Federal Agricultural Mortgage Corp (AGM) 2011 Q2 法說會逐字稿

Good morning and welcome to the Federal Agricultural Mortgage Corporation conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Michael Gerber, President and CEO. Please go ahead, sir.

Thank you, Denise. And good morning, everybody. I'm Mike Gerber, the President and CEO of Farmer Mac and the Farmer Mac management team and I are pleased to welcome you to our second quarter 2011 investor conference call. Before we begin this morning 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 reflects management's current expectation 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 2011. 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 as 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. We are pleased to report our second quarter 2011 results. These results reflect a continuing trend of improving financial performance 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 those solutions.

Strong growth in both core and GAAP earnings, another solid quarter of growth in new business, new program business volume and declines in our 90 day delinquencies and non accrual loans leading to a small reversal in the allowance for losses highlighted the quarter. Earnings were strong in the second quarter. Core earnings were $10 million compared to $5.3 million in the second quarter of 2010 and $9.1 million in the first quarter 2011. GAAP earnings improved from $1.8 million in the Q2 2010 to $5.2 million in Q2 2011.

These increases continue to be a reflection of adding new volume or adding new loans coupled with our continued low cost of borrowing. This has improved the profitability of our core portfolio.

During second quarter 2011, Farmer Mac added $608.1 million of new program volume bringing the total new volume for the first half of 2011 to $1.6 billion. This represents a 3% increase in program loan volume during Q2.

All of our products and sectors contributed to that new volume which replaced principle paydowns resulting in Farmer Mac's outstanding volume remaining unchanged from December 2010 at $12.2 billion.

Also in the second quarter of 2011 we experienced a lower level of delinquencies. Farmer Mac's 90-day delinquency were $54.6 million or 1.27% of the portfolio of our Farmer Mac I portfolio as of June 30, 2011. That is down from $70.2 million or 1.63% as of December 31, 2010 and $56 million or 1.3% as of June 30, 2010.

It is important to note that as of June 30 we had no ethanol loans that were delinquent and that compares to $10.9 million of delinquent ethanol loans of as of December 31, 2010 and June 30, 2010. When analyzing our delinquencies in our program business we take into account really more than those Farmer Mac agricultural loan delinquencies as a percentage of Farmer Mac I volume.

Total program business, [co vac] securities and rural utility loans, neither of which currently have any delinquencies, and the USDA guaranteed portions, or Farmer Mac II business, which are backed by the full faith and credit of the United States. When these are included in the calculation our overall level of 90-day delinquent loans in all of our programs is just 0.45%.

While many Ag sectors remain volatile and any one sector or individual large loan could impact these numbers, we are pleased with the decline in delinquencies and this decline reflects our continued focus on disciplined underwriting and the recognition that credit quality is a key component to our continued success.

As you know, Standard & Poor's recently downgraded the credit rating of the United States, related agencies and certain GSEs. We are pleased to say that to date, Farmer Mac's access to the capital markets has not been negatively affected by those rating downgrades. The ultimate effect on global markets, and specifically on Farmer Mac's business and our financial condition and our liquidity, are unpredictable and may not be immediately apparent.

To ensure that we were able to meet our customer needs and to continue to perform on our obligations, Farmer Mac took a number of precautionary steps including building cash reserves. We continue to monitor the markets carefully and will continue to adjust strategies accordingly to ensure that we can purchase loans as they become available and that we can meet our obligations. With that as a background I would like to turn to Tim Buzby, our CFO, to cover in detail the financial results. Tim?

Thanks, Mike. As mentioned, second quarter core earnings were $10 million, or $0.94 per diluted share, up significantly from $5.3 million or $0.50 per diluted 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 reflects 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. The first, increased net interest income which was $29.2 million compared to $21.6 million insecond quarter 2010. While program asset growth throughout 2010 and 2011 generated this higher income, our net affect to spread for second quarter 2011 was 96 basis points, down from 108 basis points in second quarter 2010. It is important to note, however, that the 12 basis point drop in spread was due to the addition of lower yielding assets in our liquidity portfolio, primarily US treasuries which provide Farmer Mac a contingent source of liquidity.

The second contributing factor to the higher core earnings was a reduction in our allowance for losses of $800,000 compared to provisions for losses of $1.2 million a year ago. The resulting allowance for losses at quarter end was $18.5 million down from $20.1 million at the end of 2010 and $19 million as of June 30, 2010.

For second quarter 2011 GAAP net income available to common stock holders was $5.2 million or $0.48 per diluted share compared to net income of $1.8 million or $0.17 per diluted share for second quarter 2010.

Second quarter 2011 GAAP earnings benefited from the same items that increased core earnings. Farmer Mac's capital surplus above the statutory minimum capital requirement was $162 million as of quarter end, slightly higher than the $160 million surplus at the end of 2010.

