Q3 2019 Earnings Call
Good morning, and welcome to the farmer Mac third quarter 2019 Investor Conference call.
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I would now lets turn of the conference over to Brad Normal Chief Executive Officer. Please go ahead.
Thank you operator.
Morning, assess Brad nor at home and I'm very pleased to welcome you to our 2019 third quarter Investor Conference call.
We have a number a positive developments to discuss today, but before we can do with that I would like to turn to Steve already our general counsel to comment on forward looking statements that may what we might be using today during the presentation.
Thanks, Brett.
Some of the statements made on this conference call maybe forward looking statements under the securities laws.
We make these payments based on current expectations and assumptions about future events and business performance.
We may not be obligated to update these statements. After this call.
We caution you that forward looking statements are subject to risks that uncertainty.
Actual results may differ materially from the results expressed or implied by the forward looking statements.
And evaluating farmer Mac, you should consider these risks and uncertainties as well as those described in our 2018 annual report on Form 10-K , <unk> third quarter 2019 Form 10-Q filed with the FCC.
In analyzing its information farmer Mac, sometimes uses measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States also known as non-GAAP measures.
Disclosures and reconciliations of farmer Mac's non-GAAP measures can be found in the most recent Form 10-Q and earnings release post about farmer Mac's website.
<unk> Dot com.
Under the financial information portion of the Investor section.
Recording of this call will be available on our website for two weeks starting later today.
Thanks, Steve and good morning, everyone. Thanks, very much for joining us.
This morning, I'm going to provide you with a high level overview of our third quarter 2019 results.
I'm going to turn the call over to exact Carpenter, our chief business officer, who will discuss customer and market developments.
Her coming down our Chief Credit Officer will then give you an update of the current agricultural environment and related credit conditions.
And finally, Greg Ramsey, our principal financial Officer will cover our financial results.
Our third quarter 2019 results continued our strong momentum from the first half of the here.
We had another quarter of solid core earnings and we also had portfolio growth in our world utility in agribusiness lines of business.
Outstanding business volume grew $186 million to $20.9 billion during the quarter.
And with growing that business bomb year to date of September Thirtyth.
By $1.2 billion compared to $533 million over the same period last year I.
I would note that the delta between the 1.2 billion from 2000, this year and the 533 million from last year, it's materially greater than the Cobank transaction that we announced in February of 2019.
This accelerated growth isn't the result of the creation of our Chief business Officer, Senior Vice President role infrastructure possessions.
That we really established to lead our core lines of business.
These changes within our organizational structure, all our businesses to begin to be more commercial and underscore our commitment to building and maintaining strong relationships with our customers relationships that translates into financial results.
Our agribusiness enroll utility businesses are foundational not only to our business model, but also to farmer Mac's mission of providing financing to rural America.
That said on the two prior calls I've mentioned that farmer Mac's management team that's been working on the development of multiyear strategic plan.
We recently had an opportunity over a three day session treat view this with our board of directors.
The plan focus on waste farmer, Mac and further execute Potter mission of.
Setting meaningful business, Oh, my side any meaningful business volume objectives, meaning higher business volume objectives that will require innovative approaches and how we acquire and retain customers.
As well as how we develop new products.
[noise] Soc Carpenter will discuss this a bit further.
But let me provide an immediate example of how farmer Mac can leverage innovation.
Execute on the objectives.
And that is by focusing you on the fact that this last month, our world utility line of business. It farmer Mac closed our first renewable energy project finance loan.
<unk> 10 million dollar loan participation in a larger syndicated transaction.
Oh 20 year term on two solar projects you have to rural California.
These projects have 20 or fixed price power purchase contracts with high quality investment grade Offtakers utilities.
[noise] by keeping our eyes open and being deliberate and the stacks stops we take and these new areas. We believe that won't be able to continue to take advantage of excellent opportunities to significantly grow our volume.
And ultimately the should expand our bottom line.
We understand that this will be a large and all encompassing effort.
Rounded an obvious common sense opportunities, but we believe our approach and the team. We haven't plays will enable us to take this company to a higher growth shot grade and really the next level in the years to come.
With that I'd like to turn because I Carpenter, our chief business officer to give you an update on customer and market developments.
Thanks, Brad as Brad mentioned, we had another solid quarter of that volume increases farmer Mac with net volume growth in the agriculture commercial lines of business, which include farm and ranch institutional and credit and U.S.D.A. guarantees exceeding $200 million for the quarter driven by strong result in the right.
Shelf space.
