Q4 2019 Earnings Call

It's a pretty lousy day in the markets today, but I'm happy to report that farmer Mac had an excellent year in 2019 on all fronts are outstanding business volume grew one point four billion dollars during the year to a record twenty one point 1 billion dollars while quarter earnings increased 12% from 2018 to a record of ninety three point seven million dollars our growth and strong financial performance in 2019 can be largely attributed to closely aligning our business development efforts with our jobs a year strategic plan that we worked on throughout the back half of 2019.

She sounded our press release earlier this afternoon. We announced a $0.10 per share increase in our quarterly common stock dividend to eighty cents per share this reflects our patients decision to maintain our common dividend payout Target is a percentage of our annual earnings at approximately 35% in deciding wage increase farmer Max, stock dividend and maintain our payout Target the board comprehensively considered are strong Capital position in the consistency of outlook for earnings along with the size of our balance sheet and the need for Capital to fund significant growth objectives identified in our strategic plan. I want to make sure in thinking about dividend declarations that we're meeting all of our regulatory Capital requirements and our Capital metrics established by our board.

Are consistent with farmer Max goal of providing a competitive return to our common shareholders Investments through the payment of a cash dividend and a payout ratio of earnings this month approximately line with those of other financial institutions.

Execute about our mission of financing Rural America are long-term strategic plans objectives emphasize innovation in how we acquire and retain customers as well how we develop new products that Carpenter a chief business officer and Brian Bridge our senior vice president of rural infrastructure if taken the lead in these efforts over the last year and they made significant progress towards our goal of becoming a more efficient organization and in building and maintaining strong relationships with our customers.

Our farm and ranch and Rural utility businesses are foundational their absolute Court of what we do not only to our business model, but also to our ability to provide financing to America that's where the greatest need is by executing on our strategic plan with an increased emphasis on customer value and profitable volume growth We Believe are well positioned to expand our business volume and market share and ultimately expand our bottom line.

The support of our board and our new board chair Moana will sure we believe our unified commitment to Farmer Mac strategic plan in conjunction with the organization's talented and compelling employee base are enabling us to take firm or Mac to the next level.

I'd like to turn this out to give you an update on customer and Market development.

It's Brad mentioned 2019 was a significant year as we focused on enhancing our foundation so that we be being a better position to achieve our strategic vision and deliver a package of financing solution to the broader Agriculture and Rural credit markets.

In a rural utilities line-of-business outstanding business volume nearly doubled in 2019 compared to 2018 primarily due to the purchase of a portfolio of participation from coping off-season utility loans in the amount of $546 billion dollars.

This purchase not only represented an enhanced relationship with cobank the largest institution Farm Credit system, but also elevated our ability to provide Capital to a mature Financial Market.

All utilities team did an outstanding job of enhancing our foundation and infrastructure to become a meaningful player in this market, which can be seen by additional flow purchases of approximately 230 million hours following initial coping transaction on top of eighty million dollars of loan purchases from our key partner a national rural utilities Cooperative Financial Corporation in 2019.

In our foundational Farm and Ranch and on purchases and USDA guarantees lines of business net volume growth increased 44% or approximately eight hundred million dollars in 2019. I bought a record year in Lone purchases in our core Farm and Ranch lines of business where we had net loan volume increase by 77% from 2018.

As a mission-driven organization, it is important that in an ever-changing Agriculture and economic environment. We remain adaptive and flexible to meet our customers needs by providing financing Solutions.

with

During the second half of 2019. We created a more Dynamic and responsive business model.

Has transformed the way we deliver Upon Our mission and resulted in Improvement in customer satisfaction volume retention and penetration in existing and new markets.

The success of the strategy was especially apparent in the fourth quarter of this year of last year as we added net new Farm and Ranch loan purchases of four hundred forty million dollars compared to $168 in the third quarter of 2018 This Record quarter growth in Farm and Ranch land purchases can be partially attributed to the numerous initiatives. Our team has implemented focused on enhancing our relationship with your customer set through providing flexible competitive and enhanced financing Solutions.

And pursuing these growth initiatives. We remain grounded inappropriate risk profiles as we continue to look to grow our business lines and deploy Capital to the industries we serve

We also continue to invest in infrastructure including people and technology in order to become more commercial and more efficient as an example of these efforts would be our scorecard underwriting product home and express which was launched in 2019. This new platform has been a tremendous success representing almost one-third of loan applications in 2019 and offers pricing discounts for loans that are easier to process and underwrite as well as reduces the approval time for a loan to be purchased from our customer.

the products

Efficiency and structure have allowed our underwriting team to be able to focus on more complex loans reducing the approval time on these transactions.