For 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.

Thanks, Tim. As you can see we continue to make progress. Solid earnings, the addition of new volume, some improvement in our delinquencies and a decline in our distressed credits all contributed to another quarter of improving results.

Currently with strong commodity prices and a healthy agricultural segment many producers are using cash rather than debt to make purchases. That has impacted our growth in the short-term. However, we continue to have dialogue with lenders in both the agriculture and rural utility sectors as they continue to search for sources of capital and liquidity and to reduce their credit risk exposures. As a result of these impacts we continue to be optimistic about the opportunities in front of us.

To that end we are pleased that subsequent to year end Farmer Mac and MetLife agreed to replace a $1 billion off balance sheet AgVantage security issued by MetLife that matured in July of 2011 with new AgVantage securities issued by MetLife totaling $1 billion with maturity dates ranging from 2014 through 2021. $800 million of those AgVantage securities have already been purchased by Farmer Mac with the remaining $200 million scheduled to be purchased by mid August.

We expect continued new loan volume to help offset maturing volume and provide for continued improving earnings. And with the current health of the Ag and rural utility sectors we are well positioned to take advantage of future opportunities and we look forward to sharing those future results with you.

With that and at this time we will be glad to take any questions you might have.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question will come from Jon Evans of Edmunds White Partners. Please go ahead, sir.

Can you just talk about you have excess liquidity and you made a statement that a lot of your customers are using cash as opposed to debt to fund their purchases. I guess have you thought about raising the dividend? It used to be a dime, a quarter, it is a nickel now. I guess in this low interest rate environment that seems like that might be appealing to shareholders. So could you talk a little bit about that, please?

Yes, we continue to look at the dividend on a regular basis. One of the challenges we have is as we have talked about historically, our new business is a lumpy business that comes in not only the continued cash window business, but with the large AgVantage transactions. We believe it prudent to have enough capital to continue to meet the needs of our customers, and so that is the balance that we continue to look at and trade off as we think about whether or not to raise the dividend. The Board looks at it on a quarterly basis and makes their decisions, and we at this point in time will continue to look, and that decision will to a large extent be based on the outlook for growth in the future.

(Operator Instructions). And we have a follow-up question from John Evans of Edmunds White Partners. Please go ahead.

I'm sorry. I got cut off. So have you already had the board meeting? Was it before the quarter? And then I guess the $162 million that you have in excess capital that you have -- where can you lever that to then?

The dividend payment, Jerry, you want to take?

The dividend payment for the previous quarter was set at the Board meeting that occurred in August. The Board has not met to consider the dividend yet this quarter.

Okay, got it. And then the $162 million that you have in excess capital, I guess what can you lever that to, or how much more business can you put on with that type of capital.

This is Tim Buzby. Just simply using the simple math of our statutory minimum capital calculation, the conservative way to look at it would be is if we put all of the new business on our balance sheet and it would require to hold 275 basis points of capital against that business. That would be roughly $5.8 billion worth of business. So it would depend from an economic standpoint on how we looked at that business, but that is simply from a compliance standpoint $5.8 billion would be the maximum that we could do.

Right. I guess that is the point of the conversation. Doesn't it seem ridiculous that you are not going to get $5.8 billion? Your portfolio is flat year over year. I know you've done a nice job with it, but it seems hard to believe that you are going to get $5.8 billion in business, so why wouldn't you start to give some of that back to shareholders?

At this point as I said, that continues to be discussed. The challenge is as I said, the business comes in lumpy pieces and the transaction that we just did with MetLife, as an example, was $1 billion.

So we are not making a statement about how much of that comes today or tomorrow or the next day, but we continue to look for those opportunities. We continue to think there is opportunities in front of us and we want to look at that a little farther out than just quarter to quarter because rebuilding that capital so you have the excess that you need to continue to operate the business, it doesn't come back overnight. If you were to give it back either in the form of dividends or for that matter even grow the business that is significant.

So we want to take a longer term view. We want to be able to meet our mission and meet our customers needs, and of course, we have to balance that against our desire to provide returns for investors. That is the balance. We will continue to look at it.

Thank you. And showing no further questions in the queue, I will -- excuse me, we have Mr. Evans with a follow-up question. Please go ahead, sir.

I'm sorry since nobody has any questions can I ask you several?

Absolutely.

Okay. Great. So can you just talk a little bit about the $1 billion that you announced? So at the end of the quarter I think you had $12.2 billion inoutstanding volumes, and so the $1 billion that you announced with Met, is that an addition or does that just replace it? So do we look at that as adding to the portfolio or the portfolio staying flat?

That replaced a transaction that we had with them before. That said, it is a little different structured transaction in that we are bringing it on balance sheet which requires some additional capital with that. In addition though, it also provides because of the structure of it, additional income because we are bringing it on the balance sheet.

