Q1 2020 Earnings Call
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After today's presentation.
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President CEO. Please go ahead.
Good morning.
<unk>.
I used to walk you through the from about 2021st quarter Investor Conference call.
Before I begin I will.
Need to ask Steve following our general counsel to comment on forward looking statements.
Like today.
Well.
Its use non-GAAP financial measures.
Thanks, Brad.
Some of the statements made on this conference call maybe forward looking statements under the securities laws.
Make these statements based on our current expectations and assumptions about future than some business performance.
May not be obligated to update these statements after this call.
We caution you that forward looking statements are subject to 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.
As well as described in our 2019 annual report on form 10-K filed with the FCC in February.
Updated to discuss risks related to the code at 19%.
Quarterly report on form 10-Q filed with the FCC yesterday.
Analyzing its financial 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 posted on farmer Mac's website <unk> Dot com.
Financial information portion of the Investor section.
Recording of this call will be available on our website for two weeks starting later today.
Steve Thanks, very much and good morning, everyone. Early morning, I would note and thank you for Johnny House I'd like to start by recognizing that this is really extremely challenging time.
All of us and our thoughts are especially with those most affected by covered my teams, particularly those on the top line of this crisis.
It's farmer Mac, our immediate priorities are to support American agriculture, and we'll communities.
Provide a safe secure work environment for employees.
I believe that we focus on these parties.
That's just the financing of producers in processors crude on the spot on.
We can and will be a positive horse and help information.
Got through this terrible endemic.
I'm happy to report that farmer Mac has been successfully operating uninterrupted, 100% about why is working well remotely.
Doing about since March 12.
Like all businesses, our leadership team has challenged ourselves to communicate.
Right and new ways.
We've been successful I think.
Our business continuity plan has been functioning it's designed in support of all functions of the organization.
Recent investments in technology have allowed us to stay in communication.
Within our organization and with our customers and our suppliers.
Our board has also remained very active oversight role I've done that your weekly teleconference meeting.
We had been working effectively.
The boy with our regulators.
Our debt capital market investors.
To help ensure the continue safety what did the.
Soundness following that.
Let me now turn to result.
Our strong underlying fundamentals.
<unk> business model really enabled us to successfully continue operations.
Execute our mission.
We provided $1.3 billion of new credit to North America.
Ultimately leads to people.
And the first quarter of 2020.
The challenges presented beginning in March 2020.
Acquired farmer Mac to respond dynamically.
We pivoted, our customer outreach approach and fine tune on some of our products and.
In order to continue fulfilling our mission.
A few minutes that car that's going to go into more details on how we've done that.
Our access to capital markets. It's remained strong despite the ongoing market volatility.
We have continued to issue debt on a daily basis, and maintain our disciplined asset liability management policies and practices.
Long gun in place.
We have remain well capitalized with a strong liquidity position that has been at or above $1 billion for most of the last couple of months. The strong liquidity position enables us to meet any unexpected cashflow need with minimal operational disruption.
As we previously noted we indefinitely suspended our 10 million dollar share repurchase program and early March reserve capital and liquidity and as additional cautionary measure.
Turning to credit despite the normal seasonal uptick in delinquencies in the first quarter, our credit quality has remained healthy.
We have maintained the same consistent underwriting guidelines.
Got it approvals are closely monitoring impact of cobot 19 on new applications.
Well, we are not subject to any regulatory requirements that would require forbearance of loan payments.
We are working closely with those borrowers that have been impacted my called the 19, and we've been providing flexibility on payment terms to them as needed.
More specifically, we have approved 71 payment deployment requests related to cope with 19 through may 1st with a total principal balance of $78.9 million, that's less than one half of the percent of outstanding credit.
We do expect to see an increase in Mr from request over the next quarter.
We're continuing to work closely with our servicers to provide appropriate really.
Impacted followers.
We remain focused on serving the needs of our real customers and our challenging ourselves to find more efficient effective ways.
To provide customers with the flexibility and assess their borrowers need.
I said that the standpoint.
While we had knowledge uncertainty in a broader distribution of possible outcomes in the future.
