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Federal Agricultural Mortgage Corp. (NYSE:AGM)

Q1 2013 Earnings Call

May 10, 2013 11:00 am ET


Timothy L. Buzby – President and Chief Executive Officer

Stephen P. Mullery – Senior Vice President, General Counsel and Corporate Secretary

R. Dale Lynch – Senior Vice President, Chief Financial Officer and Treasurer


Mike Turner – Compass Point Research & Trading LLC


Hello, and welcome to the Federal Agricultural Mortgage Corporation First Quarter 2013 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 that this event is being recorded.

Now, I would turn the conference over to Tim Buzby. Mr. Buzby, please go ahead.

Timothy L. Buzby

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 first quarter 2013 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 as well as Farmer Mac’s use of non-GAAP financial measures. Steve?

Stephen P. Mullery

Thanks, Tim. Some of the statements made on this conference call may be 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.

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 intended to supplement GAAP information and not to replace it. A recording of this call will be available on our website for two weeks starting later today.

Timothy L. Buzby

Thanks, Steve. We are pleased to record outstanding business volume, solid core earnings and continuing good credit quality in the first quarter of 2013. New business from all of our product lines raised our aggregate outstanding business volume to $13.4 billion. Portfolio credit quality also remained at very favorable levels with 90-day delinquencies reduced in both dollar and percentage terms from the first quarter 2012.

First quarter core earnings were $11.3 million or $1.01 per diluted share compared to $11.8 million or $1.08 per share a year ago. The decrease was largely due to an increase in provisions for losses that reflects a change in methodology for providing losses within our non-ethanol ag storage and processing commodity group that reflects more conservative loss assumptions on these specific types of properties, which tend to be more developed and specialized.

While we’ve not actually realized losses in this portfolio, we’ve undertaken a more conservative view given the unique nature of the underlying collateral types in this commodity group.

GAAP net income to common stockholders for the quarter was $16.2 million compared to $22.2 million last year, with the difference almost entirely attributable to the effects of fair value changes on financial derivatives.

In first quarter 2013 we added $0.9 billion of total new business volume and $0.4 billion of net new business volume after maturities and prepayments, reaching outstanding volume of $13.4 billion at quarter-end.

The net increase for the quarter was a 12.3% annual growth rate despite the fact that January tends to be our highest prepayment month of the year. That first quarter new business came from all three of our lines of business and we’re optimistic about additional growth opportunities going forward.

One area in particular that we are seeing good growth opportunity is in our Farm & Ranch loan purchase activity, which increased 45% year-over-year in the first quarter as Farmer seek to refinance their loans in the long-term fixed rate mortgages as they consider the potential for increasing interest rates.

Our credit quality remains strong. 90-day delinquencies were just $39.7 million, or 0.83% of the non-AgVantage Farm & Ranch loan portfolio as of March 31, 2013, down from $53.1 million, or 1.21% a year ago. This continues a positive credit trend and seen our 90-day delinquencies decreased from $70.2 million or 1.63% of the non-AgVantage Farm & Ranch loan portfolio as of December 31, 2010.

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

R. Dale Lynch

Thanks, Tim. As Tim mentioned, first quarter core earnings were $11.3 million or $1.01 per diluted share, compared to $11.8 million or $1.08 per diluted share a year earlier. In addition to the reduction in core earnings resulting from the increase in the loss provision methodology Tim mentioned, there is also a modest increase in operating expenses that was offset slightly by an increasing net effective spread, which is $26.3 million in the first quarter of 2013, up from $25.6 million last year.

Net effective spread on a percentage basis contracted 4 basis points in the first quarter to 90 basis points as the advantageous short-term funding levels relative to LIBOR available to Farmer Mac in 2011 and early 2012, have returned to levels more consistent with historical averages.

GAAP net income to common stockholders was $16.2 million or $1.45 per diluted share this quarter, compared to $22.2 million last year or $2.04 per diluted share with the difference almost entirely attributable to the effects of fair value changes on financial derivatives.

