Federal Agricultural Mortgage Corp (AGM) 2012 Q1 法說會逐字稿

Good morning and welcome to The Federal Agricultural Mortgage Corporation first-quarter 2012 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 and I would now like to turn the conference over to Michael Gerber, CEO. Please go ahead.

Thank you, Emily, and good morning, everybody. 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 our first-quarter 2012 investor conference call. Before we begin this morning I'll 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 in 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 2012. The form 10-Q and the Form 8-K continuing a 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 another quarter of excellent results here at Farmer Mac. The first-quarter 2012 numbers continue the upward trend of the past several years. Highlights include strong GAAP and core earnings, solid business volume resulting in an increase in aggregate outstanding program volume and credit quality also remains high.

First-quarter 2012 core earnings were $11.8 million compared to $9.1 million in the first quarter 2011, this is a 30% increase. GAAP earnings were $22.2 million for the quarter and also compare favorably to GAAP earnings of $18.3 million in the first quarter 2011. This increase in both GAAP and core earnings were primarily attributable to higher net interest income.

During first quarter 2012 Farmer Mac added $616.2 million of new program volume. That brought Farmer Mac's outstanding program volume to $12.1 billion as of March 31, 2012, that was a net increase to $153.1 million from December 31, 2011. Of note is that the added new program volume in the first quarter came as a result of growth in all of our product lines.

Credit quality also remains strong, primarily as a result of the continuing healthy ag economy. Farmer Mac's 90-day delinquencies were $53.1 million or 1.21% of the Farmer Mac I portfolio as of March 31, 2012, that's down from $57.3 million or 1.33% as of March 31, 2011. Importantly, there continues to be no delinquent ethanol loans as of March 31, 2012.

In addition, as we analyze the overall credit quality of our program business we take into account more than just the Farmer Mac I agricultural loan delinquencies. The total program business includes AgVantage securities and Rural Utility loans, neither of which have any delinquencies and USDA guaranteed securities, or Farmer Mac II, that are backed by the full faith and credit of the United States.

When these are taken into consideration the overall level of 90-day delinquent loans in all of Farmer Mac's programs was just 0.44% as of March 31, 2012, that compares to 0.48% a year ago. Credit quality is a key component to our long-term success. Strength in the ag sector across most -- and the ag world across most commodity sectors has helped our efforts to improve the credit quality of our portfolio.

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

Thanks, Mike. As mentioned, first-quarter core earnings were $11.8 million or $1.08 per diluted share, up from $9.1 million or $0.85 per share a year earlier. Farmer Mac uses core earnings, a non-GAAP financial measure, to measure corporate economic performance and develop financial plans because in management's view core earnings is a useful alternative measure for understanding Farmer Mac's economic performance, transaction economics and business trends.

This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. And Farmer Mac's disclosure of the core earnings is not intended to replace GAAP information, but rather to supplement.

Core earnings for first quarter 2012 benefited from higher net interest income of $34.2 million compared to $27 million in first quarter 2011. The increase in net interest income in first quarter 2012 was primarily attributable to the cumulative purchases of AgVantage securities throughout 2011 and 2012 that Farmer Mac has held on balance sheet.

The overall net effective spread for first quarter 2012 was 94 basis points which is the same level it was during first quarter 2011. The increase in net interest income was partially offset by provisions for losses of $0.5 million in first quarter 2012 compared to a net release from the allowance for losses of $0.7 million in the same period in 2011. There were no charge-offs recorded against the allowance during first quarter.

In first-quarter 2012 the GAAP net income attributable to common stockholders was $22.2 million or $2.04 per diluted share, compared to net income of $18.3 million or $1.72 per diluted share for first quarter 2011. As with core earnings, the increase in GAAP net income was primarily attributable to higher net interest income.

GAAP net income exceeded core earnings in both periods due to the periodic increases in the fair value of the financial derivatives which rose as a result of longer-term interest rates trending upward during each of those quarters.

Farmer Mac uses financial derivatives, primarily interest rate swaps, to mitigate its exposure to interest-rate risk and achieve an overall lower effective cost of borrowing. These financial derivatives are not designated in hedge relationships for accounting purposes.

Therefore, as changes in long-term interest rates effect the fair values of the financial derivatives those fair value changes are recorded in earnings, while much of the offsetting changes in the fair values of related assets and liabilities are not recorded in earnings. Farmer Mac excludes these fair value fluctuations from its core earnings.

As of quarter end Farmer Mac's $498 million of regulatory core capital exceeded the statutory minimum capital requirement of $361 million by $137 million, an excess of 38%. Capital surplus was up from $126 million at year-end 2011 due to the additional retained earnings during first quarter. [We have] complete information on Farmer Mac's performance for the quarter as set forth in the 10-Q we filed yesterday with the SEC. With that I'll turn the discussion back to you, Mike.

