Federal Agricultural Mortgage Corp (AGM) 2010 Q3 法說會逐字稿

Good morning and welcome to the Farmer Mac third quarter investors 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. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Michael Gerber. Please go ahead, sir.

Thank you. And good morning, everybody. I am Mike Gerber, the President and CEO at Farmer Mac. The Farmer Mac management team and I are pleased to welcome you to Farmer Mac's third quarter 2010 investor conference call. Before starting this morning, I will ask Jerry Oslick, Farmer Mac's general counsel, to comment on forward-looking statements that may be made today.

Thank you, 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 third quarter 2010. The form 10-Q and a Form 8-K containing the press release 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 statements to reflect any future events or circumstances, except otherwise mandated by the SEC. A recording of this call will be available on our website after the conclusion of the call.

Thank you, Jerry. Today, we are pleased to present to you Farmer Mac's third quarter results. Those results showed growth both in our core earnings, and more significantly, in our outstanding portfolio of loans, guarantees and commitments. In the third quarter we did $1.1 billion of new business, bringing the total outstanding portfolio to $11.5 billion, which is an increase of nearly 7% for the quarter. That new business came in the form of both agricultural mortgages and rural utility loans. It is also of note that this growth included three large AgVantage transactions, in addition to the ongoing purchases of individual loans under our Farmer Mac I and Farmer Mac II programs, both of which continue to exhibit strong growth.

Farmer Mac's core earnings for the quarter grew to $7.9 million, compared to third quarter 2009 earnings of $1.3 million. Our nine month core earnings for 2010 were $18.6 million, compared to $10.8 million for the same period in 2009. This 72% increase is a result of both growth in the loan portfolio, and higher spreads on those assets. This will continue to be our focus in the quarters ahead, both growth in the portfolio, as we support the needs of rural America, and growth in our core earnings, to build a stronger Farmer Mac to provide solid returns for shareholders.

Of note is the continued elevated level of delinquencies. We continue to see effects of challenging general economy, and the impacts of highly volatile pricing for ag commodities. Farmer Mac's 90-day delinquencies were $64.8 million, or 1.53% of the portfolio as of third quarter end 2010. And that is up from $56 million, or 1.3% as of the second quarter June 30, 2010.

On a positive note, for much of 2009, Ethanol loans were the most significant concentration within that 90-day delinquency group. As a result of better margins in the industry, and the resolution of a number of nonperforming Ethanol loans, 90-day delinquent Ethanol loans stood at $10.9 million of the total, which represents 16.8% of the total 90-day delinquencies, as of September 30, 2010. That compares to $18.5 million, or 31.1% of the 90-day delinquencies at the same period of 2009. We continue to closely monitor the portfolio.

Given current conditions in ag and the general economy, it is likely that we will continue to see some stress in the portfolio. Delinquencies, losses and charge-offs are likely to remain higher than the historical average, but within the corporation's historical experience, for the rest of 2010, and for the first half of 2011. As of September 30, 2010, there were no delinquencies in our Farmer Mac's portfolio of rural utility loans.

With that as a background, I'd like to turn to Tim Buzby, our CFO, to cover the Q3 financial results in greater detail. Tim?

Thanks, Mike. For third quarter 2010, GAAP net income available to common stockholders was $6 million, or $0.56 per diluted share, compared to net income of $17.9 million, or $1.74 per diluted share for third quarter 2009. Third quarter 2010 GAAP earnings included after tax net gains of $1 million, due to changes in the fair values of financial derivatives and trading assets. Down significantly from similar gains of $17.1 million in third quarter 2009.

GAAP earnings were reduced in third quarter 2010 by $1.9 million, due to the amortization expense related to premiums on assets consolidated at fair value on January 1 of this year, while there was no such amortization in 2009. Farmer Mac excludes 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 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 to supplement it.

Core earnings for third quarter 2010 were $7.9 million, or $0.74 per diluted share. Up from $1.3 million, or $0.12 per diluted share in third quarter 2009. Third quarter 2010 earnings were driven by higher net interest income. Our net effective interest spread was 104 basis points for the quarter, up from 93 basis points for third quarter 2009. That increase is in part, due to redemption of higher cost callable debt, over the course of the past year. Across our larger base of program assets that spread produced $16.2 million in third quarter 2010, up from $11.9 million in third quarter 2009.

