Federal Agricultural Mortgage Corp (AGM) 2016 Q1 法說會逐字稿

Good morning and welcome to the Federal Agricultural Mortgage Corporation first-quarter 2016 investor conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Tim Buzby. Please go ahead.

Thank you. Good morning. I'm Tim Buzby, Farmer Mac's President and CEO. Farmer Mac is pleased to welcome you to our first-quarter 2016 investor conference call. Before I begin, I will ask Steve Mullery, Farmer Mac's General Counsel, to comment on forward-looking statements that Management may make today, as well as Farmer Mac's use of non-GAAP financial measures. Steve?

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 as well as those described in our 2015 annual report on Form 10-K, our subsequent quarterly reports on Form 10-Q, and our other filings with the SEC.

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. Farmer Mac's disclosure of core earnings is intended to be supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP. A recording of this call will be available on our website for two weeks starting later today.

Thank you, Steve.

Farmer Mac is off to a good start in 2016. During first quarter we continued to grow our outstanding business volume, and credit quality remains stable. Farmer Mac ended first quarter 2016 with outstanding business volume of $16.2 billion. We added $1.3 billion of new business this quarter, resulting in net growth of $317 million after maturities and repayments. The increase was primarily due to a significant increase in our institutional credit line of business, which we believe reflects a continued trend toward financial institutions recognizing the competitive benefits of Farmer Mac's wholesale funding solutions. Overall, our Institutional Credit AgVantage securities grew by $337 million, and this growth was balanced between the Agricultural and Rural Utility sectors of our business.

On the Rural Utility side, we added $250 million of new business, with national rural utilities Cooperative Finance Corporation, which is known as CFC. On the agricultural side, we grew by nearly $97 million net of repayments, with $100 million in new business coming from our traditional AgVantage product, and $25 million from two farm equity AgVantage deals, which included one for a new counterparty. We are excited about this new relationship which we expect to grow over time, and for the long-term growth prospects for this wholesale funding solution in general. During the quarter we also successfully refinanced a $500 million AgVantage bond that was maturing with MetLife, as well as a $50 million AgVantage bond for Rabo AgriFinance.

In terms of our Farm & Ranch line of business, we purchased nearly $200 million of new loans this quarter, which reflects a pace more than 50% greater than that of first quarter 2015. This higher pace of volume is being driven by an ongoing strong level of primary demand from land sales as well as increased demand for credit, given the tighter agricultural economy. Net of repayments, which are historically higher in first quarter, our Farm & Ranch loan purchase business grew more than $64 million in first-quarter 2016.

Farmers Mac's net effective spread for first quarter 2016 grew $0.7 million compared to first quarter 2015, due to growth in our outstanding business volume. Compared to fourth quarter 2015, net effective spread was flat in dollar terms and decreased modestly on a percentage basis. Dale Lynch will describe those changes in more detail in a few minutes.

The credit quality of our portfolio remains stable. As of March 31, 2016, $34.7 million or 0.61% of our $5.7 billion Farm & Ranch portfolio was 90 days delinquent compared to 0.56% at year end 2015. As we had mentioned previously, we expected over time Farmer Mac's 90-day delinquency rate will eventually revert closer to our historical average of approximately 1% due to macroeconomic or other factors. On balance we believe a reversion closer to our historical averages is healthy, and that Farmer Mac's business can benefit through higher volumes and wider spread in such an environment.

As we've discussed on previous calls, the western part of the United States, and in particular California, continues to experience the effects of drought conditions. These conditions could have an adverse effect on Farmer Mac's delinquency rates or loss experience in the future, but we have not yet seen a material impact on our portfolio. We continue to remain informed about the drought and its effects on the agriculture industries located in the western states, and on our Farm & Ranch portfolio, through regular discussions with our loan servicers, its service loans in drought stricken areas, as well as customers and other lenders in the industry.

With that as background, I would like to turn to Dale Lynch, our Chief Financial Officer, to cover our financial results in more detail. Dale?

Thanks, Tim.

As reflected in our first-quarter 2016 results, Farmer Mac is executing well on the opportunities within its markets. We believe that the relative value that Farmer Mac offers its customers is greater when credit conditions are somewhat tighter, which we think can lead to greater volume opportunities for us. Fourth quarter 2015 and first quarter 2016 seemed to reflect this trend, and we believe the outlook for us is positive even as the agricultural economy adjusts to lower commodity prices and drought conditions in the west.

