Federal Agricultural Mortgage Corp (AGM) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Federal Agriculture Mortgage Corporation second-quarter 2007 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 CEO for Federal Agriculture Mortgage Corporation. Thank you. Mr. Edelman, you may now begin.

Good morning and welcome to Farmer Mac's second-quarter 2007 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 development. Management's expectations for the Corporation's future necessarily involve a number of assumptions and estimates and the evaluation of risk and uncertainty. 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 second quarter 2007 and in Farmer Mac's annual report on Form 10-K for 2006. A Form 8-K, containing the press releases and the Form 10-Q were filed yesterday afternoon with the SEC. The Form 10-K was filed with the SEC on March 15, 2007.

Any forward-looking statements made by Farmer Mac during this call represents 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 of this call.

With that, let me turn to the substance of the call. Farmer Mac yesterday reported strong new business volume in the second quarter of 2007, bringing its outstanding program volume to a record $8.4 billion. Farmer Mac guaranteed portfolio, consisting of guarantees, loans and commitments, is performing well with delinquencies at historic lows in terms of both dollars and percentages.

Farmer Mac's U.S. GAAP net income available to common stockholders for second quarter 2007 was $18.4 million, or $1.74 per diluted share, compared to $13.4 million or $1.18 per diluted share for second quarter 2006.

For the first half 2007, net income available to common stockholders was $22.3 million, or $2.10 per diluted share, compared to $28.5 million or $2.50 per diluted share for the corresponding period in the prior year.

Farmer Mac reports is 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 standard. Farmer Mac's core earnings were $5.5 million or $0.53 per diluted share for second quarter 2007, compared to $6.3 million or $0.56 per diluted share for second quarter 2006. For the first half 2007, core earnings were $11.7 million or $1.10 per diluted share, compared to $12.5 million or $1.10 per diluted share for the corresponding period in the prior year.

We are pleased with the growth in Farmer Mac's guaranteed portfolio to a record $8.4 billion and confident of the high credit quality of the assets in the portfolio. The growth of the portfolio and our confidence in its performance derived from the success of business strategies we implemented in the fall of 2005 that emphasized large program transactions with high asset quality, providing greater protection for Farmer Mac against adverse credit performance with commensurately lower compensation for its assumption of credit risk and administrative cost. Farmer Mac's revenues increased as a result of those strategies with guarantee and commitment fees, a primary source of income, growing to $12.2 million for the six months ended June 30, 2007, compared to $10.3 million for the same period in 2006.

Looking at the trends in Farmer Mac's financial results in second quarter 2007, particularly the components of core earnings growth in guarantee and commitment fees, was achieved while noninterest expenses remained relatively flat. Farmer Mac guarantee and commitment fees and noninterest expense were major drivers of core earnings in second quarter of 2007 and are expected to continue as such. In contrast, Farmer Mac's core earnings in second quarter 2006 benefited from items that are not predictable sources of ongoing revenue, specifically representation and warranty claims, income, gains on the sale of REO, and significant recoveries from the allowance for losses.

Going forward, two recent governmental actions may affect Farmer Mac. On the legislative side, the House of Representatives, on July 27, 2007, passed its version of a 2007 farm bill that would expand Farmer Mac's charter authorize it to purchase and guarantee securities backed by rural utilities -- that is electric and telephone loans -- made by cooperative lenders, particularly the National Rural Utilities Cooperative Finance Corporation and institutions of the Farm Credit System. At this time, no assurance can be given that this legislation will be enacted into law nor, if enacted, that it will result in substantial additional business for Farmer Mac.

On the regulatory side, the Board of Farmer Mac's federal regulator (technical difficulty) the Farm Credit Administration, yesterday adopted proposed amendments to the risk-based capital regulations applicable to Farmer Mac that will be published in the Federal Register for public comment. Farmer Mac has not seen the proposed legislation. Based upon preliminary information from FCA, Farmer Mac understands that the proposed regulation have been in effect as a final rule on March 31, 2007. Farmer Mac's regulatory capital requirements as of that date would have been somewhat greater than the regulatory capital requirement under the existing rule but less than the statutory minimum capital requirement. Farmer Mac is required to comply with the higher of the statutory minimum and risk-based capital requirements.

Turning to net interest income, net interest income was $8.5 million for second quarter 2007, compared to $10.1 million for second quarter of 2006. For the six months ended June 30, 2007, net interest income was $17.6 million compared to $20.7 million for the corresponding periods in the prior year.

Farmer Mac's net interest yield, adjusted for the effect of FAS 133, "Derivative Accounting", was 70 basis points, $17.6 million, for the first half of 2007 compared to 83 basis points or $17.8 million for the corresponding period in 2006. Farmer Mac's effective duration gap was at +1.2 months as of June 30, 2007 compared to +0.7 month as of March 31, 2007.

Next, we will consider guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac guaranteed securities and standby commitments. These were $6.4 million for second quarter 2007, compared to $5.3 million for second quarter 2006. For the first half 2007, guarantee and commitment fees were $12.2 million compared to $10.3 million for the first half of 2006.

Farmer Mac's core capital totaled $258.4 million as of June 30, 2007, compared to $243.5 million as of December 31, 2006. Farmer Mac's core capital, as of June 30th, 2007, exceeded the statutory minimum requirement of $192.2 million by $66.2 million. As of June 30, 2007, Farmer Mac's regulatory capital of $262.3 million exceeded its risk-based capital requirement of $83.8 million by approximately $178.5 million. The increase in the risk-based capital requirement from $42.9 million as of December 31, 2006 to $83.8 million as of June 30, 2007 was attributable primarily to changes in the risk-based capital stress tests that were adopted in a final rule published by FCA in the Federal Register on December 26, 2006. That rule became effective as of March 31, 2007. Had the existing risk-based capital stress tests been in effect on December 31, 2006, the regulatory capital requirement would have been $89.6 million at that time.

During second quarter 2007, Farmer Mac repurchased 133,500 shares of its Class C non-voting common stock at an average price of $27.75 per share, pursuant to the Corporation's previously announced stock repurchase program. These repurchases reduced stockholders' equity by approximately $3.7 million.

Turning next to interest-rate risk, Farmer Mac measures that 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 June 30, 2007, a parallel increase of 100 basis points across the entire U.S. 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 June 30, 2007, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a shorter-term measure of interest rate risk, by 2.7%, while a parallel decrease of 100 basis points would have decreased NII by 4.3%. More complete information on Farmer Mac's performance for the quarter ended June 30, 2007 is set forth in the Form 10-Q Farmer Mac filed yesterday with the SEC.

This concludes my formal remarks, and we will now open the call to questions. Thank you.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). At this time, there are no questions. I would like to hand the floor back over to management for any closing comments.

Thank you all very much for your participation on the call this morning. We look forward to talking with you on our next earnings conference call. We appreciate your continuing interest in Farmer Mac. Thank you very much.

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