With the adoption of hedge accounting for $950 million of our pay fixed interest rate swaps in the third quarter of 2012, a substantial portion of the volatility caused from changes in the fair values of financial derivatives no longer impacts earnings. This will be more evident once comparisons are no longer being made to periods before the adoption of hedge accounting, which again, that will be the third quarter of 2012 once we get past that comparison period.

Total allowances and reserves for losses were $14.3 million in the first quarter compared to $18 million last year. Total provisions for losses were $1.2 million this quarter compared to $450,000 a year ago. During first quarter 2013, we recorded $3.8 million of charge-offs against allowance for losses, including $3.6 million charge-off related to an ethanol loan that transitioned to REO status this the quarter and for which Farmer Mac had reported a specific allowance in early 2010.

In terms of credit quality, the portfolio experienced some small variations in metrics from quarter-to-quarter with some seasonal effects, but the overall favorable credit trend remains in place.

As Tim mentioned, at $39.7 million, our 90-day delinquencies are down in both dollars and as a percent of the Farm & Ranch portfolio compared to the prior year’s quarter. As Farmer Mac considers the overall credit quality into our 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 phase in credit with the United States. When these lines of business are considered, the overall level of 90-day delinquencies in all of our programs is just 0.3% compared to 0.26% as of year-end 2012 and 0.44% as of March 31, 2012.

Turning to capital, as of quarter-end, our core capital of $536.5 million exceeded our statutory minimum capital requirement of $380.9 million by $155.6 million in excess of 41%. The capital surplus has increased from $145 million at the end of 2012.

In addition, Farmer Mac issued $60 million of 5.7/8% non-cumulative preferred stock in January and used the net proceeds to redeem the offsetting shares of our Series C Preferred Stock, which had a dividend rate that was scheduled to step up to 7% in 2014 and 9% in 2019.

In terms of liquidity, Farmer Mac is acquired by its regulator to hold a minimum of 60 days of liquidity and it targets 90 days. As of March 31, 2013, Farmer Mac had 183 days of liquidity according to the methodology prescribed in our regulations. More complete information on Farmer Mac’s performance for the quarter set forth in Form 10-Q that we filed with the SEC yesterday.

And with that, I’ll turn it back to you Tim.

Timothy L. Buzby

Thanks, Dale. Before we conclude our prepared comments I wanted to highlight two new tables we’ve added to our disclosures this quarter. These can be found in our press release and in the supplemental information within our MD&A in the Form 10-Q we filed yesterday. First table provides quarterly net effective strength by business segment going back to 2011, and the second provides quarterly core earnings for the company throughout the same period. We believe the combination of each tables provide investors additional reference tools to access the quarterly trends and growth and profitability of our business.

We continue to see good net growth opportunities across all of our lines of business as seasonal prepayments are expected to slow from what we saw in the first quarter of this year. The outlook for our Farm & Ranch loan purchase business, which is our highest spread business, remains robust given the ongoing desire of farmers to refinance with longer term fixed rate loans. In addition, USDA guarantee and rural utility volumes are growing moderately as maturing assets are being replaced with new business.

In summary, this is another good quarter for Farmer Mac and a good start for the remainder of 2013. With business growth and credit quality turning positively, we believe we’ll still grow for core earnings growth for the company.

At this time, we’ll take any questions you may have.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Mike Turner from Compass Point.

Mike Turner – Compass Point Research & Trading LLC

Good morning, and solid job on the program asset growth this quarter. Just starting off a question on farm values, I know it seems to be an increasing topic that we’ve seen a number of articles about [bubble on] farm prices. Maybe you could talk about what you’re seeing and have you changed underwriting at all and anything you are doing that maybe alleviate concerns, but isn’t alleviating credit risk at Farmer Mac?

Timothy L. Buzby

Sure, Mike. Certainly, yes, agricultural land values are increasing in particular in certain areas of the country, primarily at the Central Plains and the Upper Midwest. We did in third quarter of last year modify our underwriting standards for certain geographic areas, and that change reduced our loan-to-value ratio, maximum ratio from 70% down to 60%.