We know we will remain steadfast in our commitment to maintain that they'll probably well credit American agriculture and rural communities.
Well that introduction I'd like now turn to back our Chief business Officer to give you an update on customer and market developments.
[music].
Thanks, Brad.
In the wake up this unprecedented the global condemning we know that companies around the world or an active new major to ensure that they continue to operate or services, but even more importantly to protect the well being and their customers and employees.
Well, we have transitioned to alternative operation our team continues to work diligently to remain flexible on adaptable to meet our customer Nancy need.
Mitigate any challenges the borrower my face.
To that end, we have taken specific step to support our customers. During this time.
These initiatives include loan closing flexibility and extended rate lock optionality for approval loans to provide customers the ability to navigate challenges due to office closures and social distancing requirements.
Continue to offer competitive prices for all available farmer Mac's products and risk management solution.
Given our ability to maintain continued it an uninterrupted access the capital markets during this volatile environment.
I'd love to providing world borrower impacted by the pandemic D.
Principal and interest payments as well supporting customer deferral requests for bounce back in guaranteed securities and long term standby purchase commitment products.
We will continue to assess and incorporate initiatives that allow farmer Mac to serve our customers world borrowers and rural America as a stable source of capital during that Unprecedent environment.
Now turning to business volume 2020 is off to a good start farmer Mac. It's all four lines of business contributed to net outstanding business volume growth of $421.4 million this quarter.
Reflecting on purchase net volume growth in farm and ranch U.S.D.A. and rural utilities about combined $303.3 million.
Which was partially offset by sequential decrease decrease in that growth in long term standby purchase commitments and guaranteed securities of $137.8 million.
We also saw increases in institutional credit, which grew $255.9 million largely driven by our ability to provide a short term liquidity for two of our largest counterparties during the most volatile capital markets environment during the month of March.
This growth is a testament to farmer Mac believed to be competitive in price, while also being affected in execution to meet the needs of these customers.
In our world utilities lines of business loan purchase that volume grow $118.4 million in the first quarter of 2020 compared to $490.3 million in that same period last year.
It's important to know that loan purchase that volume growth in the first quarter of 2019 included one large unique transaction.
Purchased them on 546.2 million dollar portfolio participation been season rural utility loans from Cobank.
Excluding the impact from the unique coping Kobe transaction.
Carmax loan purchase met volume decreased in the first quarter 22009.
The strength of growth during the first quarter of 2020 reflect studied on purchase demand from Cobank and there are other primary counterparty in the rutile. These line of business National Roll utilities co-operative Finance Corporation.
Loan purchase it net volume growth in our foundational farm and ranch and U.S.D.A. life. That's what the hundred 84.9 million dollar for the first quarter of 2020 versus a net volume decline of $64.7 million for the same quarter in 2019.
The strong first quarter of 2020, primarily reflects the results of farmer Mac's customer acquisition and retention initiatives.
Got it if interest rates across our products that.
Fishing and effective loan approval and Onboarding execution.
Fire underwriting and clothing.
Farm and ranch loan purchases had net volume growth of $142.1 million during the quarter.
Overcoming one of our largest prepayment quarters over $260 million, primarily related to the January 1st payment date as well as increased scheduled principal amortization levels, given our larger portfolio.
Looking ahead, our pipeline remains robust as we continue to build up on a more dynamic in response to bed business model.
That is transformed the way we deliver upon our mission and improved customer satisfaction volume retention and penetration in existing and new markets.
As I've mentioned on prior calls enhancing our infrastructure is crucial in order for us to continue to provide consistent and reliable capital to both existing and new markets.
I'm excited to announce that we successfully launched our new customer portal platform yesterday.
This portal provides an enhanced interface with elevated security features for our farm and ranch and U.S.P. customers and <unk> as well and will serve as the foundational platform to launch future innovative products and initiative as we continue to drive incremental capital over the course sector as we serve.
Later this fall we will launch this customer portal a news streamline origination platform for I can express score card loan product.
This origination platform will provide increased efficiency enhanced technology and faster loan approval on funding for aggregate spread score card loans.