During third quarter, we wrote down the fair value of REO properties by $1.2 million, and recorded $0.5 million dollars in provisions for credit losses on our loans, guarantees and commitments. Those charges compared to provisions for losses of $3.2 million in third quarter of 2009. After those additional provisions and $0.5 million of charge-offs, our allowance for losses at the end of the quarter was $19 million, consistent with our allowance at the end of second quarter.

Farmer Mac's capital surplus above our statutory minimum capital requirement, was $183 million at the end of third quarter. Due to growth of our portfolio, that surplus is somewhat reduced from $207 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. As you can see, we continue to move forward with our efforts to strengthen Farmer Mac, and position ourselves as rural America's secondary market. Our portfolios begin to grow. And although nothing is certain in these challenging times, we continue to see robust interest in our products, and opportunities for growth in the quarters ahead. Our core earnings have grown dramatically. And as we add high quality agricultural and rural utility assets at reasonable spreads, we expect that to continue. Even our credit quality, although delinquencies are higher than we wish they were, remain at manageable levels.

With lenders in both the ag and rural utilities sector looking for sources of capital and sources of liquidity and also looking to reduce their credit risk exposures, we're pleased that Farmer Mac is becoming an increasingly important solution for those challenges, and a means to meet the borrower's needs of lenders rural customers. We look forward to sharing future results with you. And at this time, we'll be glad to take any questions you might have.

Thank you sir. We will now begin the question and answer session. (Operator Instructions) The first question is from George Thorson of Wells Fargo Advisors. Please go ahead.

Hey, guys. Congratulations on a great quarter. 500% year over year growth on core earnings. I know that's not sustainable, but it gives us a little look at what might be entailed in the future here. I was going to ask about a dividend increase. But a 500% growth, you can keep my dividend increase and put it back into the Company. I've actually got three questions. I'll try to get one at a time. But Mike, last conference call. You said there was about a $250 million transaction that closed early in the third quarter. It sounds like with the AgVantage transactions and some other ones this quarter, am I correct to assume that the securitization market is coming back? Anyway, Ag land values, according to Chicago Federal Reserve, are actually on the upswing, as opposed to residential property. If the securitization business is back, this could be a huge positive, couldn't it?

Well, it would be. I would want to be cautious in saying the securitization market is open. Many of the assets we've seen have come on to our balance sheet, as opposed to going back out the door through securitization products. That said, there is a lot of interest in what we're doing and what's going on. And so we're continuing to work on that securitization market in the future.

Our next question is from Frank Nameth, a private investor. Please go ahead, sir.

Yes. Hello. Congratulations again on the number. My question is regarding something I noticed in the last 10-Q. You have an AgVantage loan coming due in 2011. Can you specify when that's coming due, and whether or not that's going to be renewed? Or do you have something that's going to replace it? The last part of that is, what's going to be the hit to earnings, if you don't have anything to replace it with?

The AgVantage bonds that do come due in 2011, come due in a couple or three different times, January and July and August. So they come at different times. At this point in time, we continue to work with those customers, as well to talk about the next steps. Not sure what will happen there and we'll have to see how that goes. Those were in terms of the earnings hit. Those -- any time you take volume away, you take some earnings away, but in general, those were put on at a time when spreads were very narrow. And so the impact will be -- will not be significant, at least not nearly as significant as the dollars would indicate that of -- as the dollars would indicate. I'm sorry. We're hopeful to be able to refinance those.

Sorry about that, sir. Your next question is from George Thorson of Wells Fargo Advisors. Please go ahead.

Sorry to hog the call here. I'll try to be brief. Just a little bit of a rant, the lack of research coverage has always been a concern for us longer term serious shareholders. B of A, Jefferies were your investment bankers and Morgan Keegan is doing the Ag loans, the commercial Ag loans with you. And I would think they value all that business. The stock has manipulated it quite a bit. Even this morning, your rogue analysts out there (inaudible) before they open a $0.13 estimate for your fourth quarter. I'm sure that guy is on the bid side of the stock this morning.

Anyway, B of A is probably too big. What about Jefferies and Morgan Keegan? Is it paid to try to smooth out the edges in the peaks and valleys of the stock, especially this past summer. Doesn't it make sense to have some sort of credible research trying to explain what's going on? Thank you.

