Federal Agricultural Mortgage Corporation
Q3 2008 Earnings Call Transcript

Published: 11 Nov 2008

[Operator:]

Greetings, ladies and gentlemen and welcome to the Federal Agricultural Mortgage Corporation's third quarter 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 A. Gerber, President and Chief Executive Officer for Federal Agriculture Mortgage Corporation. Thank you, Mr. Gerber. You may begin.

[Michael Gerber:]

Thank you and good morning everybody. I'm Mike Gerber, I'm the acting President and CEO of Farmer Mac and the Farmer Mac management team and I are pleased to welcome you to Farmer Mac's third quarter 2008 investor conference call. Before starting, let me first make a few comments on forward-looking statements that maybe made on this call. In addition to the 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 in 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 these forward looking statements. Some of these factors and events are identified in our press release issued yesterday and discussed in Farmer Mac’s quarterly report on Form 10-Q for the third quarter of 2008 and Farmer Mac’s annual report on Form 10-K for 2007. The Form-8K containing the press release and the Form 10-Q were filed yesterday with the SEC. The Form 10-K was filed with the SEC on March 17, 2008. 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 the business trends before the effect on earnings of changes in the fair value of financial derivatives and trading assets. Investors and security analysts have previously relied upon similar measures to evaluate Farmer Mac’s historical and future performance. Farmer Mac’s disclosure of core earnings, a non-GAAP measure, is not intended to replace GAAP information but rather to supplement them. A recording of this call will be available on Farmer Mac’s website approximately two hours after the conclusion of the call. So, Farmer Mac’s third quarter earnings were dominated by a significant write-down on two holdings in our investment portfolio. As we reported this September when Fannie Mae entered into conservatorship and Lehman Brothers Holdings Inc. declared bankruptcy, Farmer Mac held in its investment portfolio 50 million of Fannie Mae preferred stocks and 60 million of Lehman Brothers senior debt securities. As a result, during the third quarter, Farmer Mac recognized other-than-temporary impairment charges on these holdings of 44.7 million and 52.4 million, respectively. These losses were the primary contributors to a net loss for Farmer Mac on both the core earnings and a GAAP basis for the third quarter of 2008. It is important to note that Farmer Mac’s underlying business remains sound. While the housing and consumer sectors of the economy have experienced significant credit issues, the ag portfolio remains strong as has Farmer Mac’s guarantee portfolio. Our $9.8 billion guarantee portfolio continues to perform. Income from guarantee fees were stable. Funding costs were favorable during the quarter which provided for a strong net interest income and delinquencies remained low at just $11.5 million. On a GAAP basis, Farmer Mac’s third quarter 2008 net loss was $106.1 million or $10.55 per diluted share, compared to a net loss of $8.6 million or $0.82 per diluted share for the third quarter of 2007. For the nine months ending September 30, 2008, the net loss for the common stockholder was $93 million or $9.33 per both diluted share compared to net income of $13.7 million or $1.29 per diluted share for the nine months ending September 30, 2007. Farmer Mac’s core earnings only exclude items related to the fair value changes of financial derivatives and certain other assets carried at fair value. These results were also adversely affected by the losses on the Fannie Mae and Lehman Brothers securities. Core earnings for the third quarter of 2008 were a loss of $90.4 million or $8.98 per book diluted share, compared to a gain of $7.6 million or $0.71 per diluted share for the third quarter of 2007. For the nine months ended September 30, 2008, core earnings were a loss of $72.7 million or $7.30 per diluted share, compared to a gain of $19.4 million or $1.82 per diluted share for the nine months ending September 30, 2007. Excluding the effects of these changes, core earnings for the third quarter would have been $6.7 million and $29.7 million year-to-date. Farmer Mac did not report any other-than-temporary impairment charges during 2007. Core earnings for third quarter of 2008 included an after-tax charge of $1 million relating to financial advisory services and $300,000 for legal fees related to corporate governance and personnel matters. As a result of the losses on investment securities, it was critical that we raise additional capital to ensure our compliance with statutory capital requirements. As announced on September 30th, we issued $65 million of preferred stocks. This is reported as mezzanine equity on our balance sheet and as a component of Farmer Mac’s core capital for determination of our statutory and regulatory capital compliance. As of September 30, 2008, Farmer Mac’s core capital exceeded the statutory minimum capital requirement of $182.3 million by $30 million. We are pleased that Zions and a consortium of farm credit banks saw the value of our mission and invested in our preferred products. Our focus currently is on evaluating our business model, indentifying and removing risks from our balance sheet and continuing to strengthen our capital position. We are currently evaluating several initiatives to raise additional capital so that we can continue to grow our business, particularly given the high demand we’re seeing from agriculture and rural utilities lenders for our programs and our products. We are also currently revising the risk management practices related to our investment portfolio with a greater emphasis on preserving capital and liquidity in furtherance of our congressional mission to serve rural America. These items will be our primary focus in the near term. For more complete information on Farmer Mac’s performance for the quarter ended September 30, 2008, I would point you towards the form 10-Q Farmer Mac filed yesterday with the SEC. In summary, the third quarter was a challenging quarter for Farmer Mac. The losses in our investment portfolio put Farmer Mac in a difficult position. These capital markets continue to be volatile and challenging. However, the board and our management team are focused on reducing capital market risks on Farmer Mac’s balance sheet and re-positioning the company for the future. Our core business remains solid and prospects for new business and additional business is strong. Additional capital is needed to accommodate this new business and permit Farmer Mac to continue to accomplish our core mission. With that, we will now open the call for questions.

