Federal Agricultural Mortgage Corp (AGM) 2009 Q3 法說會逐字稿

Greetings and welcome to the Federal Agricultural Mortgage Corp. third-quarter 2009 earnings call. At this time all participants are in a listen only mode. A brief question-and -answer session will follow the presentation. (Operator Instructions) It is now my pleasure to introduce your host, Michael Gerber, CEO for Federal Agricultural Mortgage. Thank you, Mr. Gerber. You may begin.

Thank you, Rob, and good morning, everyone. I'm Mike Gerber, the President and CEO of Farmer Mac. And the Farmer Mac management team and I are pleased to welcome you to Farmer Mac's third-quarter 2009 earnings conference call.

Before starting I'd like to comment on some 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 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 the expectations as expressed or implied in 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 2009, and also in Farmer Mac's annual report on Form 10-K for 2008. The Form 10-Q and Form 8-K containing a press release were filed yesterday with the SEC. The Form 10-K was filed with the SEC on March 16, 2009.

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 continues to make strides to improve the risk-bearing capacity of the Corporation, strengthen its balance sheet while remaining focused on fulfilling our mission. Our capital surplus has grown to $126 million, up from the $100 million as of June 30th, 2009, and $13 million as of December 31st, 2008. During third-quarter 2009, Farmer Mac added $708 million to its portfolio of loans, guarantees and commitments. And as of September 31st, that portfolio increased to $10.8 billion. Also nonperforming assets declined $12.3 million during the quarter, to $84.8 million as of September 30th.

With lenders in both agriculture and rural utilities sectors continuing to face capital markets and economic challenges, Farmer Mac represents an important source of liquidity, capital and risk management to help lenders meet the borrowing needs of their customers.

As of September 30th, Farmer Mac's core capital totaled $331 million. This compares to $296 million as of June 30th and $207 million as of December 31st, 2008. Farmer Mac's core capital as of September 30th, 2009, exceeded the statutory minimum capital requirement of $205 million by $126 million. Farmer Mac was also in compliance with its risk-based capital standards as of September 30th, 2009. As of that date, Farmer Mac's regulatory capital of $344 million exceeded the risk-based requirement of $38 million by approximately $306 million.

Farmer Mac uses core earnings, which is a non-GAAP disclosure, to measure corporate economic performance and to develop financial plans, because in management's view core earnings more accurately represent Farmer Mac's economic performance, the transaction economics and the business trends before the effects on earnings of changes in the fair value of financial derivatives and trading assets. Farmer Mac's disclosure of this non-GAAP measure is not intended to replace GAAP information, but rather to supplement it.

Our core earnings of $1.3 million or $0.12 per diluted share for the third-quarter 2009 compare favorably to a core loss of $90.4 million or $8.98 per diluted share for the third-quarter 2008.

For the first nine months of 2009, core earnings were $10.8 million or $1.06 per diluted share. This again compared favorably to a loss of $72-point-million (sic - see press release) or $7.30 per diluted share for the first nine months of 2008. Third-quarter 2009 core earnings were driven by increased guarantee and commitment fees and also net interest spreads.

For the third-quarter 2009, GAAP net income available to common stockholders was $17.9 million or $1.74 per diluted share compared to a net loss of a $106.1 million or $10.55 per diluted share for the third quarter a year ago.

For the first nine months of 2009 net income available to common shareholders or stockholders was $76.8 million or $7.54 per diluted share. This compared to a loss of $93 million or $9.33 per diluted share for the same period in 2008.

Third-quarter 2009 GAAP earnings and core earnings were reduced by provisions to loan losses of $3.2 million. This compares to recoveries of $6.2 million of previously recorded provisions in the second quarter of 2009.

And for the nine months ending September 30th, 2009, net provisions totaled $3 million. For the same nine-month period in 2008, the provisions were $600,000.

Net interest income was $19.8 million for the third-quarter 2009, compared to $21.3 million for the third quarter in 2008. And for the nine months ending September 30th, 2009, net interest income was $63.1 million compared to $63.6 million for the corresponding period in 2008.