Thanks, Tim. As you can see from the numbers, Farmer Mac continues to make progress. Strong core earnings, the addition of new volume despite weaker demand at the retail level, and continued high credit quality all contributed to another quarter of improving results. These results have helped us continue to build our capital which builds long-term strength. Based on this performance we doubled the quarterly dividend on our common stock during the first quarter.

With the current level of strong commodity prices and a generally healthy agriculture economy many producers are using cash rather than debt to make purchases. The resulting strong returns from producers continue to affect the growth in program assets in the short term. This is healthy for the industry over the long term and producers should be well positioned for the future.

In addition, the current economic slowdown has reduced demand for electricity, resulting in less capital needs for Rural Utilities. As these cycles change Farmer Mac is well-positioned also to take advantage of the expected growth in loan volume.

Strong product lines, growth and the number of institutions that sell loans to us, and a changing regulatory environment in the banking industry all provide us significant opportunities to continue to build our portfolio and accomplish the mission for which we were created.

We continue to aggressively pursue opportunities to bring capital and liquidity to rural America as well as provide value to you, our shareholders. And we look forward to sharing those results with you. At this time we'll be glad to take any questions you might have and I'll turn the call back over to Emily to take care of that.

(Operator Instructions). Mike Turner, Compass Point.

I just wanted to ask about your growth outlook in both the ag and the Rural Utilities business. I mean it sounds like the ag business is almost going too well for -- and then thoughts on the Rural Utilities sector. I mean, do you expect originations may be able to grow from here or do you see a softening? And then embedded in that, what's kind of the best environment for the ag business looking forward?

Well, obviously we don't -- as we've talked before, don't give forward looking statements. But what I would say is that as we think about -- as we think about where we are there is no doubt that the gross or that the solid returns producers have today are impacting the growth of loan volume. And on the Rural Utilities side it's really the combination of lower demand for electric combined with an uncertain regulatory environment that they're dealing with.

Those things, well, at least on the agricultural side, it's healthy for the industry and allows producers to get their balance sheets in good shape. The business that we have is lumpy business, it comes in fits and starts. It's very difficult for us to look forward and with a very clear crystal ball see how that growth will come in.

For us the environment where we are able to grow really is one in which ag producers are healthy but expanding their businesses. It's one where the build out that is -- if it will come in the Rural Utility business -- is underway. And I think, thirdly, as the -- as signs that interest rates are going to go up, we'll see more demand for the kinds of products that we have as well.

So all of those things would contribute. As I said in my remarks, I'm pleased that all of the product lines have had growth this quarter and in the recent past; that continues to allow us, during this period of time, have stable volume in what we do.

Great, that's helpful. And I know the farm bill is coming up for I believe, what is it, the five-year renewal this year. Are there any aspects of that that you're watching now that could be beneficial or alternatively detrimental to your business?

Well, it's hard to -- given the debate that's going on and understanding exactly where they're going to land, it's hard to even handicap how it will come out and what it will look like and what the impacts will be.

I think today producers are in a strong enough position that some of the negative or the reduced dollars that are -- will not impact them immediately and directly, we're watching carefully crop insurance and some of the risk management tools that are important to producers, those would be ones that we would want to see and understand how they're going to play out.

But overall I think it's just really way too early to handicap the impact. I would suggest that based on what we've seen fewer dollars are going to be available and I think that that will impact.

The other piece that -- one other piece I would mention, those that we're watching carefully is the dollars that USDA in their lending programs might have as they go forward. That could as well impact us positively, frankly, as some of those programs get reduced dollars and producers and rural residents are looking for $4 from someplace else.

Jordan Hymowitz, Philadelphia Financial.

First of all, I want to commend you guys on the very good research report that was written about you by the former analyst that just spoke, (inaudible) did an excellent job. A couple questions. You raised the dividend last quarter and there was a lot of pressure on the last call. And while you raised it it fell very low. How often are you going to reevaluate the dividend? Is it like a quarterly thing? A semiannual thing, an annual thing?

We evaluate that every quarter with our Board, look at the options, look at where we are and what we see as growth opportunities, the need for capital and balance that with bringing shareholder value to you.

Matthew Dodson, Edmunds White Partners.

Hey, it's [Jon Evans] how are you guys today?

Good.

Good. Hey, thank you for your time. Could you talk a little bit about -- so over the last I think six quarters your delinquencies had gone down sequentially, which would have been abnormal seasonality. This quarter was more normal seasonality. Do you believe that we've just got to a trough on the credit quality because obviously the credit quality is so good or could you speak a little bit to that?