Given that the success of the ad Express product in 2019 will be expanding this platform in 2020.

As I have mentioned on prior calls enhancing. Our infrastructure is crucial in order to improve our abilities to becoming more commercial organization that is able to provide consistent and reliable Capital to both existing and new markets.

We are excited to announce the launch of two significant infrastructure enhancements in 2020 a new customer portal and a new streamlined origination platform for Express Loans with these two enhancements are the first in a multi-phase implementation program that will create a more robust and more efficient platform for our customers to be able to do business with us driving incremental Capital wage or sectors. We serve we continued to be excited about the Strategic direction of the company and will continue to be focused on becoming a more relationship-oriented Institution for our customer base wage at the mission-driven organization. We need to be dependable and providing capital of through the Agricultural and economic Cycles be competitive and providing Innovative Financial Solutions and be adaptive to change all the changing environment.

Our recent results are early validation of these initiatives.

And we were looking forward to providing more updates on future calls. And with that. I'll turn it back to you Brad. Well, thanks Zach before I turn to Jackson. I'd like to thank Kirk Covington. Georgia Kurt was firmly our chief credit officer. I'd like to thank him for his hard work and dedication over the last five years. We wish current the very best as he saw in a recent filing a Curt resigned, uh to uh, work on some family issues effective, February 14th. We have engaged a search firm and launched a nationwide search for new Chief credit officer, and we will certainly update you when we have more details.

And now Jackson Jackson has been with us for fifteen years in various roles including most recently as our chief Economist. He understands just about every area of our organization and he'll be giving you an update on our current agriculture environment. Thank you Brad an average year for a nation's network of farmers and ranchers Springs. Risks and uncertainties that affect different sectors wage and supply chain disruptions unless common market conditions experienced by the office in the last few years is global trade headwinds relations with China Canada and Mexico the top three export destinations in 2017. We're all strained by terrorists and counter-terrorists throughout 2018 and 2019. The presence of retaliatory tariffs on farm-related trade combined with a strong US dollar caused a downward pressure in the value of agricultural exports in 2019 dead.

States Mexico Canada agreement into law and the trade negotiators from the US and China signed a phase one trade agreement in January twenty twenty. Although there is still exists in cloudiness around the true potential trade with China and twenty twenty these negotiations represent a thawing that could translate to increased demand for us agriculture in the coming years. Looking ahead the overall farm income picture remains flat in 2012-13 UNCA estimates cash farm income was elevated in 2019 largely a result of the $14 in cash installment payments to Farmers through the market facilitation program or mfp. This program was designed to offset the economic drag on Farmers from trade negotiations, after five years of off-peak farm incomes many indicators of farm Financial stress are increasing two more historical average levels composite cash farm income is down from 2014. Peace, but near 20-year historical inflation adjusted averages.

Absolute is near the average coverage ratios remain better than historical averages due to persistent low interest rates default rates on Farmland secured mortgage loans at commercial Banks and Farm Credit institutions during 2019 or elevated from 2016 lows, but remain well below the 15 years has similarly Farm and Ranch portfolio ninety days or more default rate was just under 0.8% up from Lowe's experience in 2016, but still under our 15-year average historical averages as well continue to reflect strong borrower and collateral performance as evidenced by our average German Branch loan to Collateral value ratio of 51%

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Unique to each and every rural business for example farmer Max allowed provision increased in 2019 largely the result of a single specific Reserve place on a specialized poultry loan. This is a natural function of short-term economic and agricultural cycles that affect different sectors and regions at different times.

Despite some bumps along the way the road ahead for the farm economy remains filled with opportunity interest costs and electricity costs. Remain low evidence of the mission delivery thousands of lenders and Rural Electric Cooperative providers across the country furthermore additional investments in renewable energy particularly solar present new opportunities for energy providers and landowners to generate a viable source of power and off-farm income finally specialty crops and food products to bring to Market and with that. I'll turn it back to you. Thanks very much Jackson came back remains committed to our historically and high standards of credit quality as we looked for ways to further execute on our mission to provide credit to America. There may be circumstances in which we will look up ways to expand our credit envelope and take some additional risk flexing to market conditions when we can be paid when we can be compensated dead.

or taking that risk

She joins us with over two decades of financial expertise. Most recently with the Federal Reserve Bank of Boston where she served as senior vice president and Chief Financial Officer excited to have her on board and support of our efforts to grow our business and execute on our strategic plan without altering call to a party so she can introduce herself to you and discuss our financial results in more detail. Thank you Brad. I'd like to begin by contributor to this mission-driven organization. Most of my career has been with organizations that have a strong sense of mission and my belief is that Finance can be a force for good.

