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Federal Agricultural Mortgage Corporation (NYSE:AGM)

Q4 2008 Earnings Call Transcript

March 17, 2009 11:00 am ET

Executives

Michael Gerber – President and CEO

Operator

Greetings and welcome to the Federal Agricultural Mortgage Corporation Fourth Quarter and Fiscal Year 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Michael Gerber, President and CEO for Federal Agriculture Mortgage Corporation. Thank you, Mr. Gerber. You may begin.

Michael Gerber

Thank you, Claudia, and good morning. I'm Mike Gerber, the new President and CEO of Farmer Mac, and the Farmer Mac management team and I are pleased to welcome you to Farmer Mac's fourth quarter and calendar year 2008 investor conference call.

Before starting, let me first comment on some forward-looking statements that may be made on this call. 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 and the evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac's actual results to differ materially from expectations expressed and/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 annual report on Form 10-K for 2008. A Form-8K containing the press release and the Form 10-K 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.

Farmer Mac reports financial result on a GAAP basis and also reports core earnings. The company uses core earnings to measure corporate economic performance and develop financial plans because in management’s view, core earnings more accurately represent Farmer Mac’s economic performance, transaction economics, and business trends before the effects on earnings of changes in the fair values of financial derivatives and trading assets. Farmer Mac’s disclosure of core earnings, a non-GAAP measure, is not intended to replace GAAP information, but rather to supplement.

A recording of this call will be available on Farmer Mac’s website approximately two hours after the conclusion of the call.

It is no secret that the second half of 2008 was a challenging year for Farmer Mac, maybe the most difficult period in our history. The unprecedented turmoil in the capital markets and the downturn in the national economy translated into third quarter losses in the investment portfolio, a challenging market to issue debt, and dramatic changes in the mark to market value of certain assets and the derivatives on our books. These factors combined to put pressure on our capital position.

The theme of my remarks for the third quarter was the need to raise capital and adjust our business model to reduce risk and to more effectively accomplish the mission of Farmer Mac. As expected, that process continued in the fourth quarter. These factors are reflected in the fourth quarter and our full year 2008 results.

For the year end ended December 31, 2008, Farmer Mac's GAAP net loss was 154.1 million or $15.40 per diluted share compared to net income of 4.4 million or $0.42 per diluted share for the year ended December 31, 2007. For fourth quarter 2008, the net loss was $61.1 million or $6.03 per diluted share compared to a net loss of 9.3 million or $0.90 per diluted share for the fourth quarter of 2007.

Farmer Mac's core earnings only exclude items related to fair value changes of financial derivatives and certain others assets carried at fair value. Therefore, those results are also adversely affected by the third quarter losses on Fannie and Lehman Securities. Core earnings for 2008 were a loss of 81.5 million or $8.15 per diluted share compared to a gain of 29.9 million or $2.82 per diluted share for 2007. For the fourth quarter of 2008, core earnings were loss of 8.8 million or $0.86 per diluted share compared to a gain of 10.5 million or $1 per diluted share for the fourth quarter of 2007.

Excluding the effect of the losses on the Fannie Mae and Lehman Brothers Securities, core earnings for 2008 would have been a gain of 24.7 million. Despite the difficult second half of 2008, Farmer Mac has continued to have access to the debt market to fund its program assets. We raised 124.2 million in capital through preferred stock offerings at the end of the third quarter and during the fourth quarter, ensuring compliance with our regular during capital requirements.

As we look ahead to Farmer Mac responding to the credit needs in rural America for 2009 and beyond, capital strength will continue to be important. It is in that context that the corporation's Board of Directors decided to continue but reduced the quarterly common stock dividend from $0.10 a share to $0.05 a share. Farmer Mac's net interest spread increased significantly for 2008. It was 58.2 million or 106 basis points, that compares to 40.6 million or 78 basis points in 2007.

Throughout 2008 Farmer Mac’s interest rate sensitivity remained low despite the significant volatility in the financial markets. Farmer Mac's effective duration gap was minus 2.4 months as of December 31, 2008 compared to plus 0.6 months as of September of 2008. Guaranty and commitment fees which compensate Farmer Mac for assuming the credit risk on loans underlying our guaranteed securities and standby commitments were $7.8 million for the fourth quarter of 2008 compared to 7.3 million for the third quarter and 6.6 million for the fourth quarter of 2007. For 2008, guarantee and commitment fees were 28.4 million compared to 25.2 million for 2007.

Farmer Mac's core capital totaled $207 million as of December 31, 2008 compared to 212.3 million as of September 30 and 226.4 million as of December 31, 2007. Farmer Mac's core capital as of December 31, 2008 exceeded the statutory minimum capital requirement of 193.5 million by 13.5 million. Since December 31 we estimate that our excess capital of 13.5 million has increased due to significant increases in the fair values of our financial derivatives.

