Federal Agricultural Mortgage Corp (AGM) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation Third Quarter 2007 Earnings Conference Call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Henry Edelman, President and CEO for Federal Agricultural Mortgage Corporation.

Thank you, Mr. Edelman. You may begin.

Thank you.

Good morning and welcome to Farmer Mac's third 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 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 today and discussed in Farmer Mac's quarter report on Form 10 Q for the third quarter 2007 and in Farmer Mac's annual report on Form 10-K for 2006. A Form 8-K containing the press release 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 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.

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

Farmer Mac reports financial results on a GAAP basis and also reports core earnings. The company uses core earnings to measure corporate economic performance and develop financial plans because, in management's view, core earnings more accurately represent Farmer Mac's economic performance, transaction economics and business trends before the effects of application of FAS 133. Investors and securities analysts have previously relied upon similar measures to evaluate Farmer Mac's historical and future performance.

Farmer Mac's core earnings for third quarter 2007 were $7.6 million or $0.71 per diluted share compared with $6.5 million or $0.58 per diluted share for third quarter 2006.

Focusing on that measure, in light of the volatility of the capital markets during the last quarter, we were extremely pleased with Farmer Mac's strong core earnings in third quarter 2007, up 18% in comparison to the third quarter 2006.

The major drivers of the increase in core earnings were significantly improved short-term funding costs as compared to the yields on related investments and the ongoing fee income from the corporation's guaranteed portfolio. Moreover, in contrast to third quarter 2007, Farmer Mac's core earnings in the same period of 2006 benefited from significant recoveries from the allowance for losses.

While it is not possible to predict how long Farmer Mac's short-term borrowing spreads will continue to be as favorable as they are now relative to investment yields, Farmer Mac's guaranteed fee income is expected to continue to grow as business volume increases.

Those components of income are not expected to be affected adversely by credit performance as the agricultural mortgage loans underlying Farmer Mac's guaranteed portfolio continue to perform well.

Farmer Mac's disclosure of core earnings, a non-GAAP measure, is not intended to replace GAAP information but rather to supplement it.

For third quarter 2007, Farmer Mac's GAAP net loss to common stockholders was $8.6 million, or $0.82 per diluted share compared to a loss of $6.3 million or $0.58 per diluted share for the third quarter 2006. The GAAP losses in both periods were attributable to market value changes on financial derivatives used to hedge interest rate risk on Farmer Mac's assets and liabilities, the market value changes on which are not recorded in income.

During the quarter, Farmer Mac was able to take advantage of its ready access to capital market funding at favorable rates despite increased capital market volatility. Consequently, Farmer Mac's net interest yield on short-term and floating-rate investments was significantly higher than its net interest yields earned on such investments in prior quarters.

Farmer Mac's effective net interest yield on all assets was 71 basis points for third quarter 2007 compared to 63 basis points for third quarter 2006.

Underscoring the effectiveness of Farmer Mac's ongoing credit risk management and the strength of the U.S. agricultural economy, the agricultural mortgage loans underlying Farmer Mac's guaranteed portfolio have been relatively unaffected by turmoil in the residential mortgage credit market. As of September 30, 2007, 90 day delinquencies in Farmer Mac's guaranteed portfolio remained at unusually low levels in terms of both dollars and percentages. Those delinquencies totalled $17 million, representing 0.35% of the portfolio.

Net interest income was $10.5 million for the third quarter 2007 compared to $9.1 million for third quarter 2006. Farmer Mac's effective duration gap was at plus 1.1 month as of September 30, 2007 compared to plus 1.2 months as of June 30, 2007.

Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac guaranteed securities and standby commitments were $6.4 million for third quarter 2007 compared to $5.5 million for third quarter 2006.

For the first nine months of 2007, guarantee and commitment fees were $18.6 million compared to $15.9 million for the first nine months of 2006.

Farmer Mac's core capital totalled $250.4 million as of September 30, 2007 compared to $243.5 million as of December 31, 2006. Farmer Mac's core capital as of September 30, 2007 exceeded the statutory minimum capital requirement by $196.7 million by $53.7 million.

Farmer Mac was in compliance with its risk-based capital standards as of September 30, 2007. The risk-based capital stress test generated a regulatory capital requirement of $83.8 million as of June 30, 2007 as compared to $44.2 million as of September 30, 2007. The large quarter to quarter decline in the risk-based capital requirement is the result of enhanced net interest income due to larger than usual spreads on investments.

As of September 30, 2007, Farmer Mac's regulatory capital of $254.3 million exceeded the risk-based capital requirement by approximately $210.1 million.

During the third quarter 2007, Farmer Mac repurchased 68,300 shares of its Class C non-voting common stock at an average price of $27.12 per share pursuant to the corporation's previously announced stock repurchase program. These repurchases reduced stockholder's equity by approximately $1.9 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 shocks.

As of September 30, 2007, a parallel increase of 100 basis points across the entire United States Treasury yield curve would have decreased MVE by 2.6% while a parallel decrease of 100 basis points would have increased MVE by 1%.