Our continued investment in our infrastructure does not stop with these two enhancements we have several initiatives slated for 22021 and beyond and that continuing to elevate our infrastructure.
We look forward to providing more details on future calls.
Lastly, I would like to take a moment to recognize the farmer Mac team for all their hard work and dedication to help meet the credit and liquidity needs of our customers and rural communities nationwide.
Even during these times of uncertainty it is imperative that we continue to execute upon our strategic priorities and remain dynamic and flexible and supporting our customers in Rural America.
And with that I'll turn it back to you Brad.
Sorry, thanks, very much and I'd, just like to know that.
To be able to execute the love it just kind of long growth as well as to.
Launch a major new technology initiative.
While working under our business continuity plan basically working from home I think because it's a real testament to both the commitment as well so effectiveness and upon my wife Mac team. So congratulations again.
I'd now like to try to Jackson to give you an update on the current agriculture environment, you've heard a lot a right a lot of headlines in the process now Jackson will fill in some of the detail and provide the farmer Mac perspective Johnson.
Thanks, Brad the Coca 19 pandemic has disrupted nearly all aspects of the global economy.
Energy consumption has fallen precipitously in the last few months its drivers abandoned the roads and traveler Shelby passports.
And then decline caused dramatically lower oil and fuel prices increased market volatility and uncertainty also resulted in a significantly stronger U.S. dollar in March as well as the elevated credit spreads from those borrowers both corporate retail.
Agricultural sector has not been immune to the wide reaching effects of co. The 19 schools hotels and restaurants are all significant buyers of wholesale dairy products animal protein products and fresh produce.
Without this important demand pull for our food supply system. Many farmers have abandoned milk and fresh produce due to the excess supply perishable nature of these commodities.
Animal protein processors have been challenged by the indirect economics hospitality business closures, but also more directly confronted by cobot 19 outbreaks it individual plants.
Proximately 40 animal protein processing plants have temporarily closed for parts of March and April and over 40% of hog at 30% of cattle processing was offline in early may.
This drop in gasoline demand translated to reduced ethanol usage as well, prompting ethanol producers to take nearly half of all capacity offline.
That's an all typically consumes between 30 and 40% of annual U.S. corn production. So lower core demand is pressuring green prices.
Finally, a stronger U.S. dollar and lower go global economic growth creates headwinds for agricultural exports agricultural exports through March were down from 2019 levels driven by a 15% drop in corn soybean sales.
Thankfully the American food supply chain stalwart.
Farmers and ranchers or pivoting production as a result of rapidly evolving information.
Food processors, and agro businesses are enhancing already strong food and worker safety protocols to stay open to reopen during this challenging time.
In April U.S.J. announced $16 billion indirect emergency aid targeting cattle dairy hog specialty crop and green producers and an additional $3 billion in food purchases for donation and distribution I.
Additionally, the cares Act signed in March authorized a $14 billion replenishment of the commodity credit Corporation.
For possible direct farm and ranch and later this year. The cares Act also created several small business administration programs actually cover payroll mortgage interest and other general expenses.
According to data released by the FDA. The first round a paycheck protection program payments delivered nearly $3 billion to small businesses involved in agriculture, forestry fishing and hunting.
Finally, lower fuel feed fertilizer and interest expenses provide a needed offset to those lower commodity prices.
While farmer Mac's credit portfolio contains exposure to affected industries initial indicators of credit performance show only minor signs of degradation.
Farm and ranch portfolio has no direct credit exposure to hog or cattle processing facilities.
Only $40 million or 0.5% in hog production, and only $21 million or 0.3% dairy processing as of March 31st.
We do have exposure to several indirectly affect the commodities like corn and soybeans at $2.4 billion or 30% of the farm and ranch portfolio Ranch, Katelyn cabs at $672 million or 9% of the portfolio and dairy at $538 million or 7% of the portfolio as of March 31st. However, these exposures are extremely well.
All diversified by both borrower and geography for example, the corn and soybean portfolio is spread across more than 5000 loans and 601 counties 41 States.