[Operator:]

Thank you, ladies and gentlemen, we’ll now be conduction the question and answer session. (Operator Instructions). Our first question is coming from George Mahger of Private Investor (ph 00

[Michael Gerber:]

As I mentioned in my remarks and as we talked about in it in the 10-Q, we are currently evaluating all of those things. We believe it’s critical that we focus on our core mission and that will be our approach going forward and as I mentioned, we’re also looking at that investment portfolio very carefully to understand what’s there and to make decisions about how much of that we hold on to. [George Mahger – Private Investor] May I follow up? A second question that I do have – I don’t quite understand – you have a new Chief Financial Officer, but he’s like a sub-contractor and he’s got a contract until March. I’ve never seen that happen before, quite frankly, it scared the daylights out of me. I didn’t know whether he was somebody that shot from the hip or what are we doing or where are we going with so that we get a solid Chief Financial Officer and the progress being made in determining who will carry forward as the Chief Officer of Farmer Mac?

[Michael Gerber:]

The board is currently in the process of – is going through the process to find and hire a Chief Executive Officer. Our approach in the interim of that was board asked me to serve as Chief Executive Officer. It was necessary for us to have a Chief Financial Officer on board to help us through this interim period. That is the position that Bill Sandalls agreed to and that’s the reason for the short-term contract. We will be moving forward with a permanent Chief Financial Officer as part of the process. [George Mahger – Private Investor] Thank you very much. I’ve got a few more questions, but I’m sure I’m going to step aside here. There’s got to be other people out there to ask questions. Thank you very much.

[Michael Gerber:]

Thank you for your questions.

[Operator:]

Our next question is coming from Karim Thiquiy with Vic (ph 00

[[Karim Thiquiy:]

Yes, hi gentlemen. My question relates to the swaps that had been purchased in the past and I believed they’re purchased to offset the redemption or the payoff of loans and it seems like those aren’t paying off very well and it may be in the best interest of the share holders and the company to not purchase those anymore and just let the portfolio grow naturally as it may. Any thoughts on that?

[Michael Gerber:]

Well, first of all, all those issues are currently being looked at to determine if that’s the way to go forward. Part of the strategy at Farmer Mac has been to use swaps to manage the tenure of our debt and to make sure that we eliminate risks relative to that portfolio so that it’s matched with our assets. That process of matching assets and debt needs to continue. There are other ways to do that and we will certainly be looking at all of those.

[[Karim Thiquiy:]

Okay. My follow up is regarding book value per share right now. I’m calculating book value per share at being approximately $7.50 per common share. I was wondering if you guys are doing the calculation the same way and right now we’re trading in the $4.70 range and the market is down and we all take it (inaudible 00

[Michael Gerber:]

Well, the market has to do determine the value of the company as it trades. We believe that we’re working hard to put this company in a position where it can go forward and do business, that it can accomplish the things it needs to accomplish and as we do that, we’re confident the market place will see that, recognize that and respond accordingly. So, that’s our plan at this point in time.

[[Karim Thiquiy:]

Alright, I think you guys are doing a great job in transitioning. The new capital, I would assume, that you’re looking at would result in paying off this mezzanine preferred equity issuance. I know you can’t pay it off until the nine month mark, but is that the goal, to get a lower interest rate vehicle in here that will pay that off as well as fund this new business that you guys are looking at?

[Michael Gerber:]

Well, we’re looking at all options to raise capital. Our goal is to raise the capital we need to be able to move the company forward and do that at the cheapest price possible. So, we’ll evaluate what we’re able to do. We’ll evaluate the options based on how much capital we’re able to raise and what kind of prices and how all that goes together. We’ll ultimately be looking at a long-term capital plan and so all that’s yet to come.

[[Karim Thiquiy:]

Okay. Based on the current portfolio of loans right now, the major write downs are behind us, so even based on the current portfolio, it looks like income prospects are good for fourth quarter without a lot of future growth. Am I correct in saying that?

[Michael Gerber:]

The current portfolio’s performing. The net interest income is there. So, yes, those things are in place in our core business, which is generating an income. We would expect that to continue.

[[Karim Thiquiy:]

Okay, great. One last question. It seems like you guys are looking at some very big rural utility deals. I know maybe you can’t expand too much on that but, I know that that was an enacted by Congress last year or maybe it was earlier this year and it seems like there is a very high demand for that and that is part of the need for a capital raise? Is that correct?

[Michael Gerber:]

That is part of the new business opportunities, yes.

[Operator:]

(Operator Instructions). Our next question is coming from Leonard Geraputto (ph 00

[Michael Gerber:]

We disclosed where we were in the 10-Q. At this point in time, the board has not made a decision and will be making that decision at its December board meeting. [Leonard Geraputto] – GunnAllen Financial One follow up question. The cash flow that you currently have, will that cover all your expenses, i.e., the new loan that you got from Zions Bank and would that cover the dividend if in fact you were going to pay it?

[Michael Gerber:]

The answer is yes, we believe that our cash flow works and will pay all those expenses. [Leonard Geraputto] – GunnAllen Financial Thank you, sir.

[Operator:]

There are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

[Michael Gerber:]

Okay, thank you. Again, thank you all for being on the call. We appreciate your interest in Farmer Mac. We look forward to working with you in the future, bringing forward next quarter’s results and again, thank you for being on the call. Have a great day.

[Operator:]

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