Specifically, our farm and ranch portfolio grew $102 million in the third quarter. Despite the seasonally large amount of repayments, resulting from the July 1st human data on almost all those in the farm and ranch portfolio.
In fact, our net volume growth this quarter in farm and ranch loan purchases doubled from the same quarter in 2018.
When we saw modest growth in our long term standby purchase commitment product a reversal from that decreases in previous quarters.
As I mentioned on our last call I spent much of this summer meeting with our customers and understanding their needs. How many can better served.
As a result, we have discovered new ways to deepen our relationship with our seller network.
This includes tactically competing for growth in a very competitive interest rate environment as well as incorporating additional products flexibility to retain customers.
We began implementing these initiatives this past quarter, which we believe partly contributed to the growth in the farm and ranch line of business.
As we continue to enhance our customer retention efforts. We are optimistic that these strategies will result in improved customer satisfaction.
Volume retention any deepening penetration in the markets we serve.
There continues to be significant amount of institutional capital investing in the agricultural landscape and farmer Mac has positioned itself to be a unique as well as consistent financing source for this investor base.
Well competition is fierce in pricing and structural dynamics remain aggressive we have been able to identify strong growth opportunities whereby the return has justified our investment.
In fact, our pipeline is very strong and we feel that we continue to leverage this opportunity set into the future.
Lastly, as part of these growth efforts and efforts Brad mentioned earlier, we continue to invest in infrastructure, including people and technologies.
These investments are crucial in order to approve our abilities are becoming a more commercial organization to providing consistent and reliable capital and existing but also new an untapped markets.
We continue to be excited about the strategic direction of the company and are looking forward to providing more details on these investments on future calls.
And with that I'll turn it back to you Brad.
Well. Thank you suck now I'd like to turn to Curt Covington, Our Chief credit Officer to give you an update on the current agriculture and fire.
[noise] Fred Thank you.
As the 2019 harvest comes to a close across our nation.
It's a good time to reflect on how farmers and ranchers fair to the focus on how a few key commodities and our portfolio performed.
Starting out with the not industry, primarily on star. She was closed out the harvest on a high note.
Farmers generally slow good excellent quality with bullish pricing and steady export demand.
Buyer commitments to purchase which has a strong indicator of future shipments are up 19% year over year.
In light of a low crop carrying inventory from 2018.
Cattle prices appear to have recovered from the recent lows beef supplies are tight throughout the world with U.S. maintains a supply advantage as production is expected to set a record in 2020.
Both domestic and international demand for you as beef remained strong and there is significant potential for further export growth with the implementation of the U.S., Japan trade agreement.
Dairy is benefiting from tighter global supply it should provide from putting underprice milk prices through most of 2020. However, the prospects of the slowing global economy and uncertainty around trade disputes are keeping demand somewhat in check.
Turning to the Midwest.
With combines making their last passes through the fields bears remembering what is different and perhaps a difficult year it's been.
Your started with heavy rain and flooding during the planting season.
Whether gateway to unusually dry conditions mid season, followed by a cooler and unwelcome wet weather at the beginning of harvest.
Farmers are anxious to see under what market conditions, they will be selling the 2019, corn and soybean prices. They continue to be considerable uncertainty about the path commodity prices in the end.
Farmers and their lenders are simply looking for some degree of certainty before the 2020 planting season commences.
One stabilizing element in 2018 has been a sizable government support payments across many commodities and geographies, which has helped many producers offset some of the declines in commodity prices and production disruptions.
Our credit quality remains healthy and near historical averages. Despite the normal uptick in delinquencies due to seasonality as of September Thirtyth 2019 are 90 day delinquencies were $59.7 million, 4.81% of our farm and ranch portfolio comps.
Year to $37.5 million were 0.53% in the same year ago period.
No delinquencies exist in our institutional credit are you Sta guarantees or rural utility lines of business. So 90 day delinquencies represent only 2.9, 0.29% of total business volume as of quarter end.
As of September Thirtyth, 2019, or substandard assets stood at $291 million or 3.9% of our farm and ranch portfolio compared to $216 million.
Or 3.1% one year ago.
About $54 million or the substandard assets is attributed to large relationships in different commodities in regions across the country the earn varying stages of resolution.
With an average 53% loan to value across our farm and ranch portfolio and origination. We believe we are well secured.
Even for substandard and special mentioned assets, 86% of those loans are secured at a 60% or better loan to value ratio.
And while it's never too early to begin planning for the next crop year.