Farmer Mac's net interest spread was 93 basis points for the third quarter, compared to 87 basis points for the same period in 2008. With the disruptions in the financial markets during late 2008 and early 2009, we saw net interest spreads widen dramatically. In recent quarters net interest spreads have returned to more historical norms.

As of September 30th, 2009, Farmer Mac's effective duration gap was 0.6 months. This compares with 1.3 months as of June 30th, 2009.

The Corporation's outstanding portfolio of loans, guarantees and commitments grew to $10.8 billion during the quarter. Guarantee and commitment fees, which compensate Farmer Mac for assuming a credit risk on loans underlying the guaranteed securities and standby commitments, increased to $8.2 million for the third quarter from $7.3 million for the third quarter in 2008.

And for the first nine months of 2009, guarantee and commitment fees also increased to $23.5 million, compared to $20.6 million for the first nine months of '08.

Farmer Mac's nonperforming assets declined to $84.8 million, 1.94% of the portfolio, as of the end of September, down from $97.1 million or 2.17%, as of June 30th. 90-day delinquencies were $59.4 million as of September 30th, 2009. This represents 1.36% of the portfolio and is a slight increase from the 95 basis points as of June 30th, 2009, but below the 1.9% of the portfolio that were 90-days delinquent as of March 31st in 2009.

These lower levels of nonperforming assets and delinquencies as of the end of the third quarter, compared to earlier dates in the year, reflect in part the sale of three ethanol facilities that had previously been classified as real estate-owned. And the remaining change is the result of improvements in profitability in the ethanol portfolio, offset by more challenging conditions in the protein and the dairy sectors. Farmer Mac expects its delinquencies will remain within our historical experience, but likely will remain elevated for the remainder of 2009 and into 2010.

Farmer Mac continues to make progress. Efforts to remove risk from our investment portfolio, to strengthen our capital position, and to adjust our business model continue to position Farmer Mac for long-term success. While not complete, we are much closer today. This is important.

Lenders in both the agricultural and the rural utility sectors continue to face capital market and economic challenges. That's where we come in. Farmer Mac's mission is to provide the advantages of a secondary market to lenders in rural America. And we continue to look forward to working with our customers, our partners and our investors to fulfill that mission.

More complete information on Farmer Mac's performance for the quarter ended September 30th, 2009, is set forth in the Form 10-Q we filed yesterday with the SEC. With that we will now open the call to questions.

Thank you. We'll now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question today is from the line of [Frank Mermeth], a private investor. Please proceed with your question, sir.

Yes, good morning. First of all, I just want to apologize. I've got a bit of a cold, so my voice has probably dropped almost an octave or so. I've forwarded some questions to you. Will you be addressing any of those questions I sent in an e-mail? Or is this the time I raise those?

This would be the time to raise those.

Sure. So the first question I have is, can you give us any guidance going forward for the fourth quarter and for full year 2010?

We have historically not given guidance for future quarters and for future years, given the volatility of earnings and the structure of the Company. We believe that it would be inappropriate to do that. I would also add, I think, that our focus really here, as you have seen over the last year, is really to focus on the long-term and rebuilding the Company. So adds to the difficulty of giving short-term forecasts.

Thank you. (Operator Instructions) Our next question today is from the line of [Doug Stalen], a private investor. Please proceed with your question, sir.

Hey, good morning. My question is on those -- the preferred stocks, the B-1 and the B-3 I think they're called, the step-up preferreds. Have you retired any of those, and do you have any plans to retire any of those?

Thank you. Currently we have not retired any of those series B preferreds. When those were put on, they were intended to be short-term investments to help us get the Company stabilized and move forward. We recognize that and are in the process of looking for options to give us a more -- a better long-term capital structure.

Thank you. (Operator Instructions) Our next question is from the line of Frank Mermeth, a private investor. Please proceed with your question, sir.

Yes, a follow-up question I have is, can you comment on the state of the litigation that was announced last year?

Yes. I'll turn that over to Jerry Oslick, who is our General Counsel.