We grew to a record outstanding business volume of $16.2 billion as of March 1, 2016. As Tim mentioned, this growth was driven primarily from net growth in our institutional credit line of business, which included the purchase of $250 million in AgVantage securities from CFC. Spreads on new assets are stable to increasing, and our credit quality remains good.

Turning to our financials. Farmer Mac's first-quarter 2016 core earnings were $12.4 million or $1.12 per diluted common share, compared to $13.1 million or $1.17 per diluted common share for fourth quarter 2015, and $9.1 million or $0.80 per diluted common share in the year-ago quarter. A $0.7 million decrease compared to fourth quarter was primarily due to a $0.4 million after-tax increase in operating expenses related to higher compensation costs, resulting from the annual vesting of stock-based awards, as well as higher G&A expenses driven by higher legal and consulting fees related to business development and some corporate initiatives.

The $3.3 million increase in core earnings from the year-ago quarter was driven primarily by a $3.5 million after-tax decrease in preferred dividend expense, resulting from the redemption of all outstanding shares of Farmer Mac II preferred stock in first quarter 2015, and a $0.4 million after-tax increase in net effective spread and a $0.4 million after-tax increase in guaranteed fee income. Partially offsetting the year-over-year increase in core earnings was a $0.5 million after-tax increase in credit related expenses due to provisions to the allowance for losses in first quarter 2016 compared to releases in the year-ago quarter, as well as a $0.5 million after-tax increase in operating expenses related to the items I just mentioned.

Turning to GAAP net income, first-quarter 2016 net income attributable to common stockholders was $10.3 million or $0.94 per diluted common share, compared to $1.8 million or $0.16 per diluted common share in the year-ago quarter. The year-over-year increase was primarily due to the absence in first quarter 2016 of an $8.1 million loss recorded in the year-ago quarter resulting from the write off of deferred issuance costs upon the redemption of the Farmer Mac II preferred stock on March 30, 2015, and the absence in first quarter 2016 of a $3.5 million after-tax increase in dividend expense recorded during first quarter 2015 on that preferred stock. The increase was partially offset by the effects of unrealized fair value changes on derivatives and hedged assets, which was a $1.9 million after-tax loss in first quarter 2016 compared to a $0.6 million after-tax loss in the year-ago quarter.

Turning to spreads. Farmer Mac's net effective spread for first quarter 2016 was $29.9 million, or 82 basis points; compared to $29.9 million or 85 basis points in fourth quarter 2015 and $29.3 million or 86 basis points in the year-ago quarter. There were two unique factors that impacted net-effective spread in first quarter 2016. First, market increases in LIBOR-based short-term funding costs increased the financing costs on certain floating rate assets; and second, a tighter spread on a $500 million AgVantage security that was refinanced at a shorter maturity than the original security also had a modest one-time impact. Each of these two factors had about a 1 basis point impact on overall net effective spread.

This market increase in LIBOR-based funding costs is not unique to Farmer Mac, and is simply due to Treasury rates being higher relative to swap rates than in the past. Farmer Mac is adjusting to its funding to mitigate this market-driven dynamic and we have seen some improvements recently in terms of reductions to LIBOR-based funding costs, especially for three month LIBOR-based assets. Notably, we have also adjusted our pricing higher in first quarter 2016 on floating rate assets to offset these higher funding costs, and this should start to show up on our financials over the course of the year. The increase in dollar terms in first quarter 2016 compared to the year-ago quarter was due to growth in outstanding business volume.

Turning now to our four lines of business. Net effective spreads for first-quarter 2016 and fourth-quarter 2015 quarter were as follows: $9.5 million, or 171 basis points for Farm & Ranch compared to $9.4 million or 172 basis points in fourth quarter 2015. $4.3 million or 91 basis points for USDA guarantees compared to $4.5 million or 96 basis points. $2.5 million or 102 basis points for Rural Utilities, compared to $2.8 million or 114 basis points; and $11.1 million or 80 basis points for Institutional Credit compared to $10.9 million or 80 basis points.

