Federal Agricultural Mortgage Corp (AGM) 2010 Q1 法說會逐字稿

Good morning and welcome to the Farmer Mac investor conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Michael Gerber. Sir, please go ahead.

Thank you BJ, and good morning. I am Mike Gerber, the President and CEO of Farmer Mac. The Farmer Mac management team and I are pleased to welcome you to the Farmer Mac first quarter 2010 investor call. Before starting today I would like to ask Jerry Oslick, Farmer Mac's General Counsel, to comment on some forward-looking statements that may be made today.

Thanks, Mike. 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 from the forward-looking statements. Some of these factors and eventsare identified in our press release issued yesterday, and discussed in Farmer Mac's quarterly report on Form 10-Q for first quarter 2010, and in Farmer Mac's Annual Report on Form 10-K for 2009. The Form 10-Q was filed yesterday with the SEC. A Form 8-K containing the press release was filed this morning, and the Form 10-K was filed on March 16.

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.

Thank you, Jerry.

Today we are pleased to present to you the first quarter results. These results were dominated by a number of significant events, such as the capital raised through the sale of preferred stock issued by our newly-created subsidiary, and the implementation of a number of significant accounting rule changes, like FASB 166 and FASB 167, and the roll-out of segment reporting. In a few minutes I am going to ask Tim Buzby, our CFO, to go through the numbers and details, but given all of the moving parts I thought it was appropriate to give you some perspective for the quarter. Overall, Q1 was a solid quarter.

Results are in line with our expectations, and because of that we remain optimistic about the opportunities for 2010 and beyond. With the completion of the capital raise in January and earnings in Q1, our capital position grew significantly. As of March 31, 2010, capital in excess of the regulatory minimum grew to $195 million, adding significant strength and stability to the balance sheet and providing capital for growth. Outstanding program volume was flat at $10.7 billion, however, as a result of our marketing efforts the current financial landscape, and Farmer Mac's improved financial condition, our cash window loan purchases in the Farmer Mac II program which is the purchase of the USDA guaranteed loans by our newly-formed subsidiary had record growth for the quarter,continuing the trend, that began in mid-2009.

That said, over the past few years, much of the growth in Farmer Mac has come from large portfolio-based transactions. While we did not close any of these transactions, these larger transactions during the first quarter, recognize that the sales cycle for these transactions is long, and only with the recent stabilization of Farmer Mac, did lenders again become interested in our products and services. Given the pressures banks face to strengthen their capital position, to raise cash, and yet to continue to meet borrower needs, we continue to have a positive outlook for transactions in 2010. Earnings were also in line with our expectations. Core earnings of $5.4 million, or $0.54 a share, reflected larger spreads on our core business lines, and reduced provisions for loan losses.

GAAP earnings of $1.8 million were below previous quarters. However, GAAP earnings were directly affected by a number of accounting items, which Tim will describe later on the call. One item of caution remains our high level of delinquencies. 90-day delinquencies as of quarter end were 1.64%. While we believe these levels remain manageable, agricultural operations tied to the general economy, like the wine grape industry and agriculture operations that have nonfarm income, as well as the dairy segment and the ethanol industry continue to face challenges. We continue to monitor these closely, but today believe that our provision is adequate to meet the risks identified in those segments. Of note, we continue to have no delinquencies in nonaccrual assets in our rural utilities portfolio.

In conclusion, we are pleased with the first quarter results as they are within our expectations, based on our previous and our continued optimistic view of the 2010 prospects for business. Interest in our products are growing. Core earnings were adequate given our muted growth, and our credit quality continues to perform even though delinquencies remain higher than historical levels.

With that as a background, I would now like to turn to Tim Buzby, our CFO, to cover the Q1 financial results in greater detail. Tim?

Thanks, Mike. First, I would like to briefly summarize our implementation of new accounting standards during the quarter, and their impacts on our financial statements. The new standards which are related to the transfer of financial assets, and the consolidation of variable interest entities required the consolidation of $1.5 billion of Farmer Mac guaranteed securities, and corresponding liabilities onto our balance sheet that had been previously reported as off balance sheet items.

