Federal Agricultural Mortgage Corp (AGM) 2008 Q4 法說會逐字稿

Greetings and welcome to the Federal Agricultural Mortgage Corporation's fourth quarter and fiscal year 2008 earnings conference call. At this time 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. Michael Gerber, President and CEO for Federal Agricultural Mortgage Corporation. Thank you, Mr. Gerber, you may begin.

Good morning. I'm Mike Gerber, the new President and CEO of Farmer Mac, and the Farmer Mac management team and I are pleased to welcome you to Farmer Mac's fourth quarter and calendar year 2008 investor conference call.

Before starting, let me first comment on some forward-looking statements that may be made on this call. 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 to differ materially from expectations expressed in 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 2008. A Form 8-K contained in the press release and the Form 10-K were filed yesterday 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 to reflect any future events or circumstances, except as otherwise mandated by the SEC.

Farmer Mac reports financial results on 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 on earnings of changes in the fair values of financial derivatives and trading assets. Farmer Mac's disclosure of core earnings, a non-GAAP measure, is not intended to replace GAAP information but rather to supplement. A recording of this call will be available on Farmer Mac's website approximately two hours after the conclusion of this call.

It's no secret that the second half of 2008 was challenging here at Farmer Mac; maybe the most difficult period in our history. The unprecedented turmoil in the capital markets and the downturn in the national economy translated into third quarter losses in the investment portfolio, a challenging market to issue debt, and dramatic changes in the mark to market value of certain assets and the derivatives on our books. These factors combined to put pressure on our capital position.

The theme of my remarks for the third quarter was the need to raise capital and adjust our business model, to reduce risk and to more effectively accomplish the mission of Farmer Mac. As expected, that process continued in the fourth quarter. These factors are reflected in the fourth quarter and our full year 2008 results.

For year end for the year ended December 31, 2008, Farmer Mac's GAAP net loss was $154.1 million or $15.40 per diluted share, compared to net income of $4.4 million or $0.42 per diluted share for the year ended December 31, 2007. For fourth quarter 2008 the net loss was $61.1 million or $6.03 per diluted share, compared to a net loss of $9.3 million or $0.90 per diluted share for fourth quarter 2007. Farmer Mac's core earnings only exclude items related to fair value changes of financial derivatives, and certain other assets carried at fair value. Therefore, those results are also adversely affected by the third quarter losses on Fannie and Lehman securities. Core earnings for 2008 were a loss of $81.5 million or $8.15 per diluted share, compared to a gain of $29.9 million or $2.82 per diluted share for 2007. For fourth quarter 2008 core earnings were a loss of $8.8 million or $0.86 per diluted share, compared to a gain of $10.5 million or $1 per diluted share for fourth quarter 2007. Excluding the effects of the losses on the Fannie Mae and Lehman Brothers securities, core earnings for 2008 would have been a gain of $24.7 million.

Despite the difficult second half of 2008, Farmer Mac has continued to have access to the debt market to fund its program assets. We raised $124.2 million in capital through preferred stock offerings at the end of the third quarter and during the fourth quarter, ensuring compliance with our regulatory capital requirements. As we look ahead to Farmer Mac responding to the credit needs in rural America for 2009 and beyond, capital strength will continue to be important. It is in that context that the corporation's Board of Directors decided to continue but reduce the quarterly common stock dividend from $0.10 a share to $0.05 a share.

Farmer Mac's net interest spread increased significantly for 2008, and was $58.2 million or 106 basis points. That compares to $40.6 million or 78 basis points in 2007. Throughout 2008 Farmer Mac's interest rate sensitivity remained low, despite the significant volatility in the financial markets. Farmer Mac's effective duration gap was minus 2.4 months as of December 31, 2008, compared to plus 0.6 months as of September of 2008.

Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying our guaranteed securities and standby commitments, were $7.8 million for the fourth quarter of 2008, compared to $7.3 million for the third quarter and $6.6 million for the fourth quarter of 2007. For 2008 guarantee and commitment fees were $28.4 million, compared to $25.2 million for 2007.

Farmer Mac's core capital totaled $207 million as of December 31, 2008, compared to $212.3 million as of September 30 and $226.4 million as of December 31, 2007. Farmer Mac's core capital as of December 31, 2008 exceeded the statutory minimum capital requirement of $193.5 million by $13.5 million. Since December 31st, we estimate that our excess capital of $13.5 million has increased, due to significant increases in the fair values of our financial derivatives.

