Federal Agricultural Mortgage Corp (AGM) 2010 Q2 法說會逐字稿

Good morning. And welcome to the Farmer Mac investor conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Michael Gerber. Sir, please go ahead.

Thank you, Amy. And good morning, everybody. I am 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 second quarter 2010 investor conference call. Before starting, I will ask Jerry Oslick, Farmer Mac's General Counsel, to comment on forward-looking statements that may be made today. Jerry?

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 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 quarterly report on Form 10-Q for second quarter 2010, and in Farmer Mac's annual report on Form 10-K for 2009. The 10-Q and an 8-K containing the press release were filed yesterday with the SEC and the 10-K was filed on March 16 of this year. 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 Web site approximately two hours after its conclusion.

Thank you, Jerry. Today we are pleased to present to you Farmer Mac's second quarter results. With the capital raise behind us and core earnings again increasing, Farmer Mac is focused on growing our $10.8 billion portfolio of outstanding loans, guarantees and commitments.

This focus is important to Farmer Mac as it provides more opportunity to bring liquidity and capital support into rural America. But it's also key to improving our earnings and providing improving returns to our shareholders.

Core earnings were $5.3 million for the second quarter, we stabilized and began growing year-over-year, as our six-month core earnings for 2010 were $10.7 million compared to $9.5 million for the same period 2009. This represents a 12.7% increase and reflects the increase in loan assets and greater profitability on those assets.

Our purchases of individual loans with both the Farmer Mac One and Farmer Mac Two programs are at a record pace. Through the end of this year's second quarter, new business volume was sufficient to offset the repayment of loans in our portfolio. In addition, we see continued interest in our products targeted at loan portfolios as evidenced by a new $250 million transaction completed in July, after the end of the quarter. This transaction is an important event for Farmer Mac because it demonstrates renewed interest in Farmer Mac's portfolio products from our ag lenders.

With economic challenges over the last couple of years, many of the significant ag lenders who we have worked with adopted a wait and see attitude concerning the financial strength of Farmer Mac, and in addition became internally focused, coping with the various challenges facing their individual institutions. This resulted in Farmer Mac booking very few of those portfolio transactions.

With the strengthening of our balance sheet and lenders better able to focus on their capital liquidity and funding needs, this transaction represents a return of those ag lenders to Farmer Mac and we are now seeing a renewed interest in our products from that group.

With lenders in both the agricultural and rural utilities sectors looking for sources of capital, liquidity, and to reduce their credit risk exposures, Farmer Mac represents an important potential solution for those challenges and a means to meet the borrowers' needs of lenders' rural customers.

Of note is the continuing higher level of delinquencies. While Farmer Mac's 90-day delinquencies were $56 million or 1.3% of our portfolio as of June 30, 2010, which was down from $70.4 million or 1.64% as of March 31.

That decrease is primarily due to the annual and semiannual payments, January and July, the characteristics of those payments on most of our Farmer Mac One loans. Delinquencies did increase when compared to the same period in 2009 when they were $42.3 million, or 95 basis points. Also of note is the change in the concentrations within those delinquencies. For much of 2009, the 90 day delinquencies were concentrated in the ethanol portfolio. Today that concentration has been significantly reduced.

Ethanol loans comprised only $10.9 million of the $56 million of 90 day delinquencies as of June 30, and that compares to $18.8 million of the $42.3 million as of a year ago. Certain sectors of agriculture continue to show stress, most notably dairy.

Given the current conditions, we anticipate many sectors will continue to experience challenges during the second half of 2010, with delinquencies and losses and charge offs likely to remain higher than a historical average but we believe within the Corporation's historical experience.

As of June 30, 2010, there were no delinquencies in Farmer Mac's portfolio of rural utility loans. With that as a background, I would like to turn to Tim Buzby, our CFO, to cover the Q2 financial results in greater detail. Tim?

Thanks, Mike. For second quarter 2010, GAAP net income available to common stockholders was $1.8 million or $0.17 per diluted share, compared to net income of $25.4 million or $2.49 per diluted share for second quarter 2009.

Second quarter 2010 GAAP earnings were reduced by after-tax losses of $728,000 due to changes in the fair values of financial derivatives and trading assets and $2.7 million due to the amortization expense related to premiums on assets consolidated at fair value. In comparison, second quarter 2009 GAAP results benefited from $20.3 million of after-tax gains from increases in the fair values of derivatives and trading assets.

Farmer Mac excludes all these individual 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 represents 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 supplement it. Core earnings for second quarter 2010 were $5.3 million or $0.50 per diluted share, up from $4.7 million or $0.46 per diluted share in the second quarter 2009. Second quarter 2010 earnings were driven higher by net interest income.

Our net effective interest spread was 108 basis points for the quarter, up from 82 basis points for second quarter 2009. Across the larger base of program assets, that spread produced $15.5 million in second quarter 2010 up from $9.9 million in the second quarter 2009. Provisions for credit losses on our loans, guarantees and commitments were $1.2 million in the second quarter 2010, compared to net recoveries of $6.2 million in second quarter of 2009.

After those additional second quarter provisions and a $2.2 million recovery of previously charged off losses, our allowance for losses at the end of the quarter was $19 million, up from $15.6 million at the end of first quarter. Farmer Mac's capital surplus above our statutory minimum capital requirement continued to grow during second quarter. As of June 30, that surplus was $207 million, up from $195 million at the start of the quarter.

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'll turn the discussion back to Mike.

Thanks, Tim. We continue to move forward with building a strong Farmer Mac. Earnings are improving even with the additions to the reserve. Growth is beginning to occur. And the portfolio remains stable in spite of the stress in ag sectors such as dairy. With a solid balance sheet and a strong focus on growth in our mission volume, our results are in line with our expectations and we remain encouraged about the future of Farmer Mac. Thank you for being on the call. We look forward to sharing future results with you in the quarters to come.

And with that I'll turn the call back over to Amy and we'll be glad to take your questions.

(Operator Instructions). Our first question is from Mark Armentrout with Investors Asset Management. Sir, please go ahead.

Good morning. What's the plan to develop increased investor interest in the stock? I notice again the tremendous sell off that occurs every time you report earnings.

Well, our focus over the last year, year and a half has really been to try to stabilize the Company and begin the process of building confidence in investors and confidence in our shareholders. We currently are talking to our board about options along those lines. We continue to meet with investors when the opportunity allows. And we'll be working on additional strategies over the next six months to do just what you're talking about.

Okay. Thank you.

(Operator Instructions). Our next question is from John [Sioux] with Recap. Please go ahead.

I would like to know why such a big loss on the derivatives.

Tim, you want to take that?

Sure. The derivative losses are a result of pay fix swaps that we've had and use in our risk management strategies. Those fluctuations in fair value we exclude from our core earnings. In general the derivatives that we hold we hold throughout their maturity, and we expect that those values whether they are positive or negative for a particular quarter will return to zero upon maturity.

Thank you.

(Operator Instructions).

Well, if there are no more questions, again we appreciate very much the opportunity to share our results and talk with you. We look forward to sharing our results in quarters to come. Thank you and have a great day.

This concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.