And the reclassification of $457 million of on balance sheet Farmer Mac guaranteed securities to loans. These changes in classification also caused a $2 million increase in our allowance for loan losses, and a corresponding decrease of the same amount to our reserve for losses. The new accounting standards also increased our retained earnings by $2.7 million,and our statutory minimum capital requirement by about $30 million.

On our income statement, this quarter and going forward the new standards will primarily have two effects. The first is the classification of income related to these newly consolidated assets, which was previously classified as guaranteeing commitment fee income, to now be reported as interest income. The second is the reporting of additional amounts of interest income and interest expense. Both of these changes, however, will have no net effect to our bottom line.

All of these changes are significant changes to the presentation of our balance sheet and income statements. It is important to note that they do not change the underlying economics of our business. The credit risk, interest rate risk management, and the liquidity position of Farmer Mac are unchanged.

Moving on to our overall financial results. For first quarter 2010, GAAP net income available to common stockholders was $1.8 million,or $0.17 per diluted share, compared to net income of $33.5 million, or $3.31 per diluted share for first quarter 2009.

First quarter 2010 GAAP earnings were reduced by a $5.8 millioncharge related to the redemption of previously outstanding preferred stock. While first quarter 2009 GAAP results benefited from a $33.3 million of gains recorded, to reflect increases in the fair values of financial derivatives and trading assets. Farmer Mac excludes both of these items from its core earnings. Core earnings is a non-GAAP disclosure that Farmer Mac uses to measure corporate economic performance and develop financial plans.

In management's view, core earnings more accurately represent Farmer Mac's economic performance, transaction economics and business trends. Farmer Mac's disclosure of core earnings is not intended to replace GAAP information, but rather to supplement it. Core earnings for first quarter 2010 were $5.4 million,or $0.54 per share, up from $4.8 million,or $0.47 per share in the first quarter of 2009. First quarter 2010 earnings were driven by higher net interest income and reduced provisions for losses. Those provisions for losses were $1.4 million in first quarter 2010, down from $6.1 million in first quarter 2009.

Our net effective interest spread was 105 basis points for the quarter, up from 101 basis points for first quarter 2009. Across the larger asset base of program assets, that spread produced $14.8 million in first quarter 2010, compared to $12.6 million in first quarter of 2009.

There are two other items to consider in comparing our current core earnings to the prior year. In first quarter 2009, Farmer Mac realized gains on the sale of investment securities and loans that totaled $4.7 million, in comparison to the sale of investments in first quarter 2010, produced net gains of just $240,000.

In addition to the core earnings disclosures we have made historically beginning this quarter we also included in the footnotes to our financial statements core earnings by business segment, differentiating the operating results for our three business lines, Farmer Mac I, Farmer Mac II and Rural Utilities separately from our general corporate activities. The financial results are indicative of the progress Farmer Mac has made over the course of the past year. More complete information on Farmer Mac's performance for the quarter is set forth in the 10-Q we filed yesterday with the SEC.

With that, I will turn the discussion back to Mike for questions.

As you can see, the accounting changes Tim described resulted in significant changes to the presentation of our financials, as well as impacting in our results for the quarter ending March 31, 2010. Therefore, we have spent some additional time on this call describing those. In the midst of all that noise, as I reflect on our results I'm pleased with the quarter. Core earnings growth, stronger capital, a more stable balance sheet, and an increased interest in our products all point towards what we believe will be a solid year at Farmer Mac as we focus on our mission. That mission, providing liquidity and capital to rural America.

We look forward to sharing those results with you in the quarters to come. At this time, I will turn it back over to BJ, and we will be glad to take any questions you might have.

Thank you. (Operator Instructions). One moment as we pause. (Operator Instructions). Mr. Gerber there appears to be no questions at this time.

Thank you. We appreciate your attendance on the call, and appreciate the opportunity to share the results, and we look forward to sharing the results for next quarter. Thank you, and have a great day.

Thank you. The conference has now concluded. We appreciate you attending today's presentation. You may now disconnect.