Q2 2020 Federal Agricultural Mortgage Corp Earnings Call
[music].
Actual results conference call.
All participants will be and they listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Brad nor at home.
Incident, and Chief Executive Officer. Please go ahead.
Good afternoon, Bretaa Norte and I'm very pleased to welcome your second quarter 2020.
The conference call.
Before I begin Steve Mallory, our general counsel to comment on forward looking statements that management may make today, it's walls farmer Mac's use of non-GAAP financial measures.
Thanks, Brad.
Some of the statements made on this conference call maybe forward looking statements under the securities laws.
We make these statements based on our current expectations and assumptions about future events and 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 forward looking statements.
Evaluating farmer Mac, you should consider these risks and uncertainties.
As well as those 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 pandemic quarterly report on form 10-Q filed with the FCC today.
Good 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.
Sit on farmer Mac's website, <unk> dot com under the financial information portion of the Investor section.
A recording of this call will be available on our website for two weeks starting later today.
Hey, thanks, very much for that.
Good afternoon, everyone and thank you for joining us I hope the spots you on your families all doing very well at being healthy unsafe.
Our second quarter of 2020 was an exceptional one.
Flux farmer Mac's execution on our business plan and our disciplined approach.
Business model and singular focus on a sector of the economy that is among the most essential agriculture and the front that sustains us.
We recorded another quarter of solid operating performance was strong asset growth across multiple lines of business.
Record core, earning swirls consistent net effective spread.
Stable operating expenses and good credit quality.
Outstanding business volume grew to $22 billion as we have provided $1.7 billion and their credit and that's a gross number.
So 1.7 billion, a new credit to roll America, and the second quarter 2020.
The combination of historically low interest rates strong demand for long term credit from our agribusiness and rural utility customers.
Our proactive approach to outreach to our customers an uninterrupted access to the debt capital markets at competitive spreads results and our ability to offer competitive pricing.
These all were among the primary drivers of growth this quarter.
Looking back over the last 12 months, our net business volume growth has increased significantly compared to the broader agriculture real estate lending.
Dr.
A key factor contributing to this growth over the last year.
The country companywide reorganization.
To the creation of the Chief business Officer, and the senior Vice President for World infrastructure.
These discussions were established to lead and to increase our focus on our core lines of business and our key customers.
These changes within our organizational structure allow our business.
As to be more commercial.
I think underscore our commitment to building and maintaining strong relationships with customers.
When we do this write it translates into consistent volume growth and strong financial performance.
Turning to our financials core earnings form a record $26.3 million for the quarter, reflecting double digit growth to a sequential and on a year over year basis.
Net effective spread was 89 basis points in the second quarter. That's in line with a historical results and our business plan and the discussions we've had with you over many quarters.
Our overall credit quality remains healthy.
We have maintained our consistent and conservative underwriting guidelines for credit approvals.
And we're continuing to closely monitor the impact of called 19.
New applications.
That's March we have approved 392 payment afirma requests related to come from 19, and that's through July 31st of this year.
Those are paying about deferral requests have total principal balance.
$408 million or put another way, 1.8% of total outstanding credit.
We remain focused on serving the needs of our customers and our challenging ourselves to find more efficient and effective ways to provider customers the flexibility in assistance their bowers need.
They adapt to this new normal.
Although the environment ran Vance, particularly fluid and there's a broad distribution of possible outcomes in the future.
We will remain steadfast in our commitment to maintain the availability and flow of credit to American agriculture and rural communities that is why we are here.
Before I turn it over to Zach I'd like to take a moment to thank all the employees.
A farmer Mac for there really extraordinary efforts during this time.
Well if this crisis, we've been able to maintain exceptional customer service levels.
And Weve continued the strong momentum we have in their business development efforts.
These are all closely aligned with our multiyear strategic plan.
We've increased our headcount operating remotely, adding additional talent to the team.
Our second quarter results are a testament to the culture, we haven't farmer Mac and I'm extremely proud of the way our team has consistently found ways to overcome obstacles and deliver for all of our stakeholders.
With that I'd like to turn to Zach Carpenter Chief business Officer give you an update on customer and market developments back.
Thanks, Brad.
We're very proud of our second quarter results. They have validated our customer acquisition and retention initiatives as Walter lack the success that we're achieving record why do you can bet if interest rates across our product and executing an efficient and effective long approval and purchase process.
I think continue develop new products and solutions for our agricultural told these customers. These efforts have and will differentiate farmer back in the credit markets. We serve enter establishing a long runway for growth for farmer Mac.
Outstanding business volume growth in the second quarter 2020 was robust at multiple lines of business contributed to net how steady growth of $502.8 million.
The quarter reflects record net volume growth in farm and ranch U.S. de securities and really rural utilities combined $748.7 million.
This growth was partially offset by a sequential decrease in long term standby purchase commitments loans held him trusts and guaranteed securities and the combined $204.6 million as well the decrease in institutional credit $41.3 million.
In our rural utilities line of business.