Loans past due by 90 days or more increased in the first quarter of 20, 20% to 1.02% the outstanding farm and ranch portfolio or 0.37% across all four lines of business.
This increase was driven by a handful of larger exposures, but the percentage of loan count is also increasing.
There were no delinquencies in any of the other portfolios, including girl infrastructure institutional credit or U.S.T.A. guarantees.
Individual loan risk ratings held steady in the first quarter of 2020, substandard loans totaling $370 million across all loans and guarantees.
This volume is spread across 56 commodities 212 counties and 36 States. These metrics are near historical averages as a percentage of farm and ranch as well as total loans guarantees.
There are still exists considerable uncertainty around the full impacts a covert my team on agriculture and rural communities the disruption could significantly alter the trajectory of the related economic cycles.
Fortunately there exist strong support mechanisms to help augment any financial disruption I give rural communities time to heal and with that I'll turn it back to you Brad.
Jackson. Thank you very much now I'd like to turn.
The call to a partner to discuss the financial results in more detail, Florida.
Thank you Brad.
Mike had very good start to be yet with our results for the quarter divided into two distinct macroeconomic periods.
January and February what characterized by rising markets and a stable and positive economic outlook.
However proved to be unprecedented for everyone.
As the cold 19 virus strict globally and children place autos became common we saw significant volatility and market to function in the latter half as much and this coincided with national and global locked out.
We continued to have two strong access to capital markets, and we're able to issue across various price points and done as so many well within GFC spread issuances.
Well I was initial strain and widening the longer ended the curve in the latter half as much we worked with our existing investor in dealer base and issued bonds in a flexible we thought the stalemate to meet and investor needs.
During the period to which opened 19 husband declared a national emergency we issued long so for buttons in fact, one of them because the longest U.S.C. so for issuance and $285 million its structures, Daniel the creative but still the medium term note issuances of approximately two and half a billion dollar to date.
A strong liquidity position as Brad mentioned and market access also enabled farmer Mac to called higher cost issuances.
For like funding to business lines for new assets and add over $160 million and high quality liquid assets to our investment portfolio.
Let me now provide an overview of our financial results.
Core earnings were $20.1 million for first quarter, twentytwenty compared to $22.2 million in first quarter 2019.
Net effective spread was $44.2 million in first quarter Twentytwenty.
Good to $38.8 million into same period last year.
Net effective spread in percentage terms remained stable at 89 basis points for both periods.
The 2.1 million dollar you all of your decrease though in core earnings was primarily due to a $3.3 million after tax increase in the total provision for losses under $2.7 million after tax increase in operating expenses.
These were partially offset by the higher net effective spread.
The increasing the total provision for losses reflects the adoption and implementation of the new standard current expected credit losses, let's see so I'm immediate impact updated economic factor for us, particularly how your credit spreads unexpected higher unemployment as a result of the cold.
Pandemic and the resulting economic volatility that I mentioned that had an impact on seafood models itself.
Oh, the 3.8 million dollar loss provision during the first quarter, approximately $3.5 million, but attributable to factors related to cope with 19.
Operating expenses increased by 26% in first quarter Twentytwenty compared to first quarter 2019th.
It's primarily was due to increased compensation and benefit expenses, including higher cash bonus payments to employees unrest shopped annual bonus plan.
As long as onetime payments to an executive who resigned during the quarter.
It's important to note that these additional compensation expenses are seasonal and be do not reflect a recording trend for the rest of the yes.
General and administrative expenses also increased compared to the prior year due to farmer Mac's ongoing investment in various group and strategic initiatives that were highlighted by both Soc and Brad.
<unk> ongoing investments in infrastructure will enable farmer Mac to more efficiently, we discussed the monies and but ultimately enable greeted with revenue rec retention overtime.
As of March 31st Twentytwenty.
Total allowance for losses was $19.1 billion.
An increase of $6.5 million from December 31st 2019.
The total allowance for losses represents nine basis points, a farmer Mac's 21.5 billion dollar portfolio and we continue to compare very favorably industry peers.
