Federal Agricultural Mortgage Corp (AGM) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Federal Agricultural Mortgage Corporation third-quarter 2012 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 Timothy Buzby, President and CEO. Please go ahead.

Thank you. Good morning. I am Tim Buzby, the President and CEO of Farmer Mac. The Farmer Mac management team and I are pleased to welcome you to our third-quarter 2012 investor conference call.

Before starting this morning, I will ask Steve Mullery, Farmer Mac's General Counsel, to comment on forward-looking statements that may be made today and in our use and disclosure of core earnings.

Thanks, Tim. Some of the statements made on this conference call may constitute forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance. We do not undertake any obligation to update these statements after the date of this call.

We caution you that forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied by the forward-looking statements. In evaluating Farmer Mac, you should consider these risks and uncertainties, including those described in our most recent annual report on Form 10-K, our subsequent quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission.

Farmer Mac uses core earnings, a non-GAAP financial measure, to measure corporate 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. Farmer Mac's disclosure of core earnings is not intended to replace GAAP information, but rather to supplement it.

A recording of this call will be available on our website for two weeks, starting later today.

Thanks, Steve. We are pleased to report all-time highs this quarter for core earnings and outstanding program volume. New business volume from all of our product lines raised the aggregate outstanding program volume to $12.5 billion. Portfolio credit quality also remained high, with 90-day delinquencies reduced in both dollar and percentage terms. The recent drought has not negatively affected the credit quality of our portfolio, and we believe that we are well-positioned to handle any future stress in the agricultural economy.

Third-quarter 2012 core earnings reached a new high of $13.4 million or $1.22 per diluted share compared to $11.2 million or $1.04 per share a year ago, nearly a 20% increase. Our GAAP net income for third-quarter 2012 was $16.4 million or $1.49 per diluted share compared to a net loss of $23 million or $2.22 per diluted share in the third quarter of last year.

The GAAP loss in the prior year was attributable to adverse fair value changes in financial derivatives. That type of volatility in the fair value of financial derivatives led us to designate some of our financial derivatives in hedge relationships for accounting purposes at the beginning of this quarter. Those designations allow us to record offsetting fair value adjustments for the hedged assets in earnings. GAAP earnings still differ from core earnings, just not as much.

Earnings for the quarter benefited from higher net effective spread of $27.3 million, which was 95 basis points, compared to $22.8 million, or 93 basis points, in third quarter 2011. This higher net effective spread was driven by increased levels of interest earning assets held on balance sheet, combined with retirement of long-term callable debt and a simultaneous refinancing at lower rates.

The increase net effective spread was partially offset by provisions to the allowance for losses of $100,000 compared to a net release from the allowance in the prior year's third quarter of $800,000. During third quarter 2012, we recorded $400,000 of charge-offs against the allowance for losses compared to just $5,000 of charge-offs in the third quarter of last year.

During third quarter 2012, we added $841 million of new program volume, which produced a net increase of $555 million since December 31, a 6.2% annual growth rate. As important is that significant additions of volume this quarter came from all of our product lines, and we are seeing increased demand for longer-term fixed-rate agricultural loans, a trend we believe will continue.

Farmer Mac's 90-day delinquencies at quarter end were $40.8 million or 0.93% of the agricultural loan portfolio, down from $47 million or 1.07% as of June 30, 2012, and down from $44.8 million or 1.02% as of September 30, 2011. The decrease in delinquencies compared to second quarter is notable because our 90-day delinquencies are usually higher both in dollars and in percentage terms at the end of the first and third quarters of each year.

As we consider the overall credit quality of our entire business, we take into account more than just the agricultural loan delinquencies. Our total program business also includes AgVantage securities and Rural Utilities loans, neither of which currently have any delinquencies, and USDA guaranteed securities that are backed by the full faith and credit of the United States. When these lines of business are considered, the overall level of delinquencies in all of our programs is just 0.33%, which improved from 0.38% as of both June 30, 2012 and September 30, 2011.

The agricultural sector remained profitable across a variety of industries through the first nine months of 2012, but the summer drought across the Midwest and Great Plains generated concerns about the grain crop. While we do not expect the drought to have a significant negative effect on grain producers, increased grain prices resulting from reduced supply may adversely affect the profitability of producers in many industries that use feed grains as an input, including livestock, dairy and ethanol producers.

The drought has not had a measurable impact on the credit quality of Farmer Mac's portfolio, and we believe we are generally well-collateralized on exposures in drought areas.

As of quarter end, our core capital of $508 million exceeded our statutory minimum capital requirement of $368 million by $140 million, an excess of 38%. The capital surplus has increased from $126 million at the end of 2011. More complete information on Farmer Mac's performance for the quarter is set forth in the Form 10-Q we filed with the SEC yesterday.