Yes. That's a legitimate question. One we've talked about a lot. I will tell you to date, our focus, because we saw the pipeline being full and lots of opportunities. Our focus has been primarily on making sure that we could access the debt markets at the rates that our customers needed us to, and fund the growth that was coming. I think as we look forward, we will begin to work on that side of the coverage, if you will, of Farmer Mac. Of course we don't have any control who chooses to cover us or not. But I think as we move forward, that'll be an important piece of what we look at.

Our next question is from Jon Evans of Edmonds White Partners. Please go ahead.

You guys did a great job with new business this quarter. I guess -- was that a seasonal spike, I guess in new business? Or can you talk a little bit about the pipeline and maybe kind of your expectations roughly for Q4? And how you're thinking about next year from a demand standpoint?

Sure. In terms of seasonality, it really was not seasonality. The large AgVantage transactions are transactions, as we've talked about in previous quarters, that are lumpy in terms of when they come. And they're really a result of us being able by late 2009, to be begin to seriously talk to customers again about the kinds of opportunities that we can provide for them. As we look forward, I think, a couple of things that are worthy of note. Our cash window business, our Farmer Mac II business continues to be very strong, as smaller commercial banks look to us for funding and capital relief and risk management with their assets. And there's nothing, at least today, on the horizon that will suggest that won't continue.

We continue, as I said in my comments, to have a strong interest in our products, and again, it's hard to say exactly when that -- when those, or if those transactions will come. But we're seeing lots of interest, and believe there will be additional transactions as we go forward.

(Operator Instructions) The next question is from Frank Nameth, a private investor. Please go ahead.

Yes. My question is I guess a bit of follow up to the question from the gentleman from Wells Fargo. I'm curious. Is there a policy at Farmer Mac which prevents you from making these deals --disclosing the deals prior to the 10-Q? And if there's not, then why is it that we're only finding out about these things on the 10-Q, and not in between. Perhaps that might be one way to smooth out some of the volatility?

There is not a policy about disclosing or not disclosing individual transactions. I think it becomes a question of how you look at the business. Historically, those have not come very often, as you saw from this quarter, and as we disclosed as a subsequent event. In the last queue we see those coming on a more regular basis. And so if they're part of business, then it becomes a question of materiality and the threshold of which we -- well, whether or not we believe it's necessary.

I would say to you that if we did transactions that were material, significant to the business, we would be disclosing those prior to when they occur, so prior to the queue. We believe this is just part of the business, part of what we're trying to accomplish. And part of the future of Farmer Mac, is to continue to do these transactions. That said, they will be lumpy. There's no guarantees that every quarter we'll see one or four or whatever. But we continue to see opportunities to do those as part of the business [motto] going forward.

Our next question is from Jon Evans of Edmonds White Partners. Please go ahead.

Sure. Can you just talk a little bit about your spread. It was up year over year, it was down, like four basis points sequentially. Can you help us understand your guys' outlook, relative to maybe spread in the fourth quarter and going forward? Do you have some high cost debt out there that you can either prepay or refund [early]?

I'll ask - thank you for the question. I'll ask Tim Buzby, our CFO, to answer that one.

Yes. Thanks, Mike. With respect to our spread. Over the course of the past year, I mentioned earlier, we have called quite a bit of callable debt, as we've seen assets not prepay and we call that debt. We replace it with lower cost debt. So that's been one of the primary drivers of that improved net effective spread. We would anticipate that through the remainder of the year, that would probably remain at a consistent level with where we are now. It may improve as we get into next year, for the -- if rates continue to stay low and we do continue to call debt. But I think where we are currently, is probably a good proxy for where we expect to be over the next quarter or so.

The next question is from George Thorson of Wells Fargo Advisers. Please go ahead.

Thank you. In reference to that spread. All the other farm banks, Co Bank, AgriBank, they've all refinanced. In fact, some of them have got their net spread up to over 200 basis points. So who knows, maybe we've got some room in the future.

That leads to another question about the GAAP results, how they differ from the core earnings. And Tim, this is probably best for you. Am I right to assume, now that Bill Gross is calling a top and a bottom market, and we got full in to this [QE2] low interest rate environment, that we've lost money on the swaps, due to the insurance policy for higher interest rates, due to the fact that we didn't really need the insurance policy as rates dropped. So when we're at zero, we can't really go much lower. So is the negative swap number kind of behind us? I don't know if you can really project that or not. But it seemed to me if we're at zero, rates can't go a whole lot lower, and that would protect us on these swaps from now on going forward.