As I previously mentioned the adoption and implementation of Cecil on January 1st Twentytwenty as well as the corresponding increases of under these macroeconomic conditions were the primary drivers of this increase.
Moving onto capital I did want to note one item regarding the adoption of fee, so which is the impact that to Todd.
Utilities line of business.
Under the previous accounting standard.
Estimated incurred losses based on historical loss suites farmer Mac's Rural utilities line of business did not require an allowance a farmer Mac had never experienced a loss and it's really utilities line of business.
However, under the Cecil accounting standard.
Highly specialized nature of power generation and transmission utilities result in significant losses, given default estimates that drive our model assumptions, even though the actual probability of default remains very low.
It is definitely important to note that as of March 31st Twentytwenty Farmer, Mac's $2.4 billion and outstanding utilities loan purchases.
Long term standby purchase commitments have no historic current delinquencies.
Turning to capital, we continue to remain very well capitalized which puts us in a position of strength as we entered the challenging time.
And will serve us well as we move forward.
Farmer Mac's $815.1 billion of core capital as of March 31st Twentytwenty exceeded our statutory requirement by $165.8 million 25%.
This compares to $815.4 million of core capital as of December 31st 2019, which exceeded our statutory requirement by $196.7 million a 32%.
Slight decrease in excess capital from the prior quarter, it's primarily due to net growth in front of Max outstanding business volume.
I'm to coincide decrease in retained earnings related to very effective.
However from an overall liquidity standpoint, we are comfortable with a current cash position, which is hovering around a billion dollars and which was up 1.2 billion on March 31st Twentytwenty.
Leveled resulted in 202 days of liquidity and it's far exceeded our regulatory requirements by approximately 112. These.
It pretty likewise continued to be strong well the daily average cash cash position also around a billion dollars accompanied by strong levels of liquidity, which have continued through today.
As Rob noted the higher than mandated levels of cash and liquidity allow us to where the any unexpected cash flows adequately fund to funds to meet customer needs, while retaining the flexibility to meet the law, but still ample levels as market conditions change.
So in conclusion farmer Mac's underlying financial fundamentals, reflecting a well capitalized balance sheet stable core earnings disciplined asset liability management and strong capital markets access positions us to continued to successfully deliver upon a critical mission and not to get these uncertain times effectively.
<unk>.
Well complete information about farmer Mac's first quarter Twentytwenty performance. It's in the 10-Q, we filed yesterday with the FCC.
And with that Brad I'll turn it back to you.
[noise], but part of the thank you very much.
Farmer Mac was credited in response to crises back in the 19 eighties aneurysm tended to be a resource for National institution, serving Rural America.
This is especially true during times of economic pressure and uncertainty.
We are proud to play a vital role as a source of credit and liquidity for Americans farmers ranchers and rural utilities. They comprise one of the most resilient sectors of this economy.
Our ongoing commitment to invest in technology and business infrastructure has played a critical role and our ability to reach our customers and we will continue to work diligently to ensure that remains the case as we look ahead.
Were hurt by the fact that we've been operating the company remotely over the last two months remain confident in our ability to continue doing so and to navigate the evolving market conditions, thanks to our strong and resilient business model.
In closing I'd like to express how proud I am of our team's efforts during this very difficult time.
Identify new and creative ways to connect with those who we search.
This includes the hardworking farm and ranch families, who continue to be the most efficient innovative producers of food in the world even in the face the challenges of trade, whether labor and transport.
It includes the people who process transport and distribute our food, we're facing new safety challenges.
And who are adjusting to new distribution channels.
It includes the people, who produce and distribute electricity and provide real infrastructure, who are having to adjust to fluctuate in demand and safety and other issues.
But certainly includes the network a financial institutions, who are farmer Mac's partners in serving all of these people.
Our team our employees at farmer Mac.
I've shown remarkable resilience in large part because of the character and their belief in the purpose and the mission of farmer Mac.
To them a big thank you.
And now operator, I'd like to see if we have any questions from anyone on the line today.
We will now begin the question and answer session. So that's a question and you May Press Star then one or your Touchtone phone.
Can't use any speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble a roster.