At this point no action has been taken by the plaintiffs. We're waiting for something to develop. It is presently in a non-active mode. We expect something will occur maybe in the next quarter or so. Again, we do not believe there is any merit to the litigation.

Thank you. (Operator Instructions) Our next question is from the line of [George Thorsen] of Wells Fargo. Please proceed with your question, sir.

Thank you. Several of us in the room here were in the process of going through the 10-Q. But can you comment any further on -- it looks like core earnings were around $0.12. Obviously we were expecting a little bit higher. Like I say, it's probably in the 10-Q, if we spent a day or two to get through it. Anybody can summarize that in layman's terms by chance?

I'll turn it over to Tim Buzby, our CFO. He can give some additional flavor to that.

Keep in mind with the core-earnings calculation it does include everything other than adjustments related to fair value, changes in financial derivatives and trading assets. So that core-earnings number does include the charge to allowances for losses that we took this quarter, a little over $3 million, and also an other-than-temporary impairment charge that we took on our investment in HSBC Finance. So those were two items that adversely impacted core earnings for this quarter.

Thank you. Our next question is a follow-up question from Frank Mermeth, a private investor. Please proceed with your question, sir.

Yes, can you tell me, are you -- I guess this is related to capital surplus, and maybe it's a two-part question. One, do you have a target for your capital surplus? And does any capital raising include more issuance of common equity?

As we look at and as we explore capital raises, we will continue to look at all the options, and do what we believe is appropriate. As we've said in the past, we believe that the capital structure we have was put in place to allow us time to do some restructuring and fixing the Company.

We believe we've made significant progress there, as we said before, and we'll now be looking for something that is at least more intermediate term to longer term in nature. So we haven't ruled out anything. We'll continue to look at all the options and put together a plan that makes sense for the long-term viability of the Company.

Thank you. (Operator Instructions)

Well --

Excuse me, sir. We do have a question coming from the line of [Dave LaDue] with National Securities. Please proceed with your question, Mr. LaDue.

Yes, could you please elaborate on what the surplus could tell us for the next quarter? The increase from $100 million to $126 million?

Again, I'll let Tim Buzby, our CFO, answer.

Not sure I fully understood the question. If you're asking what we expect that surplus to be at the end of next quarter, we don't know at this time. That will depend on earnings and results for fourth quarter.

Thank you. (Operator Instructions) Gentlemen, our next question is a follow-up question from the line of Frank Mermeth, a private investor. Please proceed with your question, sir.

Yes, last question that I have for now anyway is -- I guess one of my frustrations has been -- I guess I'd phrase it as a lack of news releases coming out of Farmer Mac. Just by way of example, just for your recent quarterly call, you only posted information just recently, in the last couple of days. Now thankfully I'm on the e-mail, so get it in advance.

It sounds like on the phone call there you do have brokerage firms on there, Wells Fargo and National Securities. Not sure how many others are following you. But I guess my question is, are you doing anything else to, I guess, promote yourself? And then can you also keep the news flow a little more current?

I think where we have been and part of what we've needed to do is really stay focused. Our Board of Directors and management have been very focused on restoring the strength and health of the Company. We feel like we've made significant progress there, and while not finished, as I said earlier, we're much closer today.

Part of what we will be looking to do in the future is finding ways to continue to communicate and share appropriate information at appropriate times. And so we'll be looking at those kinds of things over the next few quarters, as we move forward. So that's, I think, where we are at this point in time.

Let me add one other thing. I know there have been some who have wanted to get some questions answered. If by chance you don't get them all answered or get them answered today, by all means you should feel free to contact us. If we have received questions that have been e-mailed to us or mailed to us we will certainly respond to those if they weren't answered today.

So part of the discussion of sharing information -- or our desire is to make sure you know we're glad to answer questions and help you understand our Company a little better.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Mr. Gerber for closing comments.

Again, thank you, Rob, and thank you everybody for being on the call. As I said, we continue to work hard to restore and put -- establish and finish the process of fixing this Company and moving it forward to -- and to be able to accomplish our mission. We look forward to talking with you in the future. And we look forward to working with our partners and all of you to make that happen. Again, thank you for being on the call and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.