Federal Agricultural Mortgage Corp (AGM) 2010 Q4 法說會逐字稿

Good morning, and welcome to the Farmer Mac investor call. All participants will be in 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. Mr. Gerber, please go ahead.

Thank you, Amy, and good morning, everyone. I'm Mike Gerber, the President and CEO at Farmer Mac, and the Farmer Mac management team and I are pleased to welcome you to Farmer Mac's fourth 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.

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 the factors and events are identified in our press release issued yesterday and discussed in Farmer Mac's annual report on Farmer Mac -- on Form 10-K for 2010. The 10-K 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 as otherwise mandated by the SEC. A recording of this call will be available on our website after its conclusion.

Thank you, Jerry.

Today, we are pleased to present to you Farmer Mac's 2010 results. These results reflect an excellent year. Growth in our outstanding portfolio of loans, guarantees, and commitments was significant. We did $3 billion of new business in 2010, increasing the total outstanding portfolio at year-end 2010 to $12.2 billion. That represents a 14% net growth for the year.

It is also significant that all sectors of our Business contributed to that growth. Purchases of Farmer Mac I loans increased by nearly 100% for the year, as we added 62 new seller banks in 2010. Farmer Mac also purchased $900 million of Farmer Mac I AgVantage securities on seven transactions including four different issuers. Similarly, purchases of USDA Guaranteed portions of loans by our subsidiary, Farmer Mac II LLC, were also up 32% over the previous year. And rural utilities -- while new business growth was lower in 2010 compared to 2009, net rural utility volume grew to $2.6 billion from $2.1 billion or 24% for the year.

The increase in our loan purchase activity was due to attractive interest rates offered by Farmer Mac, as well as Farmer Mac's commercial bank business partners reaching some self-established sector or bar or exposure limits. With lenders in both agriculture and rural utility sectors looking for sources of capital and liquidity, and also to reduce their credit exposures, we're pleased that a stronger Farmer Mac is becoming an increasingly important solution for their challenges and a means to meet the borrower needs of lenders' rural customers.

This increased volume with higher margins also impacted our core earnings. Farmer Mac's core earnings for the fourth quarter of 2010 were $6.7 million, compared to fourth quarter 2009 core earnings of $5.4 million. Core earnings for the year 2010 were $25.4 million, compared to $16.1 million for 2009. This reflects a 58% increase when compared to the 2009 results.

As expected is the continued elevated level of our delinquencies. We continue to see the effects of a challenging general economy and the impact of highly volatile pricing for many of our Ag commodities. Farmer Mac's 90-day delinquencies were $70.2 million or 1.63% of the portfolio as of December 31, 2010. That's up from $64.8 million or 1.53% as of September 30, 2010, and $49.5 million or 1.13% as of December 31, 2009.

On a positive note, ethanol loans were the most significant concentration within that 90-day delinquency group for much of 2009. But, as a result of better margins in the industry and the resolution of a number of nonperforming ethanol loans, our 90-day delinquent ethanol loans stood at $10.9 million, which represents only 15.5% of the total 90-day delinquencies as of year-end 2010. And that compares to $19.1 million or 38.6% of the 90-day delinquencies as of December 31, 2009.

The increase in non-ethanol industry delinquencies reflects the fact that certain segments of agriculture, including, for example, the forest product sector in greenhouses and nurseries, continue to be adversely affected by weaknesses in the national economy in general, as well as by volatile commodity price cycles. Given the current conditions in agriculture and the general economy, it is likely that we will continue to see some stress in the portfolio. We continue to monitor -- closely monitor the portfolio. Delinquencies, losses, and charge-offs are likely to remain higher than the historical average but within the Corporation's historical experience for 2011. As of December 31, 2010, there were no delinquencies in Farmer Mac's portfolio for rural utility loans.

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

Thanks, Mike.

For fourth quarter 2010, GAAP net income available to common stockholders was $12.5 million or $1.16 per diluted share, compared to net income of $5.5 million or $0.53 per diluted share for fourth quarter 2009. Fourth quarter 2010 GAAP earnings included after-tax net gains of $12.1 million due to changes in the fair values of financial derivatives and trading assets, up significantly from similar gains of just $400,000 in fourth quarter 2009. GAAP earnings were reduced in fourth quarter 2010 by $3.7 million, due to the lower of costs or fair value adjustment on loans held for sale, compared to no such adjustment in fourth quarter 2009. GAAP earnings were also reduced by $2.4 million, due to the amortization expense related to premiums on assets consolidated at fair value in January of 2010, while there was no such amortization in 2009. Farmer Mac excludes each 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 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 fourth quarter 2010 were $6.7 million or $0.63 per diluted share, up from $5.4 million or $0.52 per diluted share in fourth quarter 2009. During 2010, core earnings were driven by increased business volume, which resulted in growth in our balance sheet and higher net interest income. Our net effective interest spread for fourth quarter 2010 was 107 basis points, up slightly from 104 basis points in the preceding quarter. That increase is in part due to the continued redemption of higher cost callable debt. Across our larger base of assets, that spread produced $19.9 million of income in fourth quarter 2010, up from $15.4 million in fourth quarter 2009.