I'd just like to know that we need to wrap up our call today by about 925.
As an outside time and that's because farmer Mac is having its annual meeting today beginning at 930, So I hope everyone understands them, a well well accommodations on that.
The first question comes from Greg Pendy from Sidoti. Please go ahead.
Hi, guys. Thanks for taking my questions I.
I appreciate all the color on the farming environment, just one quick warm I mean.
Our afirma is essentially agnostic, whether they're shipping more into the grocery channel restaurant or restaurant channel right now given everything that's going on and are there certain areas I guess that would be more impacted or less impacted by that shift has shifted to the grocery channel.
Hey, Hey, Greg Thanks, very much for that question, that's really important because those channels historically have been quite separate but Jackson why didn't you provide a bit of color on that.
Certainly so as we mentioned the animal products fresh produce a dairy are probably the most impacted by that shift in the channels from.
Sort of restaurants hotels in schools into the grocery store so they're the ones who are having to pivot the most and look to change process and change.
The the wholesale distribution model. So I think that change is ongoing and we'll be continuing to go probably throughout the summer a job figure out how to reroute the food in terms of the green sector a lot of that it's a little bit separated so they're farther away from the food supply network and so that's going to take a last time I think for them to adjust their there'll be less impact director.
The there on the grain side.
That's helpful. And then just one more if I may you know as we anniversary the big win a with a cobank Hello discussions going with some of the other farm credit a banks about possibly a deeper working relationship.
Yeah, that's great. That's a that's a really interesting strategic question.
Over the last year year, and a half two years we have.
Really worked hard to.
[laughter] poured even stronger working relationships with the various farm credit institutions.
We've done that in a very visible way.
With the early purchase a large a portfolio of electric cooperative loans and you know as you are mentioning earlier today, we're really pleased that.
No the flow of those types of loans from both of the.
Financial partners that we have pockets financial partners we have.
Yes, it's really been strong opened last year.
But now we're kind of turning to how do we do that with more agricultural related business and so maybe you could provide some color on some of the steps we're taking too.
Do more with farm credit institutions on AG side.
Yeah, Rob I'm doing it's a great question as we as we look to expand our relationship outside of Cobank. You know, we're focusing on a couple key key initiatives and really it's just leveraging our products that how we can better serve.
The farm credit system holistic way historically, we've been predominantly used as a a credit enhancement product or the farm credit system, which will continue to pursue and provide that capabilities, but I'm more focused on it you leveraging our ability to to wholesale offline as well as our disappeared and larger try.
Since actions across the system.
And a lot of that really reflects getting out there and building relationships with associations and entities that.
We haven't fully developed and so we spend a lot of time.
Beating that need and discussing those relationships you know as well as getting our infrastructure ready to be able to participate in in larger and bigger volume transactions.
Yeah, Greg I'd, just like to add to that that.
You know that haven't come from coal back and starting to build out a team that includes others from farm credit system.
Well, we're really trying to do so in a very friendly way, but we need to note that we don't just improved the relationship with the entire system I don't want to leave you without understanding it really comes from working on the relationship one farm credit Association that the time.
And our success will you know start with with some before others and grow overtime.
That's helpful. Thanks, a lot.
The next question comes from David Beidleman from Idleman for on capital. Please go ahead.
Yes. Thank you my question was regarding the balance sheet that sure on stockholders' equity and I assume that's due to.
Accumulated other comprehensive income, which was a loss of 100 million.
Dollars.
So I wondered.
What extent well that come back again to set the crew and or is that kind of a permanent loss or.
What will be the process of get of having that.
Recovered.
Thank you yeah.
Yeah, that's doing them and thank you very much for that question and you saw you know reflected and our GAAP statements on this quarter you know with the rapid plunger of interest rates keep in mind that the accounting treatment up our assets and liabilities, there's not some metric and so we have marked.
Market on our derivative swap transactions that flows through those statements, even though from an economical financial standpoint.
There really hasn't been any harm in fact, we've been very well hedged, but apartment you want to add a bit of color to that and what would happen. If interest rates for example worked reverse.
