outstanding business volume to a record $8.3 billion. This growth was achieved with a portfolio of loans underlying its guarantees and standbys that continues to perform well, with delinquencies remaining at low levels in terms of both dollars and percentages. Farmer Mac's U.S. GAAP net income for first quarter 2007 was $3.9 million or $0.37 per diluted share compared to $15.1 million or $1.32 per diluted share for the first quarter 2006. 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, plus the after tax effect of unrealized gains and losses on financial derivatives resulting from the application of the derivative accounting standards. Farmer Mac's core earnings were $6.2 million or $0.58 per diluted share for the first quarter 2007, compared to $6.2 million or $0.54 per diluted share for first quarter 2006.

Our first quarter new volume resulted in a 31% year-over-year increase in the Farmer Mac guarantee portfolio. Then, we added $1.1 billion additional dollars during the month of April, bringing Farmer Mac's guarantees and commitments outstanding to a new high of $8.3 billion. That performance reflects liquidity and lending capacity Farmer Mac is providing to agricultural lenders, who make mortgage loans throughout rural America, and is indicative of the effectiveness of our business model and recent strategies. Those strategies achieved greater protection for Farmer Mac against adverse credit performance with commensurately lower compensation for the assumption of credit risks and administrative costs, resulting in projected risk adjusted marginal returns on equity approximately equal to those of other Farmer Mac program transactions.

Turning to interest income, net interest income was $9.1 million for first quarter 2007, compared to $8.4 million for fourth quarter 2006 and $10.7 million for first quarter 2006. Farmer Mac's net interest yield, adjusted for the effect of FAS 133, was 72 basis points -- that was $8.9 million for first quarter 2007 -- compared to 81 basis points -- that was $8.7 million for first quarter 2006. Farmer Mac's effective duration gap was at a positive 0.7 months as of March 31st, 2007, unchanged from December 31st, 2006. Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac guaranteed securities and standby commitments, were $5.9 million for first quarter 2007, compared to $5.9 million for fourth quarter 2006 and $5.1 million for first quarter 2006. Farmer Mac's core capital totaled $237.9 million as of March 31st, 2007, compared to $243.5 million as of December 31st, 2006 and $244.9 million as of March 31st, 2006. Farmer Mac's core capital as of March 31st, 2007 exceeded the statutory minimum capital requirement of $184.6 million by $53.3 million.

Farmer Mac is required to meet the capital standards of a risk-based capital stress test promulgated by FCA pursuant to federal statute. As of March 31st, 2007, the risk-based capital test generated an estimated risk-based capital requirement of $80.8 million, compared to the risk-based capital requirement of $42.9 million as of December 31st, 2006 and $29.6 million as of March 31st, 2006. Farmer Mac's regulatory capital of $241.8 million as of March 31st, 2007 exceeded the RBC requirement by approximately $161 million. Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or at the amount required by the RBC test. The increase in the risk-based capital requirement from December 31st, 2006 to March 31st, 2007 was primarily attributable to changes in the risk-based capital stress test by which the regulatory capital requirement is calculated. The stress test changes were adopted in a final rule published by FCA in the Federal Register on December 26th, 2006. That rule became effective as of March 31st, 2007. Had the new risk-based capital stress test been in effect on December 31st, 2006, the regulatory capital requirement would have been $89.6 million at that time.

During first quarter 2007, Farmer Mac repurchased 360,482 shares of its Class C non-voting common stock at average price of $26.24 per share, pursuant to the corporation's previously announced stock repurchase program. These repurchases reduced the corporation's stockholders' equity by approximately $9.5 million. 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 shock. As of March 31st, 2007, parallel increase of 100 basis points across the entire U.S. Treasury yield curve would have decreased MVE by 2%, while a parallel decrease of 100 basis points would have no material effect on MVE. As of March 31st, 2007, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter term measure of interest rate risk, by 1.1%, while a parallel decrease of 100 basis points would have decreased NII by 1.9%. More complete information on Farmer Mac's performance for the quarter ended March 31st, 2007, is set forth in the Form 10-Q Farmer Mac filed yesterday with the SEC. That concludes my formal remarks, and we will now open the call to questions. Thank you.

(OPERATOR INSTRUCTIONS) Our first question is coming from Mark Mulholland with Matthew 25 Fund. Please state your question.

Hi, Henry. It's Mark.

Morning, how are you today?

Fine, thank you. Nice job, by the way on the loan increase. But I had a question on -- I looked at for year-over-year it looks like if you look at the Farmer Mac guaranteed loans and securities and the standby credits, you're up like 31%. But the earnings are kind of flat. Is there -- at some point if you can just tell me your strategy that'll eventually show up in earnings, as well?

Remember, when we do new business, it does not immediately increase our earnings because there's a delayed effect. We put business on the books and it does not begin to generate earnings immediately. They come somewhat in arrears, and over time they accumulate. Different volumes increases earnings by different amounts depending on a number of factors, including how much of the income comes in as effective return on equity, how much of it comes in as compensation for the assumption of interest rate risk and might be offset by other factors. And also administrative costs. So we look at that and also at the fact that as volume runs off, it could have higher or lower rates associated with it. And so our earnings are really a constant blend of different margins and different risks within the band of acceptable margins and risks that we look at as we do new business.

Along those lines -- not worried about -- I figured we had a solid year with some of these loans, but still earnings are flat. And I know interest rate, you earn a lot less on the asset -- the liability and the interest side. But I'm just trying to understand, do you feel like this increase in loan volume will eventually show up in earnings?

Yes.

Okay. Thank you.

Thank you, Mark. Next question, please?

We have a follow-up question coming from Mark Mulholland with Matthew 25 Fund.

The second one, Henry, (inaudible) it actually ties into that interest rate part. I was looking on -- I think it's on page 29, the cost of funding went up about -- it looked like it was about 4.9% on the liability side from 4.25. Does that show that you guys are still affected by the flat yield curve?

I'll let Nancy Corsiglia, our CFO, address that one.

Thanks, Nancy.

Sure, well, in general (inaudible). And to the extent the yield curve is inverted and we have short-term funding to see that increase. The lower end of the curve is relatively flat, but you have a slight inversion, so you have some increase into the short-term rate.

Well, I guess that's why I was trying to make sure, hopefully for everyone to see is that -- an improvement in the yield curve like the short-term rates now, long-term going up -- that will, I assume that will benefit the bottom line?

Well, keep in mind we try to maintain a fairly matched book. So while interest expense on the short end went up, interest income also went up on the short end.

Okay. But if you look on that page 29, the notes payable due within one year, that's where you're going to have the most change. That's almost half on the liability side. Is that correct?

That's right. And the vast majority of our investment assets are short-term (inaudible).

Okay. All right. Thanks, guys.

Do we have any more questions?

At this time, there are no further questions.

All right. Well, thank you all very much. We appreciate your attendance on the call. And we look forward to speaking with you again in a few months. Thank you.

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