Federal Agricultural Mortgage Corp (AGM) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Federal Agricultural Mortgage Corporation's third quarter 2008 earnings conference call. A question and answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS)

It is now my pleasure to introduce your host, Mr. Michael A Gerber, President and Chief Executive Officer for Federal Agricultural Mortgage Corporation. Thank you, Mr. Gerber. You may begin.

Thank you, and good morning, everybody. I'm Mike Gerber. I'm the acting President and CEO at Farmer Mac, and the Farmer Mac management team and I are pleased to welcome you to Farmer Mac's third quarter 2008 investor conference call. Before starting, let me first make a few comments on forward-looking statements that may be made on this call. Management's expectations for the corporation's future necessarily involve a number of assumptions and estimates, and evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac's actual results to differ materially from expectations expressed and/or implied by these 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 third quarter 2008, and Farmer Mac's annual report on Form 10-K for 2007. A Form 8-K containing a press release, and the Form 10-Q, were filed yesterday with the SEC. The Form 10-K was filed with the SEC on March 17th, 2008.

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. 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 the business trends before the effect on earnings of changes in the fair value of financial derivatives and trading assets. Investors and security analysts have previously relied upon similar measures to evaluate Farmer Mac's historical and future performance. Farmer Mac's disclosure of core earnings, a non-GAAP measure, is not intended to replace GAAP information, but rather to supplement it. A recording of this call will be available on Farmer Mac's Website approximately two hours after the conclusion of the call.

So, Farmer Mac's third quarter earnings were dominated by a significant write-down on two holdings in our investment portfolio. As we reported this September, when Fannie Mae entered into conservatorship and Lehman Brothers Holdings Inc. declared bankruptcy, Farmer Mac held in its investment portfolio $50 million of Fannie Mae preferred stock, and $60 million of Lehman Brothers senior debt securities. As a result, during the third quarter, Farmer Mac recognized other than temporary impairment charges on these holdings of $44.7 million and $52.4 million, respectively. These losses were the primary contributors to a net loss for Farmer Mac on both a core earnings and a GAAP basis for the third quarter 2008. It is important to note that Farmer Mac's underlying business remains sound. While the housing and consumer sectors of the economy have experienced significant credit issues, the ag portfolio remains strong, as has Farmer Mac's guarantee portfolio. Our $9.8 billion guarantee portfolio continues to perform. Income from guarantee fees were stable. Funding costs were favorable during the quarter, which provided for strong net interest income, and delinquencies remained low at just $11.5 million.

On a GAAP basis, Farmer Mac's third quarter 2008 net loss was $106.1 million, or $10.55 per diluted share, compared to a net loss of $8.6 million, or $0.82 per diluted share, for the third quarter 2007. For the nine months ending September 30th, 2008, the net loss to common stockholders was $93 million, or $9.33 per diluted share, compared to net income of $13.7 million or $1.29 per diluted share for the nine months ending September 30th, 2007. Farmer Mac's core earnings only exclude items related to the fair value changes of financial derivatives and certain other assets carried at fair value. These results were also adversely affected by the losses on the Fannie Mae and Lehman Brothers securities. Core earnings for the third quarter of 2008 were a loss of $90.4 million, or $8.98 per diluted share, compared to a gain of $7.6 million, or $0.71 per diluted share, for the third quarter 2007. For the nine months ended September 30th, 2008, core earnings were a loss of $72.7 million, or $7.30 per diluted share, compared to a gain of $19.4 million, or $1.82 per diluted share, for the nine months ending September 30th, 2007. Including the effect of these changes, core earnings for the third quarter would have been $6.7 million and $29.7 million year-to-date. Farmer Mac did not report any other than temporary impairment charges during 2007.

Core earnings for the third quarter 2008 included an after tax charge of a $1 million relating to financial advisory services, and $300,000 for legal fees related to corporate governance and personnel matters. As a result of the losses on investment securities, it was critical that we raise additional capital to ensure our compliance with statutory capital requirements. As announced on September 30th, we issued $65 million of preferred stock. This is reported as mezzanine equity on our balance sheet and is a component of Farmer Mac's core capital for determination of our statutory and regulatory capital compliance. As of September 30th, 2008, Farmer Mac's core capital exceeded the statutory minimum capital requirement of a $182.3 million by $30 million. We are pleased that Zion bank and a consortium of Farm Credit Bank saw the value of our mission and invested in our preferred stock.

Our focus, currently, is on evaluating our business model, identifying and removing risk from our balance sheet, and continuing to strengthen our capital position. We are currently evaluating several initiatives to raise additional capital so that we can continue to grow our business, particularly given the high demand we're seeing from agriculture and world utilities lenders for our programs and our products. We are also currently revising a risk management practices related to our investment portfolio, with a greater emphasis on preserving capital and liquidity in furtherance of our congressional mission to serve rural America. These items will be our primary focus in the near term. For more complete information on Farmer Mac's performance for the quarter ended September 30th, 2008, I would point you towards the Form 10-Q Farmer Mac filed yesterday with the SEC.

In summary, the third quarter was a challenging quarter for Farmer Mac. The losses in our investment portfolio put Farmer Mac in a difficult position. These capital markets continue to be volatile and challenging. However, the board and our management team are focused on reducing capital market risks on Farmer Mac's balance sheet and repositioning the company for the future. Our core business remains solid, and prospects for new business and additional business are strong. Additional capital is needed to accommodate this new business and permit Farmer Mac to continue to accomplish our core mission. With that, we will now open the call for questions.