Really, as part of our funding strategy, we have used derivatives, both pay fix interest rate swaps and receive fix interest rate swaps. As we've indicated, the reason we use core earnings, is to remove the unrealized gains and losses on the fair values of those derivatives. Some quarters, it is a positive impact and some quarters, it is a negative impact, that's with respect to our GAAP earnings.

You're correct, interest rates are low. We have seen, beginning in 2008 through today, we have seen the value of derivatives drop significantly. You'll notice on our balance sheet, the fair values of those is in excess of $140 million on liability side of the balance sheet. As interest rates rise over time, we would expect that the value of those derivatives would turn back, or be a lower negative. So directionally, you are correct that we would expect over time those values should increase.

And your next question is from Frank Nameth, a private investor. Please go ahead.

I'm starting to think Wells Fargo is looking over my shoulder at my list of questions. I'll leave the derivatives questions alone, and try to follow up again on your response to the announcements. You said there's a threshold that you said was materially significant. Can you put a dollar amount on that? Because you didn't announce in July, the $250 million. So does that mean that is not considered significant? Can you give a specific number of what you consider material and insignificant?

The -- it's hard to give an exact number. And the reason for saying that, is we have a number of different products that would depend on the product, and it would depend on the impact it has on the Company. And AgVantage transaction has different risks and different implications for the Company, whether it's on balance sheet or off balance sheet, than say, the out right purchase of $250 million or $500 million of loans. Or a stand-by commitment of $500 million or $1 billion would somewhere in there we reach a level where both we and our team here believe that's important enough. We need to tell investors. So I don't want to dance around the answer to the question, except to say that it's very hard to really pinpoint a number. There's no policy. It becomes one of, do we believe that has a material impact on what's going on.

The other side of that question is, at some point in time if these continue, and our business continues as is, then you're releasing one of those. Somewhere along the line you ask the question --Are you really accomplishing what we've been discussing, i.e., stabilizing the stock price? And those kind of things. Or at least stabilizing the interest. So, with that in mind, our focus has really been to do the business and let the quarterly statements speak for themselves. And I think one of the interesting things is, we are in transition here, where we're seeing more of those transactions happen. Which, again, leads me back to say, a $250 million transaction, really our transaction that we believe is part of our business model as we go forward.

The next question is from Jon Evans of Edmunds White Partners. Please go ahead.

I have two questions for you this time. First of all, and maybe I missed it. Can you just tell me what was book at the end of the quarter?

I'm not sure exactly what you mean by book. Are you referring to --

Book value.

Book value. That can be a bit complicated. We do get that question from investors quite a bit. With the structure of our capital, which includes preferred stock, the noncontrolling interest and common stock can be a bit complex, depending on how you calculate that. I would say it is roughly around $16 to $17 currently.

Okay. Great. And then the other question I have for you is just on 90-day delinquency. Sequentially they went up in a dollar amount a little bit. Is that normal seasonality? Or do you think there's something happening on the delinquency side? Or can you just help with that? I know they're at very low levels. I'm just trying to understand.

Yes. That's a good question. There is some seasonality in those, as those mid year payments come on. So that is part of it, and really the primary driver on a dollar basis.

Great. And then just a last question. A bigger picture question. Can you just talk a little bit about with commodities hitting highs, et cetera, and farmers feeling more flushed with cash or opportunities. Are you seeing in general, opportunities more to loan, or make good quality loans?

Well, as is usually the case, what is good for the grain farmers is not necessarily good for other segments of the portfolio. And so, there's both positives and negatives in that. And higher grain prices result in higher feed prices, and higher input cost for Ethanol plants and all of those are sorts of things. So we don't get too caught in the movement of grain one way or the other.

That said, in the middle part of the country, certainly it was mentioned earlier, the statistics coming out have talked about stable or slightly increasing lands prices in the Midwest, in that market, as producers have cash and as properties become available. The answer is, yes, we will see some additional activity in that part of the country and in those opportunities. Though, with the general economy down, with transitional land being a challenge, with other segments of agricultural tied to the economy, a little more challenging, that you'll see some slow down there. So the net is, maybe it's a little pick up, but it's probably not the key factor that's going to drive our portfolio growth in the future.

And that does conclude today's question and answer session. I would like to turn the conference back over to Michael Gerber for any closing remarks.

Thank you. And thank you to all of you for being on the call and for the questions. We appreciate the opportunity to talk about Farmer Mac and the progress we've made. And we look forward to sharing with you in the quarters ahead, the results. So thank you again. And everyone have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line.