From a credit perspective, portfolio quality remained stable during first quarter 2016 as sub-standard assets, total allowances, and 90-day delinquencies remained near fourth-quarter levels. Sub-standard assets as a percent of the Farm & Ranch portfolio increased slightly to 1.9% from 1.8% in fourth quarter. This increase reflects the seasonal impact of the January 1 payment date on almost all loans in the Farm & Ranch portfolio. As of March 31, 2016, the total allowance for losses was $6.6 million or 12 basis points of the $5.7 million Farm & Ranch portfolio, compared to $6.6 million or 11 basis points in the Farm & Ranch portfolio as of year end. As Tim mentioned, 90 day delinquencies in the Farm & Ranch portfolio were $34.7 million or 61 basis points of the Farm & Ranch portfolio as of March 31, 2016, compared to $32.1 million or 56 basis points as of year end, and $32.1 million or 60 basis points in the year-ago quarter.

For Farmer Mac's other lines of business, there are currently no delinquent AgVantage securities or Rural Utility loans held or underlying standby purchase commitments, and the USDA securities are backed by the full faith and credit of the United States. As a result, across all of Farmer Mac's four lines of business the overall level of 90-day delinquencies, comprised entirely of Farm & Ranch loans, was just 0.21% of total volume as of March 31, 2016, compared to 0.2% of total volume as of year end, and 0.22% in the year-ago quarter.

In terms of business volume we added more than $1.3 billion in new business this quarter. Looking at the specifics for the quarter, we added the following new business volumes: $927 million of AgVantage securities purchases, including $25 million of the farm equity AgVantage product; $199 million in Farm & Ranch loan purchases; $99 million of USDA securities; $68 million of Farm & Ranch long-term standby purchase commitments; and $9.7 million of Rural Utilities loan purchases. After repayments, net outstanding business volume increased $317 million this quarter.

Turning now to capital, Farmer Mac's $563 million of core capital as of March 31, 2016, exceeded the statutory minimum capital requirement of $478 million by $85 million, or 18%. This compares to core capital of $564 million or $102 million of capital above the minimum requirement as of December 31, 2015. The decrease in core capital above the minimum required from year end was due primarily to growth and on-balance-sheet assets this quarter. In terms of liquidity, Farmer Mac had 178 days of liquidity as of the end of first quarter 2016, compared to the minimum regulatory requirement of 90 days. More complete information about Farmer Mac's performance for first quarter 2016 is set forth in the 10-Q we filed today with the SEC.

With that, Tim, I will turn it back to you.

Thanks, Dale.

Outstanding business volume is at an all-time high, our financial performance is strong, and our credit quality remains good. While the agricultural economy continues to adjust to lower commodity prices and the West's drought, the overall business climate for Farmer Mac remains positive. We believe that the relative demand for Farmer Mac's products could increase as credit becomes somewhat tighter, and we believe this is evidenced by our new business volumes in the past two quarters' results.

As we announced last quarter, Farmer Mac changed its dividend policy and increased the quarterly dividend to $0.26 per share on all classes of its common stock. Over time, Farmer Mac seeks to further increase the payout of its common stock dividends to reach approximately 30% of core earnings, which will put us more in line with other publicly traded financial companies. Farmer Mac's capital base is strong and our earnings support these higher common stock dividends. Even with the higher dividend payout amount, we still expect to retain enough earnings each year to fund our growth and build equity capital over the long term.

In terms of delivering upon our mission, Farmer Mac continues to communicate the value of our products and solutions to current and prospective customers. We continue to sign up new banks for our loan purchase and credit protection products. We see strong interest for our farm equity AgVantage financing for the existing and potential new counterparts. And fulfilling our mission to serve rural America, we are actively seeking to help bring new capital to agricultural and rural communities.

At this time we'd be happy to answer any questions you may have.

(Operator Instructions)

Chas Tyson, KBW.

Good morning. I just want to ask first about the delinquencies. I know they were somewhat flat quarter over quarter, but if you strip out the canola paydown that happened after 4Q -- and it looks like they were up somewhat meaningfully. I was wondering if there was any trend you could discern there? Is it just people not making the Jan. 1 payments or if there's some kind of geographic or story trend to those delinquencies?

Yes, thanks. No real story there, and quite frankly, no concern at this time. We typically see higher levels of delinquencies at the end of first quarter, with many of our agricultural loans -- some of them pay quarterly, some of them pay twice a year, and some of them pay just once a year. But almost all of them have a payment that's due on December 31.