It's certainly the time year to be thankful for the hard work.
Dedication to the farmers.
Ranchers rule Americans across all corners of our great nation.
With that I'll send it back to you Brad current thank you very much.
Now kind of turned to Greg to talk about natural results, but before I do a quick comment on our CFO search.
We have interviewed a number of outstanding candidates with really appropriate qualifications and expertise to be the next CFO of farmer Mac I've been gratified that farmer Mac is seen as a very desirable a career.
Opportunity for many of these qualified people and I think it's likely that we'll get to an announcement or on the farmer press release, an FCC filing a well before our next earnings call I would expect.
No later than right around the end of the year.
We're fortunate that we have so much bench strength in our finance area, beginning with Greg, but also Julie Joppa, Rob Owens and others. So that we really haven't been operating with any material gaps and our capabilities for executing on what is a very large and fairly complicated.
Our balance sheet here at farmer Mac.
And with that Greg.
[laughter].
[noise] greatly to our third quarter 2019 results are outstanding business volume increased by a net $186 million to $20.9 billion as of September Thirtyth 2019.
This increase was primarily driven by net growth of $102 million in farm and ranch and $77 million in rural utilities.
Farmer Mac's net effective spread for third quarter, 2019 was $43 million, a 9% increase from $39 million in third quarter 2018, due to growth in outstanding business volume.
In percentage terms.
Thank you spread for third quarter, 2019 was 0.9% compared to 0.93% in third quarter 2018.
Core earnings for third quarter, 2019 grew 5% to $23 million or $2.17 per diluted common share compared to.
$22 million or $2, an eight cents per diluted common share for third quarter 2018, the year over year increase in core earnings was primarily due to the increase in net effective spread partially offset by an increase in our operating expenses related to increased headcount and continued investments in technology and business infrastructure.
Thus far our year to date operating expenses have increased by roughly 7% over the same period last year as we've guided on previous calls we still believe that our full year operating expenses will be higher than last year by approximately 8% to 9% due to various growth and strategic initiatives planned in the fourth quarter of 20.
19.
As of September Thirtyth 2019, the total allowance for losses was $9.8 million or 13 basis points of the 7.4 billion dollar farm and ranch portfolio, which is a point 6 million dollar increase from the second quarter of 2019.
The increase was primarily related to some idiosyncratic factors of a few large loans and really less related to systemic macro economic factors.
Turning to capital.
Farmer Mac's $793 million of core capital as of September Thirtyth, 2019 exceeded our statutory requirement by $185 million or roughly 30%.
This compares to $787 million of core capital as of June Thirtyth 2019.
The increase was due to an increase in retained earnings partially offset by growth in our outstanding business volume.
We have more complete information about farmer Mac's third quarter 2019 performance in the 10-Q, we filed this morning with the FCC and with that Brad I'll turn it back to you.
Good thanks, very much Greg.
A couple of comments before we go to questions.
First is that we had a sad development here at farmer Mac, a couple of weeks ago. When one of our directors carry of a true or a very unexpectedly passed away.
Kerry I was a farmer ranch or in western Nebraska.
Very astute a businessman he.
He also served as the chairman of another farm credit institution, Agro bank and in Minnesota, and I know that the entire board and management team of a farmer Mac really appreciate carry service and and I will Miss him a great deal.
Reflecting on what it has been communicated today I can't underestimate or understate, how proud the management team Afirma GEC is of these third quarter results were beginning to see results from some of the initiatives that we started taking earlier this.
Here, we believe that those initiatives will begin are beginning to put us on a trajectory for higher growth.
In some it's been an excellent 2019, thus far we believe the best is yet to calm as we continue to execute and stay on that higher growth trajectory.
We have a healthy foundation to execute upon weren't great financial condition, all aspects of our operations and we have a very dedicated employee base here that is becoming very committed to our long term strategy and the strategic initiatives. The key elements of our strategic plan that.
We've mentioned.
We continue to focus on customer service and our mission to increase the availability and affordability of credit Rural America through our inherent competitive advantage cost of funding and very efficient product delivery. Just a reminder were 105 people here at farmer Mac now managing about 5 billion.
Dollars of annual originations and a balance sheet now well over $20 billion.
All of these factors should allow us to significantly expand our market share grew our topline anchor our bottom line.
Just to deliver long term value to our shareholders.
And with that operator.
We'd now like to make sure that we have an opportunity to answer any questions that anyone on the line may have for us today.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then to.
At this time, we will pause momentarily to assemble a roster.