Another thing to keep in mind with respect to land value increases is that many of the properties that are being purchased are being purchased by farmers, in addition to some that maybe purchased by investors, but largely many of those purchases were also seen are being made with cash or large down payments. Also, one of other thing to consider is many of the purchases, again being made by farmers and it’s not their first farm. They’re adding acreage to existing operation. So their average cost per acre is not the price that they’re at the margin.

Mike Turner – Compass Point Research & Trading LLC

That’s helpful. And then, on the operational side, how much operating leverage is there in the business, I mean, if loan growth continues, maybe not necessarily at this pace, but remains strong, how big a portfolio can your current infrastructure handle?

Timothy L. Buzby

Well, to give you a quick sense from a space standpoint, we recently relocated in Washington D.C. We have ample space, physical space for our headquarters. Our office in Iowa is actually in the process of moving to a larger space, but we don’t think that will have any meaningful financial impact. In terms of staffing and headcount, certainly as we grow from where we are today, almost 13.5 billion as that number become 14 billion, 15 billion, 15 billion, 16 billion we will need to have people, but it really depends on the nature of the business.

Certain of our product lines, particularly our advantage business, doesn’t require a large amount of additional infrastructure and in many cases no additional infrastructure and in many cases no additional infrastructure. However, for the loan purchase business really underwriting individual loans regularly. We have added a number of contractors that we use and that’s something that you will see increase certainly in our business, credit business, due diligence on the front end and the investment in our people certainly worthwhile. And so, while you will see with increased infrastructure over time as we grow, we’ll certainly not outpace any of the growth.

Mike Turner – Compass Point Research & Trading LLC

Okay. That’s helpful. What I get seeing underway is if we look forward your loan growth keep up, I mean, you made $1.01 this quarter, looks like there was obviously a little true up in the reserves. I mean, should we see all that equal or earnings growth as the portfolio grows or is there going to be a cost pressure offsetting that?

Timothy L. Buzby

We would expect earnings growth as the portfolio growth, to cause one outstrip the incremental revenues. And one point we have noticed. We do have an investment out in preferred stock. It is going to be maturing in the future. So, certainly as you look at earnings trends you would want to consider the maturity of that investment out in future.

Mike Turner – Compass Point Research & Trading LLC

Okay. And any plans to offset that or is that just going to roll into another security at a lower rate presumably?

Timothy L. Buzby

Well, that’s the security that sits in our liquidity and investment portfolio and quite frankly it’s a delight to see asset from more than a decade ago that we’ve owned over time and we cleaned our portfolio backup in 2009. We didn’t sell that preferred stock. We’re certainly very comfortable with the issuer. We do expect that will be called on its call date. We will be replacing that security with a security that earns a similar amount of income in our liquidity investment portfolio, but we expect over time to replace that income through program growth in our primary three lines of business.

Mike Turner – Compass Point Research & Trading LLC

Okay. Thanks. And last question, if I may. Sorry. Do you have any idea what percentage of the Farm & Ranch mortgages that are outstanding floating versus fixed, just maybe a percentage of mix, just a gauge, the refinancing activity from floating to fixed that could take place.

Timothy L. Buzby

I think it’s around half at this point. We generally look at from the [new risk] management. We look at the whole portfolio and now are down just on that part of the portfolio. But roughly of the new business volume we see coming in, sort of more than half and what exists little bit less than half.

Mike Turner – Compass Point Research & Trading LLC

Okay. Thank you so much.

Timothy L. Buzby

Thanks Mike.


Thank you. (Operator Instructions) All right. If there is nothing else at the present time, I’d like to turn the call back over to Mr. Buzby for any closing remarks.

Timothy Buzby

Thank you for listening and participating this morning. We look forward to reporting our second quarter results for 2013 in August and we’ll speak with you then. Thank you.


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

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