So March 31 is when the largest population of loans are eligible to be 90 days delinquent. So the uptick is just part of the normal cyclical payment patterns, and is not of a concern.

Okay. I think you noted in the Q that there was some reserve release from the general reserve that affected the provision this quarter. Is it possible to give a breakout of what the gross provision was, and then what the net out of the reserve release was?

I think that is in our disclosures. Dale, do you want to --?

We actually had a provision this quarter, Chas. It was about $100,000 in that provision. The year-ago quarter had a release, so that the year-over-year comparison on an after-tax basis -- that variance was like a $0.5 million increase in credit costs due to the prior-year being a release and this year being a small provision. And that small provision was really driven by growth in the portfolio, Chas.

Okay. I thought I had seen in the Q that there was some amount of release that affected the total provisions. I know there was a small provision this quarter, but I thought it said that there was some small release that affected it, but maybe I was mistaken there.

We completed the workout on the canola loans, and so those left the reserve. But maybe that's what you were thinking.

It is a net, net provision, but we maybe did talk about some of the puts and takes, and that related to the canola loan.

Okay. Thanks, guys, appreciate it.

Adam Grossbard, Sidoti.

You continue to add a significant amount of business volume in the quarter, especially in the Institutional Credit segment. My question is -- what is the Company's current capacity to keep growing this business volume while maintaining the underwriting standard? Thanks.

Certainly we're not going to relax our underwriting standards in any way. We do feel that we have the ability, from a capitalization standpoint, both in terms of our internal metrics that we run, as well as the regulatory and statutory measures that we have.

We think we have plenty of capacity in order to continue at this sort of a run rate, and even a greater run rate. The recent buyback of shares that we started in 2015 obviously took that into consideration, and we're very comfortable with the capital levels that we have. But at the same time, very optimistic about the opportunities for growth.

We do take a look at that and monitor it regularly. But at this point, we are excited for more growth and don't have concerns on [the capital side].

All right. Just to follow up to that, if you'd continue to see this outsized growth, would you expect to have to add staff or an increase in operating expenses?

We add staff regularly. Quite frankly, here in the last couple of quarters, we have done so. That is simply a matter of keeping up the level of customer service that we have come to expect of ourselves, and that our customers demand. It is in line, or sort of running at sort of the same pace of growth, and is not sizable from the standpoint of reducing our margins in any meaningful way.

So while we will continue to add staff, we think we will continue to also be a relatively lean financial institution. We're currently running at about 75 employees, and that's for a $16.2 billion institution. As we grow to $17 billion and $18 billion, yes, we will creep up there -- 80 and 85 employees -- but that will not adversely impact the overall returns to stockholders.

Okay, great, thanks. Lastly, you mentioned you expect a healthy rise in delinquencies to their long-term historical averages. My question is -- has the Company taken any proactive measures to prepare for some of this, maybe an increased level of restructurings or what have you?

That's something that, as we look at a troubled borrower, someone comes delinquent, the last thing we want to do is foreclose on that borrower. So we are constantly working with our servicers out in the field and our staff in our Iowa office in order to try and come up with the best solution for Farmer Mac and our customer, a bank or financial institution -- farm credit institution -- and also for the borrower.

So we haven't had a lot of delinquencies over the course of the past several years. As they start to creep up again, I think your word that you used is healthy, and I would repeat that word.

As there is stress in the industry, what happens is many of our customers take a look at how they manage the risks in their business, and recognize that agriculture has had a real good, strong run for the past, call it a decade. And that they may need to look at some different solutions and ways to manage the credit risk in their portfolio, and they look at Farmer Mac. We think that is a good environment for us -- the opportunity for us to bring in new customers and also take a look at our margins and make sure that we're charging the appropriate level of margin for the risks that we take.

So we're not concerned. Like we said, we think about 1% is where we are historically. And if we do climb up to that level, then we'll be perfectly comfortable with that.

Okay, great, thanks very much.

(Operator Instructions)

Okay, no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Tim Buzby for closing remarks.

Thanks. With no more questions, thank you for listening and participating this morning. I look forward to our next call to report our second-quarter 2016 results in August. Thank you.

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