Farmer Mac was also in compliance with its risk-based capital standards as of December 31, 2008. The risk-based capital stress test generated a regulatory capital requirement of $57.3 million as of December 31st. And as of December 31st, Farmer Mac's regulatory capital of $223.4 million exceeded the risk-based capital requirement by approximately $166.1 million.

Loans underlying the corporation's guarantees and commitments grew to a record $10.1 billion at year end and, with the exception of the ethanol loans, continued to perform well during 2008. Delinquencies on non-ethanol loans remain near historically low levels, consistent with the strength of the US ag economy through the end of the year. Farmer Mac's 90-day delinquencies, including ethanol loans, were $67.1 million, representing 1.35% of the portfolio as of December 31, 2008. And excluding the ethanol loans, 90-day delinquencies were $17.9 million or 0.36% of the portfolio. The fourth quarter provisions for losses of $17.2 million were largely due to the bankruptcy of one ethanol producer, and construction issues related to another ethanol plant. The ethanol industry suffered due to the volatility of commodity prices, and while prices have stabilized somewhat, the industry still faces significant challenges.

Farmer Mac's outlook for 2009 is mixed. We expect the turmoil in the financial markets will continue to create challenges to Farmer Mac's ability to raise capital and to securitize its assets. While agriculture has been strong, the industry is not insulated from the effects of the economic downturn. Some sectors continue to prosper, while others such as dairy farmers and the protein complex are experiencing pressure on profitability. In addition, portions of California and Texas are facing the effects of persistent drought. Farmer Mac continues to closely monitor developments in these industries and areas experiencing stress. We anticipate that stress in our portfolio is likely to increase in 2009, although we do believe that any resulting credit issues will remain within manageable levels.

Looking ahead, there will be -- likely be a growing need for financial vehicles such as those employed by Farmer Mac to expand credit availability to those agricultural industries that have sound financial fundamentals. As the broad trends of deleveraging capital and tightening underwriting standards continue, the effect will likely be to reduce credit availability from traditional lenders to the ag sector. We believe this presents opportunities, and Farmer Mac is actively pursuing those opportunities.

There will also be opportunities for loan growth in the rural utilities segment, a new area for Farmer Mac as a result of legislative expansion of its charter in May of 2008. Farmer Mac experienced growth in this sector during 2008, and expects that demand for rural utilities will be robust in 2009 and beyond, particularly as the industry adds significant new capacity for the first time since the '70s. Furthermore, additional power transmission lines will need to be constructed, as the development of wind and solar power plants increase the demand for means to transfer power from the source of clean power generation to the ultimate consumer.

Our focus currently is on evaluating our business model, identifying and removing risks from our balance sheet, and continuing to strengthen our capital position. We've also begun to take actions intended to mitigate the impact of all the financial conditions going forward. We've concluded a review of Farmer Mac's investment portfolio and the operations around that, and we've taken actions to address the difficult market dynamics that have emerged, and seem likely to prevail in the time ahead. We've adjusted our funding strategies to reduce reliance on financial derivatives that have adversely affected our capital position, notwithstanding that all the derivatives have been economically affected. We continue evaluating several initiatives to raise capital so that we can continue to grow our business, particularly given the high demand we are seeing from agricultural and rural utilities lenders for our programs and products. We are also revising the risk management practices related to the investment portfolio, with a greater focus on preserving capital and improving liquidity so that we can further the Congressional mission to serve rural America.

In summary, 2008 was a challenging year for Farmer Mac. The losses in our investment portfolio put Farmer Mac in a difficult position. The capital markets continue to be volatile and challenging. However, the Board and management team remain focused on reducing capital market risks on Farmer Mac's balance sheet, and repositioning this Company for the future. Our core business remains solid, and the prospects for doing additional business are strong. For more complete information on Farmer Mac's performance for the year ended December 31, 2008, that information is set forth in the 10-K filed yesterday with the SEC.

On a personal note, I appreciate that the Board showed their confidence in me and named me as the permanent CEO here at Farmer Mac. In these times the challenges remain great, but I also believe that the opportunities are real as well. I look forward to working with the Board of Directors and this management team to take advantage of those opportunities, and to aggressively work to accomplish the mission of serving agriculture and serving rural America.

Thank you. We'll now open up the call for questions.

(Operator Instructions)

Mr. Gerber, it appears we have no questions coming in from the phones at this time.

Well, if there are no questions, then thank you all for participating on the call. We appreciate your attendance, and we look forward to speaking to you again when we -- to discuss our first quarter earnings. Thank you again.

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