Thank you. Ladies and gentlemen, we'll now be conducting a question and answer session. (OPERATOR INSTRUCTIONS) Our first question is coming from [George Mayer], a Private Investor. Please state your question.

My name is George Mayer. There are several questions that I do have, but the one part that bothers me is the investment portfolio, where so much money has been borrowed and then reinvested into GSE bonds and student loans, this and that, and every place except where it should have been going, into the business, and I'm wondering if you're going to go forward with that and continue continue that practice?

As I mentioned in my remarks and as we talked about in the 10-Q, we are currently evaluating all of those things. We believe is critical that we focus on our core mission, and that will be our approach going forward, and as I mentioned, we're also looking at that investment portfolio very carefully to understand what's there and to make decisions about how much of that we hold on to.

May I follow-up? A second question that I do have, I don't quite understand. You have a new Chief Financial Officer, but he's like a subcontractor and he's got a contract until March. I've never seen that happen before, quite frankly it scares the daylights out of me. I didn't know whether he was somebody that shot from the hip, or what are we doing, or where are we going with that so that we get a solid Chief Financial Officer, and the progress being made, and determining who will carry forward as the Chief Officer of Farmer Mac?

The board is currently going through the process to find and hire a Chief Executive Officer. Our approach, in the interim of that, was the board asked me to serve as Chief Executive Officer. It was necessary for us to have a Chief Financial Officer on board to help us through this interim period. That is the position that Bill Sandalls agreed to, and that's the reason for the short term contract. We will be moving forward with the permanent Chief Financial Officer as part of this process.

Thank you very much. I've got a few more questions, but I'm sure I'm going to step aside here. There's got to be other people out there to ask questions. Thank you very much.

Thank you for your questions.

Our next question is coming from Kareem with Feck Investment Corporation. Please state your question.

Yes. Hi, gentlemen. My question relates to the swap that have been purchased in the past, and I believe they're purchased to offset the redemption for the payoff of loans, and it seems like those aren't paying off very well, and it may be in the best interest of the shareholders and the company to not purchase those anymore and just let the portfolio grow naturally, as it may. Any thoughts on that?

Well, first of all, all of those issues are currently being looked at to determine the best way to go forward. Part of the strategy at Farmer Mac has been to use swaps to manage the tenor of our debt and to make sure that we eliminate risk relative to that portfolio so that it's matched with our assets. That process of matching assets and debts needs to continue. There are other ways to do that and we will certainly be looking at all of those.

Okay. My follow-up is regarding book value per share right now. I'm calculating book value per share as being approximately $7.50 per common share. I was wondering if you guys are doing the calculation the same way? Right now, we're trading in the $4.70 range, and the market is down and we all can't control the market, but do you think that this is an extreme value right now at $4.70?

Well, the market has to determine the value of the company as it trades. We believe that we're working hard to put this company in a position where it can go forward and do business, that it can accomplish the things that it needs to accomplish, and as we do that, we're confident the marketplace will see that, recognize that and respond accordingly . So, that's our plan at this point in time.

All right. I think you guys are doing a great job in transitioning this. The new capital I would assume that you're looking at, would result in paying off this mezzanine preferred equity issuance? I know you can't pay it off until the nine month mark, but is that the goal, to get a lower interest rate vehicle in here that will pay that off, as well as fund this new business that you guys are looking at?

Well, we're looking at all options to raise capital. Our goal is to raise the capital we need to be able to move the company forward, and do that at the cheapest price possible. So, we'll evaluate what we're able to do. We'll evaluate the options based on how much capital we're able to raise, and what kind of prices, and how all that goes together. We'll ultimately be looking at the long term capital plan, and so all that is yet to come.

Okay. I mean based on the current portfolio of loans right now, the major write-downs are behind us, so even based on the current portfolio, it looks like income prospects are good for fourth quarter without a lot of future growth. Am I correct in saying that?

The current portfolio's performing. The net interest income is there. So yes, those things are in place in our core business, which is generating income. We would expect that to continue.

Okay. Great. One last question. It seems like you guys are looking at some very big, rural utility deals. I know maybe you can't expand too much on that, but I know that that was enacted by Congress last year, or maybe it was earlier this year, and it seems like there is a very high demand for that, and that is part of the need for capital raised. Is that correct?

That is part of the new business opportunities, yes.

(OPERATOR INSTRUCTIONS) Our next question is coming from Leonard Geraputo with GunnAllen. Please state your question.

Good morning, gentlemen. The dividend, is it going to be paid or is that something you can't discuss at the minute?

We disclosed where we were in the 10-Q. At this point in time, the board has not made a decision and will be making that decision at its December board meeting.

One follow-up question. The cash flow that you currently have, will that cover all your expenses, ie, the new loan that you got from Zion's bank, and would that cover the dividend, if in fact, you were going to pay it?

The answer is yes. We believe that our cash flow works, and we'll pay all those expenses.

Thank you, sir.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Okay. Thank you. Again, thank you all for being on the call. We appreciate your interest in Farmer Mac. We look forward to working with you in the future, bringing forward next quarter's results, and again, thank you for being on the call. Have a great day.

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