Well, I think the more normal seasonality here really only impacts us in a couple of quarters, if you look at the way the numbers have gone. So while it's been six sequentially we would typically only see bump ups because of seasonality in a couple of those. So I'm not ready yet today to say the trend of, okay, we have one where it bumped back up is the trough.

I do think that the time frame that producers in general -- and it's very difficult to generalize in the agricultural industry across all of the sectors, but in general the profitability and the strength and the returns they've gotten have continued long enough that the pace at which improvement occurs is slowing. Whether that means we're at the trough or not I'm not ready to say we are. But I think we're getting down to that level.

Recognized though that for us and our portfolio, given the size of our individual credits, that in a one or -- probably not one so much, but any few number of loans could swing those numbers some and so it could impact those numbers on any given quarter. But to specifically answer your question, I'm not ready to say we're at the trough, but we're getting much closer.

(Operator Instructions). Matthew Dodson, Edmunds White Partners.

Can you just follow up on the other person's question relative to the dividend? And I guess you did grow the portfolio this quarter. Can you talk a little bit about your guy's -- what you have to have from a regulatory standpoint, what the Board feels comfortable from a capital standpoint?

Because I mean it looks like you're going to earn over $4 this year and you're going to pay out basically 10% in a dividend and you are growing the portfolio but the growth isn't robust. So can you just help us understand your guy's thought process relative to raising the dividend and maybe what kind of percent of earnings you think you could potentially pay out over time?

Let me start with the regulator question. At the heart of the regulatory relationship, although it's not quite this clean, it's really a pass fail discussion in terms of meeting compliance with the numbers. And so, we have cushion, clearly we have a cushion today in an amount that would allow us to grow fairly significantly.

Then the question becomes how much we are comfortable with. As you've watched and listened to the calls over the past few years our view was that we needed to continue to build capital to levels that were higher than what historically we've had.

Part of that is because of the need to be able to hold larger -- hold positions and credits, the need to build long-term strength in the Company, as well as manage the earnings portfolio or the earnings using the derivatives and those things that have room so that we're not backed up against a wall at any given time. And so we've done that.

And as you've seen I think by the statement of raising the dividends, we are reaching a level today where those capital levels are where we're comfortable with, given the mix of our portfolio today. That could change, but -- and given the mix and the quality we're comfortable with that.

So I think as we look at that it's hard to pinpoint a number and say how many dollars of earnings we're going to pay out. But I think the fact that we moved the dividend it was intended to be a statement that said we've gotten the Company going in the right direction and at a pace we're comfortable improving the dividend. And I think we'll continue to look aggressively at whether or not we can raise those numbers us we go along.

Jordan Hymowitz, Philadelphia Financial.

Do you think the Rural Utilities business volume will accelerate because of the Obama administration's accelerated push-out of coal?

Yes, there will need to be -- there are a couple things happening in that industry and that is one of the significant ones as well as with the uncertainty we've seen there just haven't been any plants built along the way here or very few plants built along the way.

And so I do believe that as the regulatory and legislative environment becomes more clear you're going to see plants -- well, capital expenditures need to be made to meet the new regulatory requirements and that will be added to or growth will be aided in addition to that by what the economy does and whether demand for electric really picks up and I think that will determine how quickly they move.

But, yes, we see opportunities long term in the Rural Utility business as these plants transition from primarily a coal-based industry to at least a mix if not more of a gas-fired or other sources of energy industry.

Matthew Dodson, Edmunds White Partners.

You guys have been very aggressive taking down your high-cost funds, can you talk about your net interest margin going forward and how we should think about it throughout the year?

Tim, why don't you take that one.

Sure, the net effective spread was 94 basis points in the first quarter. If you look back over 2011, as I said earlier, it was the same number, 94 basis points in the first quarter and it fluctuated up to 96 basis points during 2011. So it's been pretty consistent over the last five quarters or so. That's driven by the mix of business as we put on new program business.

Depending on the spreads at which that business is brought in, that number can move, it can also move as the makeup of our liquidity portfolio changes as well. We've noted in prior quarters that when we add treasuries to our portfolio for liquidity purposes that actually brings the margin down because that margin is 94 basis points over all of our interest earning assets and liabilities.

So I think based on the consistency that we've seen and -- over the past several quarters, the current level is kind of within our expectations. And as we look forward we don't expect at this point to see any major shift in range around the current level.

At this time I'm not showing any questions.

Well, Emily, then to all of you on the call, thank you for being on the call, thank you for your questions and comments. We look forward to sharing results next quarter with you. And everybody have a great spring. Thank you.

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