During fourth quarter 2010, we recorded $1.2 million in provisions for credit losses, compared to provisions of $2.2 million for fourth quarter 2009. Our allowance for losses at December 31, 2010, was $20.1 million, compared to $14.2 million at the end of 2009. Farmer Mac's capital surplus above the statutory minimum capital requirement was $159.6 million at the end of 2010, compared to $120.2 million at the end of 2009. More complete information on Farmer Mac's performance for the quarter and the full year is set forth in the 10-K we filed yesterday with the SEC.

With that, I'll turn the discussion back to Mike.

Thanks, Tim.

Since the challenges of late 2008 and early 2009, our focus has been on improving our balance sheet, reducing risk in our operations, and an increasing emphasis on strengthening our relationships with both our customers and partners. We're pleased that many new customers have allowed us the chance to help them meet the needs of rural America. That focus has resulted in growth in our portfolio of loans, commitments, and guarantees, and stronger core earnings during the year. Although nothing is certain in these times, we continue to see opportunities for growth in the quarters ahead, and, as we add high-quality Ag and rural utility assets at reasonable spreads, we expect core earnings growth to continue. These factors should provide solid momentum into the future.

In summary, our goal is to support the needs of rural America, to build a stronger Farmer Mac to provide solid returns for our shareholders, and to fulfill our Congressional mission. We look forward to sharing the future results with you.

At this time, we will be glad to take any questions you might have, and I will turn the call back over to Amy.

We will now begin the question-and-answer session. (Operator Instructions). And at this time, we will pause momentarily to assemble our roster.

Our first question is from Johnny Su of ReCap. Please go ahead.

Hi. I have been a stockholder since 2008, and I would like to know when Farmer Mac plans to increase the dividend back to where it used to be.

Well, at this point in time, we continue to, with our Board, look at where we are in terms of dividend. I think the balance for us is that we continue to see growth opportunities and the need to have a strong balance sheet to handle that growth. Today is -- outweighs where we are in terms of the dividend in the short run. So we will continue to look at it, but as growth continues, we want to build capital as well.

Thank you.

Our next question is from George Forson with Wells Fargo. Please go ahead.

Hi, guys. Congratulations on a great year.

Question, everyone talks about -- obviously 58% growth on core earnings is great. Tell me if I'm getting this wrong. I look at two and a half years ago, the shareholder equity basically went to, let's say, zero, stick a fork in us. We're at $460 million now. If we back out the preferred shareholders now of last January of $250 million, it leaves us about $210 million of, in essence, capital or equity to the shareholder. That's about a $10 a year growth rate.

Am I getting something wrong there? I'm leaving the A shareholders out of this, but I kind of look at this is as sweat equity. And I missing something here?

Well, I think your math is accurate and certainly worth noting. One comment I would make is, included in that, in fairness to the marketplace, as opposed to sweat equity, is the movement back in the derivative values that added some number -- about, it looks about $75 million -- that's just a real slow, real fast add in 2009. So, some of that was due to derivative movement. But yes, there has been a lot of improvement in strengthening of the balance sheet over the last couple of years.

(Operator Instructions) Our next question is a follow-up from George Forson. Please go ahead.

Obviously, the growth is phenomenal. I think we're kind of in the third inning of a nine inning game here, but I've asked in the past about analyst coverage. I know with 10 million shares, good luck trying to get an analyst to follow the stock. These guys have to warrant making money off of their sales force, trading a lot of shares of your stock after they put a buy or sell or something out on it.

But two questions. I'm not supposed to ask, but they are related. Has the Board talked about maybe doing a two-for-one split or something to -- it wouldn't improve your market cap any, but at least 20 million shares might be a lot less scary than say 10 million shares. And along those lines, the only other way I can see you getting an analyst to cover it is you've got to work on these investment bankers. I'm surprised Jefferies isn't around.

I know there's Chinese walls and conflicts of interest, but that business is pretty much, I'll scratch your back if you scratch my back type business. Any way you can say, is this a one and done investment banking deal bill with, say, Jefferies or Boa, or do these guys intend to maybe pick up coverage so we can do some future capital raising down the road?

Well, to your questions, we continue to look a ways to get the right kind of coverage from the right people, and that's always a challenge, as you described it. And we haven't given up on that.

And to your second point, we have looked at a number of different options in terms of how to position the Company, with stock splits, with all of those kinds of things that we could possibly do. And I think we will continue to look at those, continue to see if we can find a way to get more coverage.

The last part I would suggest is, coming out of what you described as stick a fork in us phase in 2008 earlier, we've had a lot of things to work on, and so those -- the things you describe now really are today items that probably weren't there a year ago. So, we do feel in a much stronger position to go talk to people, and we will be doing that as it makes sense.

(Operator Instructions) Our next question is from Mark Armentrout with Investors Asset Management. Please go ahead.

Yes. On the loan recoveries, or the charge-off recoveries, what percentage of the loaned amount are you recovering? Are these -- is it just an indicator of the credit quality that was extended?