Yeah, I think Brad you encapsulated if they well you know the financial derivatives.
Got a designated in cash flow hedge relationships, it's really what's causing this and its recorded in other comprehensive income you know essentially these are not oh expected to be prominent and they really have to do with the fluctuations of interest rates.
I think it's also important to note that.
You know as interest rates move up and down we are going to see some of these fluctuations.
But we don't hold our do it is for speculative focuses we hold them for purposes of risk management.
So.
In fact pointed out this is not anything fundamental to you know I business, it's really just much more market risk.
Yeah, straddle, but I'm I'm Oh, we have a great team of accounting experts, who who are who do this work, but from my standpoint, you know if we had real cemetery here, what you would see offsetting that reduction in value of derivatives would be in India.
Recent value of certain loan assets, which because of their coupons are actually worth more than par, but that's not how the standards work and so.
<unk> said earlier from an economic or financial standpoint, we really don't see this is happening impact, but under the gap treatment that does.
Yeah, I know just tired I did not core earnings we don't really pick any of these fluctuations into effect, but you might see that on a net income pieces fit those derivatives, likewise that or not and hedged relationship.
Okay, but you did you answered you know to what extent.
That would be.
Overtime that hundred million would be likely to go away.
You know, we could predict or to combat the shareholders equity.
Yeah, Yeah, we have people on the team arent on the call who wouldn't know that answer off and why don't we get back to you on that but I think weighted. Thank you. It sounds like one of one of the temperature dimension and the other is just the absolute change or increasing interest rates that would take to do that and we'll come back to it that information.
Thank you.
The next question comes from Eric Hagen from KBW. Please go ahead.
Hey, Hey, Thanks, Good morning, Hey, can you guys speak to any of that conditions, you're seeing in the funding markets what kind of spread do.
Thank you might be able to issue out over the near term it on the asset in credit side.
Well, what kind of amendments have you guys made the credit box a book in farm and ranch and things like institutional credit.
Thanks for taking my question.
Yeah, Eric Let me start with the second question and then turned up your apart for the first on the second question. The credit box is quite interesting, we really haven't we we've always emphasize the underwriting of cash flow.
As well as collateral for our loans and so given that we have debt service coverage ratios for example, or different lines of business that we all look too we really haven't been adjusting though so much we have been looking at projections as well as historical.
Realized financial results through a prism of the increased volatility of the markets, but our status hold up remarkably well there may be a few pop fewer borrowers who are not meeting them.
But the standards have held up well.
But on the on the first question.
Regarding market volatility that has been a point of extreme.
Focus.
Since early March and upon and her team every morning at nine o'clock have them a markets call to share information about markets and are now we have really oh seem interesting developments, what we've done very well and a part of why didn't you just provide some some further explanation.
You know how the market has changed on how we have done within that market.
Yeah definitely thank you that's an excellent question as I noted in my commentary when we went into the crisis, we really didnt see bullets spreads widen fairly significantly we can't speak too much.
But we've had very good coordination between our asset liability teams treasury in fixed income strategy team. We also had existing relationships with the fed it's a investors and dealers and honestly a size has been.
Quite a good advantage for us.
Because we've one we actually went into this what do they fall in.
Set of prices of standards in terms of our funding. So that's one piece that really helped us, but we were actually able to a issue pretty successfully across the globe in a variety of structures.
And just to give you. Some examples me we did you make structures.
Only custom tailored structures, such as 22, good structure for a particular investor.
You know, we've obviously had you know like other geographies very good access other shorter end of itself, but in general we have really I've not seen any disruption through this time.
And so much so that we've actually been able to take advantage of of auctions as well as we've been able to get ahead of our funding needs even looking out 30 days. So we.
We actually feel very confident or at least for the next.
Month, or so in terms of what they need but we have access elysee axis levels continue you know we continue to remain very optimistic that we'll be able to.
Both fund other shorten a long into the SUV and work with.
Existing investor Indian rupees such as.
Hey cities and counties.
I would think relationship with an eye I can I can give you sort of examples.
With a lot, but the short answer is that.
Our access to capital markets remain pretty robust.