Given my values and experiences. I was really drawn to Parma Mac. I spent the last several weeks. I started here in January 6th and at the most myself and getting to know the teams as well as understanding the key business issue. I'm truly impressed by the High Caliber of talent across the organization. Very excited about Brad's Vision perform a Mac and the many opportunities present for us to serve our customers deliver on a mission and create long-term value for life. I'd like to talk to some quick highlights from a strong food quarter of 2019 as you heard from Zack and his business update. We saw sequential net business volume growth of about 185.6 million dollars and it was primarily driven by a farm and ranch line of death our net effect of spread increased 18% year-over-year 246 million dollars are cool earnings Route 28 send you over here to twenty four point five million dollars or 2.27% diluted share.

Now I'd like to turn to aparna our new CFO.

For 2019 our results were notably strong across the board and in keeping with our historical averages. We had robust new business volumes stable spreads and growing profitability specific your outstanding business volume to deter increased by a net one point four billion dollars to leave us at a record twenty one point 1 billion dollars as of December 31st, 2019. This encompasses all four lines of business that contributed to this growth.

That's effective spread for 2019 was one sixty eight point six million dollars a 12% increase from 151.2 million dollars in 2018. And this was primarily with the group that I just mentioned on that new business volume in percentage terms are net effect of spread was .91% for both 2019 and 2018. So remarkably consistent running for 2019 grew by 12% to ninety three point seven million dollars or $8.70 per diluted common share and this is in comparison to $84,000 or $7.82 per diluted common share for 2018.

Increase in earnings was primarily due to the increase in net effect of spread. Once again driven by higher business volume, which was partially offset by two point five million dollars after tax increase in the provision and one point six million dollar after tax increase in operating expenses, which is related to the continued Investments that we're making in technology business infrastructure and compensation and Genesis operating expenses increased by 4% in 2019 compared to 2018. This was notably less than our initial expectations of eight to nine percent growth. This is primarily due to timing issues as we are in the early stages of modernizing our infrastructure and also hiring some key personnel. We expect these efforts to continue and increase to 2020 as we innovate and grow our business office, exact timing of these expenses is uncertain and therefore hard to pinpoint.

As of December 31st 2019 the total allowance. The losses was twelve point six million dollars of 16 basis points of the seven point eight billion dollar Farm and Ranch work for you ma'am is increased three point four million dollars from the prior-year end. And this was largely related to a very specific reserve on a single specialized poultry loan. And this is what Jackson rep and his election. However, I would like to know that our overall credit quality for the entire portfolio for, Mac continues to remain extremely strong and in line with long-term historical averages for Farmer Mac and our industry benchmarks.

I need attention to Capital. We remain very well-capitalized and this puts us in a position of strength. We embark on a multi-year growth plan farming Max eight hundred fifteen point four million dollars of core Capital as of December 31st, 2019 rooms by eighty seven point eight million dollars from the prior-year end and exceeded our statutory requirement by 196.7 million or Thursday do for that. This increase was due to the issuance of the series D preferred stock in May 2019 would really it was a result of an increase in retained earnings a note that retains continues to be the primary driver of a capital position and allows us to provide long-term value to our shareholders at Brad mentioned are strong earnings and capital position support our dividend increase and Tom issue of 35% Of course.

Stone structures Superior operational efficiency, given Arlo headcount relative to our asset size strong earnings growth and robust Capital position. We're extremely encouraged by the momentum received the success of the Strategic initiatives that are currently underway and we remain very committed to the near-term and long-term opportunities for growth that are identified with in our strategic plans. Our goal is to continue to serve a customer and we are therefore making the necessary investments in modernizing technology and infrastructure. That's a preference and this will also enable us to adopt a more data-driven approach towards risk and return such Investments couple of options will put us in a strong position to fulfill our mission to deliver low-cost and accessible capitals across Rural America.

Once again, I'm very excited to be a part of the leadership team at Farmer Mac and helping the organization achieve a strategic and financial goals more complete information about CarMax 2019 performance is instead of you file this afternoon with the F and the thought brought on the back to you.

Thank you are bored.

And our management team are very proud of our 2019 Financial results. We believe our performance provides a strong Foundation or visible at visibility and growth in the future is we continue to execute on some of our more ambitious objectives our experiences versus leadership team as well as our dedicated and talented group employed are fully committed to our long-term strategy and have the capability of desire to make it succeed. We continue to focus on our mission to increase availability and affordability of credit to Rural America through an increased focused on Thursday summer service retention efficient product delivery and our inherent cost of funding competitive advantage.

