Federal Agricultural Mortgage Corp (AGM) 2011 Q1 法說會逐字稿

Good day, and welcome to the Federal Agricultural Mortgage Corporation investor conference call. All participants will be in 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, Rocco, and good morning everybody. I'm Mike Gerber, President and CEO at Farmer Mac, and the Farmer Mac management team and I are pleased to welcome you to our first-quarter 2011 investor conference call. Before starting this morning, I'll 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 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 first-quarter 2011. The Form 10-Q and the 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 the conclusion of the call. Before I turn the call back to Mike for his report on Farmer Mac's business, I should note that yesterday we announced Farmer Mac will make offsetting corrections on its consolidated statements of cash flows and restate its previously issued consolidated statements of cash flows for 2009, 2010.

These corrections will not impact Farmer Mac's previously issued interim or annual consolidated balance sheets, consolidated statements of operations, or consolidated statements of changes in equity and do not affect total cash flow, core earnings, core capital, or minimum capital surplus. We expect to fail an amended annual report on Form 10-A for 2010 as soon as practicable. More information about these accounting corrections are included in the current report on Form 8-K as well as in the Form 10-Q that we filed with the SEC yesterday.

Thank you, Jerry. I am pleased to report our first-quarter 2011 results. These results reflect a continued trend of improving financial results as customers continue to look for solutions that help them meet the needs of rural borrowers. We are very pleased to be a continuing part of that solution and believe our results continue to reflect that reality.

Strong growth in both core and GAAP earnings, solid growth in a new business volume, and declines in 90-day delinquencies and non-accrual loans leading to a small reversal in the allowance, highlight those results. The first quarter was a very strong quarter for earnings. Core earnings for Q1 2011 were $9.1 million, compared to the first-quarter 2010 core earnings of $5.4 million and fourth-quarter 2010 core earnings of $6.7 million.

GAAP earnings improved from $1.8 million in Q1 2010 to $18.7 million in Q1 2011 and $12.4 million in the fourth quarter of 2010. These increases continue to be reflection of adding new loans, coupled with continued low cost of borrowing. This has improved the profitability of our core portfolio. During first-quarter 2011, Farmer Mac added $1 billion of new program volume. All of our products and sectors contributed to that new volume. This new business volume partially offset the normal scheduled pay-downs and the maturity of approximately $975 million of AgVantage securities, resulting in a slight decline of our loan volume at year-end.

Outstanding program volume as of March 31, 2011, was $11.8 billion, compared to $12.2 billion as of December 31, 2010. Also in the first quarter 201,1 we experienced a lower level of delinquencies. Farmer Mac's 90-day delinquencies were $57.3 million, or 1.33% of the portfolio, as of March 31, 2011, and that's down from $70.2 million, or 1.63%, as of December 31, 2010, and $70.4 million, or 1.64%, as of March 31, 2010. It is noteworthy that no ethanol loans were in nonperforming assets as of March 31, 2011, and that compares to $10.9 million as of December 31, 2010, and $18.6 million as of March 31 of last year.

When analyzing internally the delinquencies in our program business, we take into account more than just those Farmer Mac I agricultural loan delinquencies as a percentage of the Farmer Mac I volume. The total program business includes AgVantage securities and rural utility loans, neither of which have any delinquencies. And the USDA-guaranteed portions are our Farmer Mac II loans, which are backed by the full faith and credit of the United States. When these are included in the calculation, the overall level of 90-day delinquent loans in Farmer Mac programs is 0.48%.

While many ag sectors remain volatile, and any one sector or individual large loan could impact these numbers, we're pleased with this decline in the delinquencies. This decline reflects our continued focus on disciplined underwriting, and the recognition the credit quality is a key component to our continued success. With that as a background, I'd like to turn the microphone over to Tim Buzby, our CFO, to cover our financial results in greater detail. Tim?

