Federal Agricultural Mortgage Corp (AGM) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation fourth-quarter 2007 earnings conference call. (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 fourth-quarter 2007 earnings conference call. Thank you, Mr. Edelman. You may now begin.

Thank you. Good morning and welcome to Farmer Mac's earnings conference call for the fourth-quarter and fiscal year 2007. Before starting, I would 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 a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac's actual results 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 annual report on Form 10-K for 2007. A Form 8-K containing the press release and the Form 10-K 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 the SEC.

A recording of this call will be available on Farmer Mac's website 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 applications of FAS-133. Investors and securities analysts have previously relied upon similar measures to evaluate Farmer Mac's historical and future performance.

Core earnings were $10.5 million or $1 per diluted share for fourth quarter 2007 compared to $6.9 million or $0.65 per diluted share for fourth quarter 2006 and $7.6 million or $0.71 per diluted share for third quarter 2007.

For the year ended December 31, 2007, Farmer Mac's core earnings were $29.9 million or $2.82 per diluted share compared to $25.9 million or $2.33 per diluted share for the year ended December 31, 2006. Farmer Mac's strong quarterly and annual core earnings were driven by an increase in net interest income attributable to Farmer Mac's significantly improved short-term funding costs relative to the rates on related investments, loans and Farmer Mac guaranteed securities, as well as ongoing fee income from the Corporation's $8.5 billion guaranteed portfolio.

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

For the year ended December 31, 2007, Farmer Mac's GAAP net income was $4.4 million or $0.42 per diluted share compared to $29.8 million or $2.68 per diluted share for the year ended December 31, 2006. For fourth quarter 2007, the GAAP net loss was $9.3 million or $0.90 per diluted share compared to a loss of $8.6 million or $0.82 per diluted share for third quarter 2007 and net income of $7.6 million or $0.70 per diluted share for fourth quarter 2006.

The GAAP losses in the last two quarters of 2007 were attributable to mark-to-market reductions in the fair values of financial derivatives associated with the significant decline in interest rates in the latter half of 2007. Farmer Mac uses financial derivatives to hedge interest rate risk on its assets and liabilities, but the mark-to-market fair value of changes on those assets and liabilities are not recorded in income.

Reflecting the effectiveness of Farmer Mac's ongoing credit risk management and the strength of the U.S. agricultural economy, 90-day delinquencies in Farmer Mac's guaranteed portfolio remained at notably low levels as of December 31, 2007, in terms of both dollars and percentage.

Those delinquencies totaled $10.6 million, representing just 0.21% of the portfolio. To date, the credit issues that have arisen in the housing and consumer sectors of the economy have not affected the agricultural economy in general or Farmer Mac's guaranteed portfolio in particular.

Focusing on core earnings, we were extremely pleased with Farmer Mac's strong financial results in the fourth quarter 2007, up 51% compared to fourth quarter 2006. This increase was achieved notwithstanding the volatility of the capital markets during the last quarter and helps bring our 2007 full-year results up 15% compared to 2006. Farmer Mac's net interest income and guarantee fee income were major drivers of core earnings in fourth quarter 2007. While it is not possible to predict how long Farmer Mac's short-term borrowing spreads will continue to be as favorable as they now are, relative to yields on our program and non-program assets, Farmer Mac's guarantee fee income should continue to grow commensurate with outstanding business volume. Those components of income are independent of Farmer Mac's strong credit performance.

Farmer Mac's net interest yield, adjusted for the effects of FAS-133 for fourth quarter 2007, was 119 basis points or $16.1 million compared to 69 basis points or $8.2 million for fourth quarter 2006. The adjusted net interest yield for the full year 2007 was 85 basis points or $44.5 million compared to 77 basis points or $34.9 million for 2006.

Throughout 2007, Farmer Mac's long-term interest rate sensitivity remained low despite a significant change in the yield curve that occurred during the year. Farmer Mac's effective duration gap was plus 0.7 of one month as of December 31, 2007, unchanged from December 31, 2006.

Turning to interest income, net interest income was $16.4 million for fourth quarter 2007 compared to $10.5 million for third quarter 2007 and $8.4 million for fourth quarter 2006.

Next, guarantee and commitment fee, which compensate Farmer Mac for assuming credit risk on loans underlying Farmer Mac guaranteed securities and standby commitments, were $6.6 million for fourth quarter 2007 compared to $6.4 million for third quarter 2007 and $5.9 million for fourth quarter 2006.

For 2007, guarantee and commitment fees were $25.2 million compared to $21.8 million for 2006. Farmer Mac's core capital totaled $226.4 million as of December 31, 2007 compared to $250.4 million as of December 31 -- pardon me -- as of September 30, 2007, and $243.5 million as of December 31, 2006. Farmer Mac's core capital as of December 31, 2007 exceeded the statutory minimum capital requirement of $186 million by $40.4 million.

Farmer Mac was in compliance with its risk-based capital standards as of December 31, 2007. The risk-based capital stress test generated a regulatory capital requirement of $42.8 million as of December 31, 2007, compared to the risk-based capital requirement of $44.2 million as of September 30, 2007, and $42.9 million as of September 31, 2006.

As at December 31, 2007, Farmer Mac's regulatory capital of $230.3 million exceeded the risk-based capital requirement by approximately $187.5 million. During 2007 and 2006, Farmer Mac repurchased over 1 million shares and almost 800,000 shares, respectively, of its Class C non-voting common stock at an average price of $26.61 during 2007 and $26.82 per share during 2006 pursuant to the corporation's previously announced stock repurchase program. These repurchases reduced stockholders' equity by approximately $29 million and $22 million, respectively.