Farmer Mac was also in compliance with its risk based capital standards as of December 31, 2008. The risk-based capitalist stress test generated regulatory capital requirement of 57.3 million as of December 31 and as of December 31, Farmer Mac's regulatory capital of 223.4 million exceeded the risk based capital requirement by approximately $166.1 million.

Loans underlying the corporation’s guarantees and commitments grew to a record $10.1 billion at year-end, and with the exception of ethanol loans continued to perform well during 2008. Delinquencies on non-ethanol loans remained near historically low levels consistent with the strength of the US ag economy through the end of the year. Farmer Mac's 90 day delinquencies, including ethanol loans, were 67.1 million, representing 1.35% of the portfolio as of December 31, 2008. And excluding the ethanol loans, 90 day delinquencies were 17.9 million or 0.36% of the portfolio.

Fourth-quarter provisions for losses, 17.2 million, were largely due to the bankruptcy of one ethanol producer and construction issues related to another ethanol plant. The ethanol industry has suffered due to the volatility of commodity prices and while prices have stabilized somewhat, the industry still faces significant challenges.

Farmer Mac's outlook for 2009 is mixed. We expect the turmoil in the financial market will continue and create challenges to Farmer Mac’s ability to raise capital and to securitize its assets. While agriculture has been strong, the industry is not insulated from the effects of the economic downturn. Some sectors continue to prosper while others such as dairy, farmers and the protein complex are experiencing pressure on profitability. In addition, portions of California and Texas are facing the effects of persistent drought.

Farmer Mac continues to closely monitor developments in these industries and areas experiencing stress. We anticipate that stress in our portfolio is likely to increase in 2009 although we do believe that any resulting credit issues will remain within manageable levels. Looking ahead, there will be likely be a growing need for financial vehicles such as those employed by Farmer Mac to expand credit availability to those agricultural industries that have sound financial fundamentals.

As the broad trend of deleveraging capital and tightening underwriting standards continue, the effects will likely be to reduce credit availability from traditional lenders to the ag sector. We believe this opportunity this presents opportunity and Farmer Mac is actively pursuing those opportunities.

There will also be opportunities for loan growth in the rural utilities segment, a new area for Farmer Mac as a result of legislative expansion of its charter in May of 2008. Farmer Mac experience growth in the sector during 2008 and expects the demand for rural utilities will be robust in 2009 and beyond, particularly as the industry adds significant new capacity for the first time since the 70s. Furthermore, additional power transmission lines will need to be constructed, the development of wind and solar power plants increased, the demand for – to transfer power from the source of clean power generation to the ultimate consumer.

Our focus currently is on evaluating our business model, identifying and removing risk from our balance sheet, and continuing to strengthen our capital position. We have also begun to take actions intended to mitigate the impact of all of the financial conditions going forward. We have concluded a review of Farmer Mac's investment portfolio and the operations around that and we have taken actions to address the difficult market dynamics that have emerged and seems likely to prevail in the time ahead.

We have adjusted our funding strategies to reduce reliance on financial derivatives that have adversely affected our capital position, notwithstanding that all the derivatives have been economically effective. We continue evaluating several initiatives to raise capital so that we can continue to grow our business, particularly given the high demand we are seeing from agricultural and rural utility lenders for our programs and products. We are also revising the risk management practices related to the investment portfolio with a greater focus on preserving capital and improving liquidity, so that we can further the congressional mission to serve rural America.

In summary, 2008 was a challenging year for Farmer Mac. Losses in our investment portfolio put Farmer Mac in a difficult position. The capital markets continue to be volatile and challenging. However, the Board and management team remain focused on reducing capital market risk on Farmer Mac’s balance sheet and repositioning this company for the future. Our core business remains solid and the prospects for doing additional business are strong. For a more complete information on Farmer Mac's performance for the year ended December 31, 2008, that information is set forth in the 10-K filed yesterday with the SEC.

On a personal note, I appreciate that the Board showed their confidence in me and named me as the permanent CEO here at Farmer Mac. In these times, the challenges remain great, but I also believe that the opportunities are real as well. I look forward to working with the Board of Directors and this management team to take advantage of those opportunities and to aggressively work to accomplish the mission of serving agriculture and serving rural America.

Thank you. And we will now open up the call for questions.

Question-and-Answer-Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator instructions). Mr. Gerber, it appears we have no questions coming in from the phones at this time.

Michael Gerber

Well, if there are no questions, then thank you all for participating on the call. We appreciate your attendance and we look forward to speaking to you again when we discuss our first quarter earnings. Thank you again.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.

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