We don't keep those numbers exactly. I think the losses that you've seen have been on some individual deals in sort of odd situations, and as a result, I think it is on a case-by-case basis. Historically, we have collected -- I was going to say the majority of the money, I think is probably accurate, but on an individual case-by-case situation, we could see losses. Some depends on whether it's hard real estate or whether there is more specialized structures on the property. All of those kinds of things.

Okay.

Our next question comes from Patrick Dean with RockHill Global. Please go ahead.

Hi.Thanks a lot for taking my question.

I guess, just a quick question as far as book value goes, do you have any kind of idea, you know, it last quarter I think you said it was between $16 million and $17 million. Is it the same range?

Tim, do you want to --

Yes. It hasn't changed much. That's only going to change as we retain earnings, so it's up a little bit compared to the prior quarter. And with each quarter that we continue to retain earnings, you will see that improve. That is working off of the GAAP numbers, so that increase was a little bit higher this quarter than it has been in the last couple of quarters.

Okay. Yes. That ties with what I was getting. Thanks.

Well, if there are no other questions -- we have one. And we will take that. Amy, go ahead.

Our next question is another follow-up from George Forson. Please go ahead.

I apologize for the stick and a fork in it comment there, but last comment, and I will get out of your hair.

There may be once in a, not lifetime, but a unique situation. After all the stock is very misunderstood as a Company, and GSE is a four-letter word these days, so that doesn't help us any, but has the Board talked about maybe taking some of this $160 million? Roughly $60 million of it would buy back 33% of the stock, and when you buy back 33%, your earnings per share increase not $0.33 but $0.50. And if you take a step further at 50% buyback, your earnings per share would go up 100%. Granted, that brings you down to about $60 million in cash available to grow the Business, but if this was a temporary situation and even if we awarded a seven PE on this stock, look where the price would be after a 50% buyback And then do a secondary down the road a year from now, or issue some more preferreds, or what have you. By the way, then you bring that investment banker in who's going to cover you with research.

Any thoughts on that? And I'll get out of your hair here. Thanks a lot, guys.

Thank you for the question.

Yes, we have talked about a number of those things. I think the piece that, again, let me emphasize that as we've come through this time, a lot of those things were just theoretical discussions through 2009 and even the first two or three quarters of 2010. So, we are just able to really think about some of those items.

That said, at the same time some of those items came up, with our Congressional mission, with the excitement that we've seen from our business partners, growth has been pretty solid, as you've seen. And we need to be in a position to handle that growth without over-leveraging the Company. We did that once, we don't want to be there, and so we're going to continue to look at those kinds of things and figure out the best opportunity. But recognize that it takes capital to grow in our Business, and we want to be in a position to do what we need to do in rural America.

Our next question is from Patrick Dean with RockHill Global. Please go ahead.

Hi. I just had one other follow-up question.

And that is, when I'm kind of doing some analysis here, I'm getting around a 20% ROE. Would you say that's accurate or am I in the right ballpark?

This is Tim Buzby.

I think consistent with some of the challenges we've noted in calculating a book value per share, calculating ROE can be difficult as well, depending on how much of the equity you include in the denominator or just stockholders equity. And also would encourage you to use the core earnings number in calculating that return.

So, I won't comment specifically on your number but just give a little guidance for that calculation. In the numerator I would use core earnings, and the denominator I would back out -- I would probably actually use our regulatory capital, as opposed to the GAAP numbers on the balance sheet in order to give you a good, clean calculation.

Okay. Thanks.

Our next question is from Steve Sullivan with Horizon Financial Group. Please go ahead.

Yes. Thank you for taking my call.

I was just curious if you could talk about, on a geographical basis, the portfolio -- you're seeing, obviously, some weaknesses in some parts and strengths on other parts. Can you give us a little bit more thought process on what you're seeing on a geographical, relative to the [long portfolio]?

I'm going to ask with us here today as well is Tom Stenson, our Chief Operating Officer, and is responsible for the credit portfolio. And to give you little more flavor, I'll let him answer that question.

Thank you.

Thank you, Mike.

As laid out in the 10-K, our stresses have been partly tied to the general economy, and that has taken the form of forest products, greenhouse-nursery which is related to the consumer side of things. As well, there are geographically in areas where there was path of development sort of issues in farmland, farm use, may be transitional to the ultimate use, but that date, that future day has been pushed off by the recession . So, the values of those sorts of properties, regardless of the commodities grown on them at present, have dropped precipitously in certain geographies, those that you can imagine tied to the housing issue. So, that's a high-speed overview of the geographic distribution of some of the challenges.

This is Mike Gerber.

One thing I would add to that is that if you look in the K, as you see, we have a significant diversity across geographic regions. And so Tom's assessment really, really gives us -- is an accurate one. But one of the advantages is there are other parts of the country, at least in agriculture, doing very well, and we are in those as well. So, I mitigate some of the risk in that.

Okay. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gerber for any closing comments.

Again, Amy, thank you, and thank you to all of you for being on the call, for the questions, and for the interest in Farmer Mac. And we look forward to sharing with you in the future the results and talking to you again. Have a great day, and again, thank you.

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