[laughter], Eric I think it's interesting to note one of the resilient features of our business model or I guess you'd called prudent features is that every new loan. The comes in we really fun that on a match funded basis and so we're pricing to the marginal cost of funding about loan so let's say that on <unk>.
March our cost of funds increased.
You know and I understand your range lets just you know say 40 50 basis points, if we're pricing a five or 10 your loan at that time, we would increase the pricing on that loan.
Plus an additional premium for volatility.
For the execution of transaction, even over a 24 hour period of time.
So that has really helped us and you see that reflected you know in them in the quarter. A number you know 89 basis point net interest spread you know it just continues to hover right around 90 basis points.
Yeah, and then one important thing takes you know said weve taken advantage of callable debt market.
We continue to issue Callables as well, which again is a very good hedge for us.
[noise]. Thank you guys very much for taking my question say well.
The next question comes from Keith Rosenbloom from Chrysler Capital. Please go ahead.
Hi, guys first of all I just want to send the record Jackson's commentary is very helpful. So thank you for for providing that goes I just wanted to clarify a couple of points in your core a reconciliation of core earnings.
Or is basically what you're saying that the losses on the hedging losses or non cash there mark to market and that effectively.
You will.
As your loans mature you're going to be cash neutral on those and would we expect to reverse of them ultimately at maturation.
That's the first question in the second question is.
With regard to the overall interest rate environment.
It seems like you are able to keep your your NIM pretty effective, but maybe you could speak to the demand side of the equation as a gross rates start to or continue to stay low and in our lowered is there any difference that you guys are seeing on the demand side.
Yeah, Yeah, what do you answered your first question is yes.
And yes, it will and you know if you want to get into a much more technical discussion we're happy to set up the time to do that for you and bring in spring and fall team on the second point and I I think is actually its share his perspective here with you too.
But we are seeing no strong demand for term credit, particularly refinances because of today's interest rates and one of the things. We've been doing is anticipating that and be more proactive in getting enough customers will have loans at rates that are.
Above market about today's market.
On rather than waiting for them to request to refinance or repricing actually get in front of them and proposed to such so you know that aggregate amount of credit.
It's not increasing as quickly as.
Oh, frankly, our market share all that Zach elaborate on that and why that is.
Yeah, absolutely. Thanks. Thanks for the question you know first off I think as noted on our commentary and the first quarter was kind of a tale of two stories and.
First January February March I mean, you continue to see tighter credit spreads just reflecting the overall strength of the economy.
You know in March there was a significant why didnt, you know credit spreads across the corporate space, including the agricultural communities and really until the area. We served so even though the you know the.
I'd find them yield curve were so.
So tied to narrow credit spreads for why do you significantly and you know that allowed us to price to market and maintain appropriate competitive pricing in that context, you know from the demand perspective, our results of volume or flattish approved in rate locked loans from prior months as Eagle Ford the because.
In Texas credit spreads its still widened.
That being said when you you know as Brad mentioned, when you look through our portfolio and compare you know transactions and loans that we booked you know 334 years ago. You know the re context is still well lower even in this volatile environment and by being proactive and working with our seller communities were still able to get out there and and focus on refund.
Dan's and retaining the business as well as trying to attain new business in that in this volatile market, but I do want to be clear that you know, we're focusing on credit spreads in the market.
In pricing appropriately you know given the widened in the volatility that we see on the on the pricing side.
Thank you.
This concludes our question and answer session I'd like to turn the conference back over to bread Norton for any closing remarks.
Well. Thank you operator, thank you very much for getting on the call today, we had fantastic participation and.
We assume that there are some of you who are relieved in fact very pleased with our performance and others, who are generally interested in concerned about what's going on American culture, and some both of them. That's fantastic I'm, having very open dialogue with you a is one of our objectives and if we didn't answer or any other questions or are you how follow up question.
Oh, please get in touch with Joppa, ER and will set up a I'll call to discuss this further so again, thanks very much for your interest and Oh stay safe everyone Hope that I hope that you navigate a the next month and very very good shape. Thanks.
You.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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