Our first question comes from Scott, Let then with Compass point. Please go ahead.
Good morning, everyone. Thanks for taking my question.
Just with regard to.
Mentioned 5 billion of originations give or take is kinda I guess, where you guys right now a annually.
How do you see that growing over time, you mentioned all the initiatives you've put in place or or have put in place and are putting in place. Just wondering how did your factory that growth should should happen over the course of call next couple of years.
Yeah.
Scott that some of these growth initiatives I really just beginning at the heart of some of the planning that we've been doing our other initiatives that will be rolling out and talking about early in 2000 and even into 2021 some of them just need to be sequence.
So when we talk about gross originations. We also have to consider the fact that as we get bigger we also have a higher amount.
Repayments and in some cases prepays are refinancings of commitments as well and so you know kind of bridging from that gross number two and that number, particularly you know this year. When we've had about a 120 550 basis point decline and 10 year Treasury, which is an interesting reference our rate for us.
Has to be consider taking into consideration as well, but you know if if if our CAGR right now is somewhere around a you know 567% range. Our aspiration, we see very real possibilities of increasing that compounded growth rate materially maybe as.
As much as 50% or even more.
2020 will be a year, where it'll be more challenging because we're just getting around to implement some of these strategies, but as we look out another year or two beyond that 2021 2022, we think that is very realistic.
And that's that's very helpful. I appreciate it thanks, and then in the past you mentioned, the renewable energy credit, but especially you guys did.
In the past things early this year you did some patients with the farm credit system. Just wondering if there's more opportunity. There. If just a matter of you know how those can be lumpy from quarter to quarter, but wondering if you see more opportunity on the farm credit system side.
Yeah, and just a comment on the solar and then I'm going to turn to Zach on the farm credit.
We I think a previously disclosed that we see renewable energy, particularly in rural America has a very mission driven and profitable growth opportunity for US no. The significance of that $10 million deal that was part of a larger syndicated deal that was closed in October is that.
It was our first when we now have a first one done and we can build upon that and in fact, there a couple of what I would describe as conduit like opportunities for renewable energy financings that almost start looking like our farm and ranch program, where we have.
[laughter].
Switching, adding a those more granular see an ice style, a solar project finance opportunities for us.
So we are looking for work growth than that.
Even before the end of here, but sure into 2020.
Lets Zach comment on.
You know relationship with farm credit institutions, because it's not only around roll electric cooperatives. It is around our acre business opportunities as well.
Yeah, Hi, Scott this is actually.
We've had significant amount of interaction in conversations with the farm credit system.
Over the summer into the fall in I think one piece to highlight is.
Hello, the opportunity set and how interested they are in partnering with farmer Mac going forward, we see as we've said in previous calls.
Our opportunities that we view what these institutions, but also additional institutional partners.
It's pretty amounts so on the agricultural fund you know our innovation efforts, specifically revolve around how we can partner with new and existing institutions to deploy a larger amount of capital.
Specifically at what I would say and more unique and structured credit transactions.
Larger credit transactions, such as syndications, and really creating a flow business between our current customers and new customers, including the farm credit system I'm going forward.
Scott one follow up comment this is Brad again, you're commenting on the Cobank transaction I think when you dive into the third quarter numbers, what you will see is that.
Our outstanding business with real electric Baucus have increased during the quarter and not because we did anything of the magnitude of a 540 million dollar you know portfolio of transactions, but because we are beginning to see just a nice flow of new transactions through both.
Of our partnerships both of our origination channels for rural Electric cooperatives, that's really what we.
Hope to have going forward, it's just a steady stream of of new kind of individual opportunities with rural utilities with real electric cooperative. In addition to the our renewable energy project finance that we mentioned okay. Thanks, and then I'll ask one more question I'll get back into queue, but on credit.
No.
Thank you for the color on the various different agricultural verticals normal seasonality first quarter third quarter or kind of the weaker credit performance quarters, but just wondering are you seeing any trends either by sector or geography.
Give you pause for concern or just kind of commit one off [noise].
Thanks, a good question.
In fact for kind of just seeing the exact opposite we monitor delinquencies and our credit quality really closely and what I would say is is that when you look at it from a commodity perspective.
There's nothing that San stands out on any commodity that suggest we have a systemic problem.
It's all there's a lot of newspaper print about the corn and beans sector, but we just we just simply don't have a lot of issues in that area at all and from a regional perspective.
It's pretty much all over the country, we have a few larger deals in certain states that represent as you know probably eight.