Our mission provides focus in our Focus enable specialization and expertise in agriculture credit allowing us to significantly expand our market share grow on Top Line, bottom line that allows us to deliver long-term value to shareholders put another way. I'm sometimes asked well just because you're so focused on agriculture doesn't that limit your opportunity and I thought you know that is exactly the opposite that Focus results in specialization and delivers strong financial results. But yet another way we're very good at what we can do.

so now operator I'd like to

To see if we have any questions from anyone who's on the line today.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to the first question we have is from Henry coffee from wedbush, please go ahead. Yes, good afternoon and congratulations on the dividend increase the your your spreads have been remarkably stable over the last three years.

Given the current volatility we're seeing in the interest rate Market as of late with the 10-year down a cetera. Is that going to challenge Your Capacity to keep spring within you know, the two or three basis points changed that we've seen or is that kind of more like business as usual and we should continue to expect the same thing.

Why I think the fact that there is 91 basis points. Both years is really remarkable. I think generally when we're speaking to investors, we talked about 90 basis points plus or minus plus or minus five days as a reasonable range of expectations for you. But when you consider how we fund our business and really the issuance of our liabilities and our interest rate swap off automatic specific assets that we're putting on the books really on a coterminous basis. It's not surprising because we're essentially pricing to our cost of funds off and since we understand the risk profile, we have a very very good idea of how we're going to Land close to that 90 basis points on a risk-adjusted basis.

Great. Thank you very much.

Next question comes from Greg Penny from sidoti, please. Go ahead. Yeah. Hi, I guess I just wanted to jump into the expenses. I know you mentioned you came in around 4% below your your initial Target in the 78% range. Can you just give us a little bit of color on how to think about 20 20 is this are there some IT jobs or hiring that is that has been pushed out from 2019 and it's a 2020 and kind of you know, just a a rough way to think about the year-over-year increase that we should be looking for in 2020 in Iraq. I know we've been telling you right for a couple of quarters now that are operating expenses would be trending up and it's Faith mentioned. It really is a timing issue for us. We have significant. It initiatives underway some of the actual payments for those initiatives have been hitting a little slower than we expected wage.

Even though we're remark.

Like on schedule relative to our plan for those upgrades.

We thought that where we at the end of the first quarter of 2020, we might be somewhere in the neighborhood of 110 to 112 employees think we're about a hundred and five right now with ten unfilled positions that are posted approximately ten unfilled positions that are posted. So I think maybe in that metric alone is probably the best illustration of why some of this expense pickup has been a bit slower to hit than maybe we have led to believe but we are committed to moving ahead with these initiatives. We do have growth objectives. We are filling these ten positions and probably additional positions as long as we get further into 2020. And so, you know saying, you know expense growth in that 8 to 10:00 even 12% range.

would not

Be at all unexpected.

Okay, great. That's helpful. And then I guess just one final one just on the 90-day delinquencies. I know you had a a sequential decline. I think in 3 Q you mentioned some idiosyncratic type of loans. Can you just give us a little bit of color just from a year-over-year perspective like seasonality? It should come down from three Q two four Q if I'm not mistaken, but it is a bump from where you are at home. So just kind of what's what's driving. It may be from a year-over-year perspective.

Yeah it is and if you look at 90-day delinquencies, they're up from a year ago end of 2018. They're pretty close to where we were at the end of 2017, And so there's some quarterly as well as annual seasonality that's come into play here need it does seem to be or use the term DDOS Socratic which I bought a used before situations and in fact the special reserves that we took during the fourth quarter was one of those situations. It was one lone to a processor that a unique product with a unique feed and unique processing, uh, unique processing process and does not reflect. For example, a wholesale deterioration in credit quality in any particular region Upper Midwest, for example, or across any particular crops, for example

So you said before we're keeping a very?

Eye on the situation Jackson mentioned that income and liquidity are both down from 2014 offsetting that on the other hand while debt levels may be up a bit across the sector. Our average loan-to-value is have been remarkably stable and we have actually seen that debt service coverage ratio stability of our customers to cash flow their death has actually improved a bit because of these very low interest rates. So it continues to be hard to make generalizations about what you might classify systemic or sector-wide deterioration in credit and we do continue to point to those or idiosyncratic situation Jackson you have anything to add I think that's exactly how we think about it.

That's very helpful. Thanks a lot.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Brad and we're home for any closing remarks.

I'd like to conclude by thanking everyone for listening and participating in this call. We will be having our next regular schedule call in made to report on our first quarter results. Look forward to sharing additional information with you at that time. This is always the case. If you have any questions don't hesitate get in touch with a job. We know the timing of this call later in the day basically following then he was a little bit different than sometimes. She as you've had an opportunity to maybe digest the full ten K and reflect on this call today, but do give us a call would love to talk so that operator. Thank you very much.

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

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