As of September 30, 2007, a parallel increase of 100 basis points would have increased Farmer Mac's NII, shorter-term measure of interest rate risk, by 3.9% while a parallel decrease of 100 basis points would have decreased NII by 1.7%.

Now I'd like to turn to legislative developments. Farmer Mac believes substantial business opportunity could result from an expansion of its statutory guarantee authority currently being considered by Congress. On July 27, 2007, the United States House of Representatives passed its version of a 2007 farm bill that would expand Farmer Mac's charter to authorize the corporation to purchase and guarantee securities backed by rural utilities, meaning electric and telephone, loans made by cooperative lenders, particularly the National Rural Utilities Cooperative Finance Corporation, and institutions of the Farm Credit System.

On October 25, 2007, the United States Senate Committee on Agriculture, Nutrition and Forestry approved its version of the 2007 farm bill. The Senate Committee version contained an expansion of authority for Farmer Mac similar to that in the House version. The full Senate began debate on the 2007 farm bill on November 5, 2007.

At this time, no assurance can be given that either the Senate Committee or full House legislation will be enacted into law or, if enacted, that it will result in significant additional business volume for Farmer Mac.

More complete information on Farmer Mac's performance for the quarter ended September 30, 2007 is set forth in the 10 K Farmer Mac filed yesterday with the SEC.

That concludes my formal remarks, and we'll now open the call to questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS]

Our first question comes from Mark Mulholland with Matthew 25 Fund. Please state your question.

Henry, congratulations. Actually, I think this is a great quarter.

Thanks a lot, Mark. We appreciate it.

Hey, on the interest rate spread is that -- like I know you don't the future and stuff, but is that purely just because we're getting a little bit of a yield curve now?

I think it's a number of factors, partly the curve, partly flight to quality and the widening of the difference between agencies and investment opportunities that we have.

Well, let me even say it this way. Is it from like time -- like you had mentioned something about you had gain on the short-term interest rate spread, but are they perfectly matched? Like is there a little bit of time duration? Like is this, you know, kind of like liquid short-term liabilities and maybe a few years or longer on the asset side?

So we are very, very closely matched and driven by these spread factors that I had mentioned.

Okay. Thank you.

Thank you. Next question, please?

Thank you. [OPERATOR INSTRUCTIONS]

Our next question comes from Gerry Heffernan with Lord, Abbett & Company. Please state your question.

Good morning, everybody, and my sentiments to repeat the previous. It's a very good quarter here. A good thing when all about you are losing their heads.

If I could throw myself on the mercy of the court here and just be a little bit dense, could you just review the short-term borrowing spreads and what exactly happened that you were able to take advantage of, just so I have a better understanding -- to understand what to look for in the future as to whether this is repeating itself or going against you?

Actually it is agency spreads through LIBOR and they are much deeper through LIBOR than they have been historically while at the same time the types of eligible investments for Farmer Mac that we hold in our portfolio, although very closely matched to the duration of our funding, nevertheless have also become somewhat wider to LIBOR. So the combination of all of that has given us the opportunity that I was referring to on the prior question.

Is that helpful?

It is. How much of this is the market moving your way to the way the balance sheet was structured versus the -- you being able to take advantage of things you see in the market? Does that make sense?

It's mostly the latter.

Okay. So you guys saw this change in the agency spread through LIBOR and you made changes to take advantage of that?

Well, we made investments that took advantage of that.

Understood. Okay. Great. Thank you very much.

Thank you.

Our next question comes from Mark Mulholland with Matthew 25 Fund. Please state your question.

Henry, on the farm bill of 2007, I know it may or may not come but in the event it was or even if it doesn't, what is the total volume or what's the amount of loans that, you know, are these rural utility type of loans? Like what -- I'm just trying to get an idea of how much potential business this is or not.

It's difficult to quantify because I haven't seen legislation signed into law by the president. But if we were to assume that the legislation that is currently pending were to be enacted, it would range well into the billions of dollars of potential new business.

That's great. Thanks.

[OPERATOR INSTRUCTIONS]

Our next question comes from Mark Mulholland with Matthew 25 Fund. Please state your question.

Hi, Henry. I keep coming back to you, but on the income statement for the third quarter that, you know, the employee benefits and compensation and G&A, for year-over-year for the quarter look great. They actually improved a bit. But for the nine months they still, you know, they're still -- they're going up.

Are we at the point now that the increases are kind of still thin and that part of the expense, you know, the expense column should be a little bit more stable going forward?

Generally, although we do compensate our employees for performance and therefore it will also be sensitive to performance. Corporate performance is a large determinant of employee compensation, although by no means all of it.

Now, is that like stock option awards and things like that?

Yes, it is.

Okay.

And also, of course, annual incentive compensation.

Okay. Well, thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

There are no further questions at this time. I will turn the conference back over to management for closing comments.

Thank you very much for your continuing interest in Farmer Mac and your participation on the call today. We look forward to speaking with you again in a few months and appreciate your continuing interest in the corporation.

Thank you all and have a good day. Thank you.

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