Got it. Okay. And then the other question I have, I read your filings relative to I think the bonuses that you have, and I think you guys are bonused on being able to grow the portfolio. You are halfway through the year and your portfolio is flat since December. With what you see out there now, I know it is lumpy, but if we were having this conversation at the end of the year do you think your portfolio will be up?

Well, as I said, it is a very lumpy business. It would be unfair for me to try to speculate in too big of a way as to where we are.

Our cash window and the other pieces of our business continue to grow solidly. We are talking to a number of other customers about potential business, but when and if those transactions come to us remains to be seen. And so it would be hard for me to tell you exactly where we are going to land.

Okay. And then so obviously we have seen the treasury get downgraded but we have seen yields go down tremendously. Have your spreads changed much? And then since yields on treasuries have gone down so much, are you seeing your absolute funding going down, and do you have an ability to refinance much of your debt?

Well, we have seen exactly what the rest of the market has seen. No real differences in our portfolio versus everybody else's. Real rates have gone down in the short run here. We have seen those go down and that has impacted. We have been aggressively looking at opportunities to reposition our debt portfolio all along the way, so of course when rates go down it gives us more opportunity, but it is not as if we have a significant amount of high priced debt that we are able to move and change.

Right, but do you become even more advantageous, or do customers like Met, et cetera, look at you even more positively because they can fund even cheaper now through these conduits?

Certainly as rates go lower and on a relative basis if that is the way it works out. Again, it depends on the individual customer, absolutely. That is an advantageous position for us to be in.

Okay. And then just to talk to you about your spread. So your spread was down year-over-year, but it was up like 4 basis points sequentially. Kind of with what you see with spread now would you expect your spread to be flat, up, down, sequentially from here, from the 96 basis points?

This is Tim Buzby. I think probably some where in the low to mid 90s is what we expect in the near-term barring any significant changes in market conditions. I think we gave similar guidance last quarter that in the 90s is about where we expect to see it.

And we do have another question from [Joy Moloch] of Loomis, Sayles. Please go ahead.

Hi, good morning. Good morning. I was watching this spring and early summer all of the flooding that occurred along the Mississippi and Missouri and Illinois and Kentucky. Just curious how is that affecting your business? And do you expect like delinquencies to uptick slightly due to that? If you could just comment on that.

Well, the reality is there has been an impact on individual operations in those areas. That it is important to note that for us that our portfolio in that area is very small and we are diversified all over the country, so that piece is not significant in terms of our overall portfolio. While there could be some individual effects we don't see that,or for that matter, other current weather conditions having a real impact on our delinquencies.

Okay. And do you see it like mentioning that your volumes have grown, but do you think that could have impacted further growth?

Well, at this point in time agriculture is profitable. Again, individual operations in every season have to deal with impacts.

The reality is as profitable as many of those industries are, they have not been borrowing lots of money from their lenders, and so there haven't been as many deals, and so that is healthy for the industry, but it does slow down our growth to some extent. So as the cycles change, as individual operations decredit, that is when we can step in and help and, yes, some of those could very well need additional debt as they go along to help work through the scenario, and we would be available for that.

Okay. Thank you.

Showing no further questions in the queue -- oh, we do have an additional follow-up from John Evans of Edmunds White Partners. Please go ahead.

Sorry. Just a last question. Your credit quality if you look at it sequentially in absolute dollars it came down by about $3 million. I guess in the first quarter you pointed that out and said that was kind of an anomaly. Is the normal seasonality for credit quality to get better sequentially from Q1 to Q2 normally, or was this an anomaly, too?

Typically in terms of delinquencies and credit quality it does get better sequentially from Q1 to Q2 because you have year end delinquencies, a lot of payments at year end that show up in the delinquencies of the first quarter. Those have to be worked through. In addition the credit cycle typically is those deals are looked at in the spring, and so they would be adjusting credit qualities in the spring of the year. So yes, we would expect that trend to be a normal trend.

Got it. And then I promise this is the last question. You mentioned ethanol. You had nothing that was in ethanol. If the tax credit goes away, does that concern you about some of our customers, or have you gone through that analysis?

Yes, we have gone through that analysis. We continue to look at that portfolio. Today the impacts I would say are uncertain. It is a blender's credit, not a direct producer's credit. Whether it goes away or gets reduced or gets changed to something else still is up in the air.

So we continue to monitor it. Ethanol operations have continued to perform here recently, and we are hopeful that continues, but we will keep watching closely.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Michael Gerber for any closing remarks.

Thank you, Denise. And again, thank you to everybody for being on the call and for your questions and interest in Farmer Mac, and with that we will sign off and look forward to sharing with you the Q3 results. Have a great day.

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