More lumpy portion of our delinquencies, but there's nothing there that would suggest we have anything system.
Thanks, Greg in his comments did a label that kinda idiosyncratic.
Issues and.
Kurt recently took me through some analysis that done.
Credits that were keeping an eye on.
If there was any pattern there was more around issues sections divorce or other things.
The other than.
Commodity cycle and commodity price driven delinquencies.
Okay. Thanks very much.
Hi, Good if you have a question. Please press Star then one.
The next question comes from Greg Pendy with Sidoti. Please go ahead.
Hi, guys. Thanks for taking my questions I.
Just one I guess I know, it's early innings on.
The renewable energy side, but the two solar deals, but can you help kind of give us I guess color on how maybe the company is viewing this market maybe different I believe in the past the company was involved with the ethanol market and just kind of how you're looking at it maybe differently from a risk management perspective and why.
You might see this this market being different from ethanol.
Absolutely.
And.
Greg I I've I've spent the last 20 years doing some of the so I I think my perspective is quite informed in addition to Brian and his teams and our and our credit Counterparties as well. The most fundamental difference is that in liquids, it's like what feels it's almost impossible.
To lock in long term net margins you might be able to do a dirty hedge against index Eatingwell for example, but you're going to go out two three years and that's going to be it and the issue with ethanol was that plant, which is essentially a tolling instrument getting stuck between a mismatch and the price trends.
Of the values the output and the cost of the input what is different about solar energy project finance and <unk> and some other types of project finance as well is that there excess opportunities to lock in margin for 20 year period of time. So these alone.
Phones that we're doing and solar.
Fully amortized over the life of the fixed price for output revenue contracts that we have with investment grade entities.
And that means that given that the cost of a solar project are essentially all fixed price cost.
You have a very predictable revenue stream to service the debt and pay for the fixed operating expenses, such as insurance and maintenance associated with these projects bottom line is that these projects lock in very predictable margins for servicing debt for the entire period that we amortize the debt.
And that is a very fundamental difference.
That's very helpful. Thanks, a lot.
Your next question is a follow up from Scott Wilson with Compass point. Please go ahead, but thanks for taking my question again, just in terms of two items. One I guess the I think are you mentioned that the aid that's out there to farmers just wondering how that's impacting credit I assume it's been a positive for credit given given the that's flowing into it.
Early days and no one wants like a prediction on China, U.S. trade, but there's been talk about China resuming a agricultural purchases just wondering what you think that would do for yeah. The outlook for the farm economy. Thanks.
Yes, again, it's a a really good question. So it's a net positive.
In terms of I think where we are on a on the U.S., China trade agreement Theres a lot of optimism out in Rural America, We talk to community bankers virtually every day.
And we talked to many farmers see this in some of them you know I mean, there's when you when you go into a coffee shop get a mixed bag of answers right in feelings about all this.
M.S.P. has been obviously a real benefit.
And no farmer.
Would choose to take that over higher commodity prices.
But in the end I think it's a particularly you know I can only speak to our portfolio has been beneficial for our portfolio and maintaining credit quality and helping these farmers make it through particularly being farmers the soybean farmers to make it through but in the yen.
When I look at our portfolio.
We talked to many many farmers in AG bankers. He's farmers have done a really good job controlling their cost. So it's not just how much revenue received and words coming from.
It's been their ability to manage their costly just an exceptional job of that.
And just in terms of if there was a resolution hopefully but by year on trying to U.S. trade.
I mean, comparing credit demand, where it was you know early 18 or early 19 I.
I assume that would be positive for credit demand. If farmers felt the there was a deeper end market for product and maybe see more demand for quite a starting in the planting season.
Yeah, I think you'd see it isn't net positive for sure with the bankers, we talk to obviously from the operating side I think you'd see some relief there and some optimism from our perspective, you know we support 700 route community banks across the U.S.
Who.
Come to us for the opportunity for many of these farmers to expand and I think you would see that in this marketplace. So we see it is a net positives.
Alright, thanks very much.
This concludes our question and answer session I would like to turn the conference back over to Brad normal for any closing remarks.
Thank you operator, and thank you all for listening and participating in our call. This morning, a will be having our next regularly scheduled call in February trayport on our fourth quarter and full year results and we look forward do sharing.
That information with you at that time.
In the meantime wish that you all have a fabulous Thanksgiving holiday season, and as always the case, if you have follow up.
Questions, let us know, we're happy to jump on the phone with you and and talk further about any of these matters and anything else on your mind.
Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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