Thank you, Mike. As mentioned, first-quarter core earnings were $9.1 million, or $0.85 per diluted share, up from $5.4 million or $0.54 per share a year earlier. 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 reflect 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.

The increase in core earnings was primarily due to two items. First, a reduction in our allowance for losses of $700,000, compared to provisions for losses of $1.4 million a year ago. Our resulting allowance for losses at March 31, 2011 was $19.5 million, compared to $20.1 million at the end of 2010 and $15.6 million as of March 31, 2010.

Second, increased net interest income, which was $27 million, compared to $23.6 million in first quarter 2010. While program asset growth throughout 2010 and 2011 generated this higher income, our net effective spread for first quarter 2011 was 94 basis points, which was down from 105 basis points in first quarter 2010. It's important to note, however, that the entire 11 basis point drop in spread was due to the addition of lower-yielding assets in our liquidity portfolio, primarily US treasuries. Those treasuries provide Farmer Mac a contingent source of liquidity.

For first quarter 2011, GAAP net income available to common stockholders was $18.3 million, or $1.72 per share, compared to net income of $1.8 million or just $0.17 per share for first quarter 2010. First-quarter 2011 GAAP earnings benefited from the items that increased core earnings, but also increased due to the application of fair value accounting guidance, primarily due to changes in the fair values of financial derivatives. The application of that accounting guidance added $9.3 million, compared to $2.1 million in first quarter 2010. GAAP earnings were also up in first quarter 2011 compared to the prior year, due to the $5.8 million of preferred-stock issuance costs recognized in earnings in first quarter 2010. Farmer Mac excludes each of these items from its core earnings.

Farmer Mac's capital surplus above the statutory minimum capital requirement was $168.7 million as of March 31, 2011, compared to $159.6 million at the end of 2010. 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 make progress. Solid earnings, the addition of new loan volume, some improvement in delinquencies, and distressed credits all contributed to another quarter of improving results. Although nothing is certain in these times, with lenders in both the ag sector and rural utilities sector looking for sources of capital and liquidity and to reduce their credit risk exposures, we continue to be optimistic about the opportunities in front of us.

Continued new loan volume will help to offset maturing volume and provide for continued improving earnings. And we look forward to sharing those future results with you. At this time, we'll be glad to take any questions you might have.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

At this time, we will pause momentarily to assemble our roster. George [Thorson], Wells Fargo.

Good morning, gentlemen. Great quarter. Hey, question. I know I have been pounding the table on analyst coverage and such for some time. And if we're not really able, due to the share count being around 10 million, would it be possible for you guys in the future to maybe start giving us some forward guidance? We're out here on an island all by ourselves trying to due our own due diligence.

I understand where that's the opportunity comes also, but some forward guidance or at the end each quarter some updates, a little baby press release or something. That's about 6 weeks before the 10-Qs come out. But something. We basically hear from you four times a year. Any thoughts on that?

Yes, we'll consider that. Here's been the challenge along the way, as we've thought about that. And that is that given the lumpiness of our business, these large AgVantage transactions, those kinds of pieces of business coming in and maturing, and some of them going away, some of them being redone, it becomes challenging for us to, with any credibility, give exact numbers for -- from quarter to quarter. And so we've shied away from giving those specific numbers just because of that. We do think that -- but in terms of your other questions, early earnings releases or those kinds of things, that's something we need to evaluate and take a look at, and we'll do that.

Thank you. John Evans, Edmonds. And as a reminder, I would like to mention that we are limiting ourselves to one question. If you'd like to ask a follow-up, please reenter the queue.

Can you talk -- you had a real impressive reduction in the delinquencies or in your credit issues. Obviously, they're at very low levels. Do you see the opportunity for that trend continuing? And then also, can you just talk about spreads sequentially? Do you think spreads go up, or do you take that treasury money and reinvest it? Help us understand that.

Okay, let me take the delinquency question, then I'll turn it over to Tim to talk about the spread question. We were very pleased. In fact, somewhat surprised, by the delinquency decline in the first quarter, primarily because a lot of our payments are semiannual and annual payments. And so typically first quarter is one of our higher levels of delinquencies in the year.