Farmer Mac measures its interest rate risk through several tests, including the sensitivity of its market value of equity, or MVE, and net interest income, NII, to uniform or parallel yield curve shock. As of December 31, 2007, a parallel increase of 100 basis points across the entire U.S. Treasury yield curve would have decreased MVE by 2.5%, while a parallel decrease of 100 basis points would have decreased MVE by 0.1%.

As of December 31, 2007, a parallel increase of 100 basis points would have increased Farmer Mac's NII, a short-term measure of interest rate risk, by 1%, while a parallel decrease of 100 basis points would have decreased NII by 2.2%.

Turning to legislative development, Farmer Mac believes important new business opportunity would result from expansion of its statutory guarantee authorities. In that regard, both the U.S. House of Representatives and the U.S. Senate passed their respective versions of the 2007 Farm Bill. Both of those bills contain provisions that would expand Farmer Mac's charter to authorize the corporation to purchase and guarantee securities backed by rural utilities, particularly electric and telephone loans, made by cooperative lenders, including the National Rural Utilities Cooperative Finance Corporation and institutions of the farm credit system. A conference committee has not yet meant to reconcile the differences between the two bills. At this time, no assurance can be given that either the House or Senate legislation will be enacted into law, or if enacted, that will result in significant additional business volume for Farmer Mac.

More complete information on Farmer Mac's performance for the quarter and the year ended December 31, 2007, is set forth in the Form 10-K 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). Gerry Heffernan, Lord Abbett.

Thank you very much for some real impressive results here. You had made -- when you were talking about interest rate sensitivity, at one point you were commenting that I believe on the 100-point move test that your susceptibility to, or the impact from big swings would not be all that great, that you are rather well insulated. However, upon having the interest rates drop the way we have on the short-term, the mark-to-market is a very large number, so that when we are looking at core earnings versus GAAP earnings, there is a very large difference there. Help me understand why your interest rate sensitivity analysis comes up with a moderate risk or a moderate volatility, given an 800-basis-point move, while we are seeing as far as the mark-to-market shows a pretty large move?

I am going to let Nancy Corsiglia, our CFO, handle that question.

Sure. On an overall interest rate sensitivity perspective, Farmer Mac uses a combination of duration GAAP matching and cash flow matching across the entire yield curve and entire book of business. And the actual liability measures that we report, particularly the market value of equity, includes our entire balance sheet, whereas the mark-to-market changes on derivatives are simply the derivatives that are on the balance sheet and it does not include a mark-to-market change for the entire asset or hedged liability.

So the truest picture of our total exposure is our market value of equity, whereas one of the problems with the accounting rules under GAAP for just derivatives is that it only shows one side of the picture. It does not show the hedged items. That's why we emphasize core earnings in terms of showing the true picture of the economic earnings.

Understood. So --

Mr. Heffernan, did you ask --

I did have one more question, but I did forget that the instructions told me only one question.

As long as that answered your question, we will come back to you.

[John Barlow], Equity Strategies.

Congratulations on a great quarter. Just had a question on your 10-K, you show $131 million of auction rate securities at 12/31. Has there been a liquid market for these securities recently?

Recently, there has not been. As we disclosed in our discussion, the market for auction rate has -- there is a limited liquidity due to the failures of the auctions of late since about mid-February. Farmer Mac has not sold any. But given the quality that these are government guarantee loan-backed securities, we have no concerns about the quality of these securities. But the steady liquidity has temporarily been limited. We do believe, based on analysis of this market, that there is an incentive for most of these issuers to restructure these securities and call them -- they are callable at anytime -- and we expect that over time they will be called and restructured into a different type of security method, for example a straight floating rate instead of the auction rate structure.

But when you say they are government guaranteed, these are all -- can you give me more color? Are these local government -- ?

As we disclosed, our securities that we own are entirely backed by government guaranteed student loans that are backed by the full faith and credit of the U.S. government, as our disclosures detail. They're all 100% self loans.

(Operator Instructions). Gerry Heffernan.

Going to the 10-K also, I was looking at the calculation of minimum capital requirements based on what's on the balance sheet, and certainly you are extremely well capitalized on that basis. You do have a majority of the off balance sheet. I was wondering if you brought all of that on balance sheet, how would that capital equation work out?

I don't exactly understand your question. Bringing things on balance sheet, there are many things that we have guaranteed that are securities that are trading in the capital markets as off balance sheet securities, and unless we were to go into the capital markets and seek to reacquire them, they would not come back onto our balance sheet as on balance sheet assets.

Understood. That would be the mechanics, but I was inquiring on an as-if basis, whereas --

We don't do that calculation, because we don't anticipate it.

Okay. Unfortunately, a lot of the Wall Street firms did not anticipate it either, and that is why I am trying to understand the full capital coverage.

This is very different very. This is securities that we have guaranteed in the capital markets that are trading with our guarantee and there would be no reason to reacquire those. The only problem that we could ever have would be a situation where there were credit problems with assets where we had to buy back the underlying loans in either a guaranteed security or a standby. And in those circumstances. we believe we would have adequate capital to carry that.

Yes, I understand it would be on -- it's a credit issue as to the extent that the credit was being called on that, and you needed to step up. It just seems like a lot of odd things are happening these days, and I'm just trying to look at things from all angles. Thank you.

(Operator Instructions). There are no further questions in queue at this time, Mr. Edelman. I would like to turn it back over to you for closing comments.

Thank you all very much for participating today. We appreciate your continuing interest in Farmer Mac and look forward to speaking with you again in May. Thank you very much. Have a good day.

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