In summary, this was another good quarter for Farmer Mac, with earnings, business growth and credit quality all trending positively. At this time, we are happy to take any questions you might have.

(Operator Instructions) Mike Turner, Compass Point.

Good morning. Great quarter. Just a couple questions on the originations. I know the increase in demand for fixed-rate products seem to have been a catalyst we've sort of been waiting for as rates rise; kind of assumed that many of the floating-rate borrowers would swap into fixed. Is this purchase or refinance? Maybe you could provide some more color on that, and if you see this kind of trend continuing into this quarter; that would be helpful.

Thanks, Mike. It is both purchase and refinance, and it's really not that we are seeing that increased volume as of yet. What we are seeing is a shift in the makeup of the loans that we are purchasing. So we are seeing a trend toward the longer-term fixed-rate loans. We expect that will continue and we expect that will lead to increased volume as rates begin to rise.

Okay, that's great. And on the Rural Utilities, the $250 million of originations, was that a -- it looks like that was a one-year deal. Maybe you could provide -- that was a pretty big number -- color on that as well.

Yes, that was an AgVantage security. It was a refinance of an existing security that matured in August, and I believe, yes, it was about a one-year deal.

And sorry, last -- I'm going over my one question allotment -- your capital seems to continue to build and earnings that are a record and your dividend payout ratio is pretty low. How do you look at capital going forward? And am I right -- usually dividend increases or dividend discussion seems to happen at the end of the year?

The dividend last year, we increased it in the first quarter of -- or in first quarter of 2012. We will be looking at the dividend again every quarter, but most notably in the first quarter.

With respect to capital and how we manage that going forward, you will see that we do have large amounts of preferred stock that become callable in early 2015 and late 2014. So as we look at our capital management, we will also look at those securities, as well, as we manage the surplus of capital that we have and the dividends that we will be paying in the future.

Thanks a lot. Great quarter.

Jordan Hymowitz, Philadelphia Financial.

Thanks. I'm just wondering with the Obama victory and hence the war on coal continuing, would that be beneficial to your rural electricity business?

We think what will be beneficial to the rural utility business will be when actually the economy turns around, and the producers and distributors of electricity need to modernize their plants and expand their operations. I don't really see the results of the elections having any measurable, noticeable impact. I think the trends in that industry occur over a longer period of time. So I would look more toward the economy than any particular change in the administration.

Okay, and also, the core earnings this quarter, could you remind us what management's incentive is based on, what percent increases?

It is 5%, 10% and 15% management's compensation. The target is at the 10% level. And it's based on earnings, also based on business volume outstanding, also charge-offs and a credit quality measure.

Thank you.

(Operator Instructions) [George Thorson], Wells Fargo.

Great quarter, you guys. Question -- Farmer Mac is a great story. Just had another solid earnings growth quarter -- 17%, 18%, if my math is right. The lowest delinquency rates in, I think, your history, right during a drought. So the story is great.

The concern for these longtime shareholders is how do we get some more exposure on the stock? We are still sitting here at a PE ratio of around five to six to one, and I would imagine if you've got a NOBO list, which is a non-unobjectionable beneficial owner list, you probably have virtually no retail clients in this -- investors in this stock, other than perhaps my people.

But is there a way to get the word out a little bit better so we can get some interest in this thing? It is just a fantastic growth story.

Thanks, George. We are pleased with the performance of the Company, and we think we have a bright future at Farmer Mac. We have been meeting with investors over the past several months. You are aware that we do have analyst coverage now which we haven't had in prior years. We think that will be beneficial into getting the Farmer Mac story out. There are also a number of conferences, et cetera, that we do or will be attending.

As many of you know, we have been focusing our investor relations on debt investors for several years now and just have recently focused on stockholders. So we think that sort of change in focus over the past several months and into the future will gain us additional exposure. We'll continue to perform quarter after quarter, and we hope that will be recognized in the performance of our stock price.

Fair enough. Appreciate it. Mike Gerber was not one that wanted to give any forward guidance. I don't know if you guys have reconsidered that going forward, Tim, now that you are running the show.

We have not. We are not going to provide forward guidance. We are going to continue to focus on running the business. We think our performance will be -- you can look at it every quarter, and use your own analysis and determine where you think we will be each quarter, and we will report our results historically.

Great. Thanks a lot.

(Operator Instructions) Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Timothy Buzby for any closing remarks.

Thanks. With no more questions, I'd like to thank you for listening and participating this morning. I look forward reporting our annual results for 2012 to you in March. Thanks, everyone.

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