While I think the profitability and the strength of agriculture is there, and we're comfortable that delinquencies are going to stay within manageable levels, the volatility in agriculture today, the volatility in the various segments, and the continued dependence on continued profitability for a number of sectors means that there could be some movement in those numbers. But in general, we think the decline has -- the agriculture sector's been solid, and the declines arrest result of improved profitability in agriculture. Do you want to handle the spreads question?

Sure. With respect to spreads, that 11-basis-point drop that I talked about earlier, going from 105 down to 94, keep in mind that is across comparing to a year ago. So there have been a lot of changes on the balance sheet that are reflected in that number. And as we said, too, that drop is largely driven by the addition of US treasuries, explain quickly the rationale for holding the treasuries.

Many institutions have bank lines of credit. Farmer Mac does not. Instead, rather, we borrow money in the capital market and then buy US treasuries and hold those on our balance sheet. If we were to need liquidity, rather than drawing down a line of credit, we would simply sell those US treasuries. So there is a small cost to holding those, but that's the reason for the drop in spreads.

I would suspect that -- so you use the term sequentially. Looking back to the prior quarter and going forward, you typically won't see as large a drop as compared to looking at a number compared to a year ago. I would expect somewhere in the 90s is probably what we expect to see going forward.

Okay. Thank you.

Johnny Su, ReCap.

My question regarding the increase on the compensation and employee benefits.

Tim, you want to handle that?

Yes. Again, that's comparing to a year ago. That is largely the reflection of higher headcount, more employees at Farmer Mac, and also increase in medical insurance costs, quite frankly.

Thank you.

Just to add to that, we've continued to build staff and strengthen the depth of the organization. With the growth we've had, we've also seen the need to add body count just to handle the business that comes through the doors.

Thank you.

(Operator Instructions)

James [Panna], [Sipan] Partners.

Thank you. Just a question about your compensation and how it relates to core income, or core earnings. What percentage of your total base compensation, or total compensation system, including bonuses, for the management team is based on core earnings? And what core earnings level do you have to hit to get 100% of your targeted bonus compensation?

Jerry, you want -- or Tim? The --

I'll take it, Jerry. Actually, we recently filed our proxy, which includes extensive disclosure about management compensation. It talks about the metrics from the prior year that had to be obtained in order to hit certain levels of compensation. So I think your question would require a very long answer, so I'll just refer to you that document and just ask if you have further questions, you can call us. Clearly, executive compensation, and employees as well, is a component of base compensation. There is short-term bonus cash compensation, then there's a form of restricted stock grants and also stock depreciation rights.

The specific -- and specifically to your question about core earnings, the component, I believe, is 30%, would be for -- well, they've changed somewhat. Actually, the core earnings piece did not change for 2010 and '11, so it would be 30% of the short-term inventive piece would be tied to earnings. And to reach 100% payout would require a 10% increase in core earnings over the previous year.

Thank you.

Johnny Su, ReCap.

My question is any plan to increase the dividend, even by a little bit? Because I know I've been a longtime stockholder, and we're still down -- I think we're still down by 50%.

Yes, the answer to your question is, I'll take that when we continue to look at the dividend on a regular basis as to what is appropriate. One of the things we've seen is, with the growth that we've seen over the last 3 or 4 quarters and the opportunities in front of us, and some -- and our decision to continue to build the balance sheet, right now, at least to date, the decision has been to continue to hold that capital for growth in the Company. If that growth slows, and if that changes, we'll be looking again at the dividend to make a decision.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time. So I'd like to conclude the question-and-answer session, and I'll turn the conference back over to Mr. Gerber for any closing remarks.

Again, thank you, Rocco, and thanks to all of you for being on the call. We appreciate your support and your interest, and we look forward to providing results for you in the quarters ahead. Thank you again, and have a great day.

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