Federal Agricultural Mortgage Corporation (AGM) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to The Federal Agricultural Mortgage Corporation’s Third Quarter 2012 Investor Conference Call. [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’m Tim Buzby the President and CEO of Farmer Mac. 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, on forward-looking statements that may be made today and that are used in 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 to 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 the useful alterative 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 2 weeks starting later today.

Thanks, Steve. We’re pleased to report all time high in 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 of 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 and 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 the third quarter of 2011; this higher net effective spread was driven by increased levels of interest earning assets held on balance sheet combined with the retirement of long-term callable debt and the simultaneous refinancing at lower rates. Increased 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 of 2012, we recorded $400,000 of charge-offs against the allowance for losses compared to just $5000 of charge-offs in the third quarter of last year. During the 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. And 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 remain profitable across a variety of industries through the first 9 months of 2012 but the summer drought across the Midwest and Great Plains generated concerns about the grain crop. While we do not except 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 miserable 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%. 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 filled with the SEC yesterday. In summary, this was another good quarter for Farmer Mac with earnings, business growth and credit quality all trending positively. This time, we’re happy to take any questions you might have.

[Operator Instructions] Our first question comes from Mike Turner with Compass Point.

Just a couple of questions on the originations. I know the increase in demand for fixed rate products seems to been a catalyst we sort of have been waiting for as rates raise, it kind of assume 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 that the $250 million of originations, was that, it looks like that was a one-year deal, maybe you could provide so that was a pretty big number color on that as well.

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

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

The dividend last year we increased 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 in the dividends that we will be paying in the future.

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

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

What 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 plans 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 longer period of times. And so I would look more toward the economy than any particular change in the administration.

Okay. And also your core earnings this quarter, could you remind us what management’s incentive is based and what percent increases?

It’s 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.

[Operator Instructions] Our next question comes from George Thoreson with Wells Fargo Securities.

Farmer Mac is a great story, just had another solid earnings growth quarter, 17%, 18%, if my math is right. With the lowest delinquency rates, I think your history, right during the drought, so the story is great, the concern for these long time shareholders is how do we get some more exposure on the stock? We’re still fitting here at PE ratio around 5:6:1 and I would imagine. If you got a NOBO list which is a Non-Objectionable 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’s just a fantastic growth story.

Well, 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 to get into 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 in our Investor Relations on debt investors for several years now and just we have recently focused on stockholders. So we think that sort of change in focus over the past several months and then in 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’re running the show?

We have not, we’re not going to provide forward guidance we’re 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’ll report our results historically.

[Operator Instructions] I’m 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 would like to thank you for listening, participating this morning. I look forward to reporting our annual results for 2012 to you in March. Thanks everyone.

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