Home purchase volume grew $311.9 million during the quarter compared to $98.1 million during the same quarter and 2019 due to increased loan purchase demand from our two primary counterparties in a rural utilities line of business Cobank and National Rural Utilities co-operative Finance Corporation.
This growth was jargon largely driven and the result at historically low interest rates.
Loan purchase net growth in our foundational farm and ranch line of business, what was $363.7 million during the quarter over two times greater than the same period in 2019, reflecting our ability to attract and retain borrowers in this low interest rate environment, but also our ability to significantly.
Increase our product utilization across and expanding seller network.
Actually a farm and ranch sellers, meaning a lender that is transacted with farmer Mac this year through a loan sale.
Reached over 40% can see period in 2019.
In addition, the number of agricultural lenders, one farmer Mac more than $1 million and loans. This year has more than doubled same period last year.
He's there are few specific metrics to highlight how we are deepening penetration with our existing customers as well to broaden our available customer network through our collaborative approach to customer relationships pricey product structuring and efficient and effective execution.
As Brian mentioned, our strong business volume growth over the last year has outpaced the broader agricultural credit markets, specifically farmer Mac's agricultural mortgage loan portfolio grew 18% over the last 12 months compared to the year over year growth rate of the total agricultural mortgage loan market approximately.
3% through March 20 Twond.
Turning to our U.S. de Securities mining business, we achieved record gross loan purchase volume this quarter at $224 million outpacing last quarter's performance by $76 million.
Year to date <unk> growth rate in U.S. do you use your fees, reflecting the positive effect of adjustment that we need to aquatic structure and the second half in 2019.
More effectively meet customer demands are consistent and reliable credit availability as well as the increased loan limits authorized by the 2000 <unk> farm.
Our institutional credit line of business experienced net decrease $41.3 million during the quarter.
Primarily due to the maturity of coupons from one large counterparty as well as regular scheduled amortization payments on bonds from another large counterparty.
Partially offset by continued strong growth in smaller fund volumes.
The decision by the one counterparty to not extend the maturing bonds during the quarter. It's directly a result abundant liquidity support provided by the federal reserve.
To celebrate the function of the capital markets during the quarter.
Which resulted in a tightening of investment grade credit spreads to historically low levels.
Looking ahead, our pipeline remains strong for the third quarter of 2020.
Although some financial institutions may have paused capital deployment to the sector you serve given impacts associated with the pandemic, which has created a window of opportunity preclinical incremental market share.
Core agricultural loan there can you need the pea proteins auctions, which in many cases, it's probably competitive pressures in terms of price structure and execution.
We will remain steadfast in our commitment to deliberate broad spectrum of financial solutions to the agricultural community by working alongside our growing customer base.
More dynamic in response to that business model has transformed the way you're going to lever up on our mission and hasn't group customer satisfaction volume retention and penetration in existing and new markets.
I have mentioned on prior calls enhancing our infrastructure and products that is crucial to provide consistent and reliable capital to both existing and new Martin.
In the coming months, we will be expanding our AG Express score card loan product doubling the eligible loan size that sellers can offer to their borrowers from 750000 to $1.5 million since the launch of that product in early 2019.
We have seen tremendous interest and utilization of this product throughout reseller network.
Given the simplified application process.
Scorecard based underwriting criteria and the receipt of a credit decision in many cases at the same day.
We believe this I expressed pod product enhancement, coupled with continued infrastructure innovation is necessary for us to provide the agricultural community with the capital needed to manage through this volatile time.
Looking at everything we've managed through over the last few months the efforts of our entire team has done nothing short of exceptional in assisting our clients in communities in which we said.
As an organization. It is imperative that we continue to further promoter in Michigan and or me, they meet Donnie, making flexible and supporting our customers. During this volatile times.
Bob I'll turn it back to you Brad.
Hi, Thanks, very much I'd now like to turn to Jackson takeaways to give you an update on a current agricultural environment, what's going on out there Jackson.
Thanks, Brad the cover 19 pandemic continues to disrupt the general and agricultural economies. The second quarter 2020, U.S. gross domestic product contracted at the fastest pace history falling at an annualized rate of 32.9%. According to estimates from U.S. Bureau of economic analysis.
While the financial markets and corporate credit spreads I've been remarkably stable through the quarter civilian unemployment touched the highest level since before World War, two driven by closures in the leisure and hospitality services sector [noise].
According to data from the U.S. census Bureau, U.S. consumer spending on Foodservices away from the home fell to 50% of free covered levels in April.
While some consumer mobility and spending on food returned by June the virus resurgence in the south and west had slowed the pace of recovery and the services sector.
Despite the pandemic America's Foods system has been humming sales at grocery and food store smashed records in March had many state impose quarantines and they remained elevated in the second quarter as consumers rotated from soon at restaurants in schools to food at home.
You asked me processing was curtailed a significant coven related worker outages in April and May recover to near capacity in June and July.
Drivers returned to the road in May and June and ethanol production rebounded to nearly 90% of pre covered levels by July.
Agriculture was the only major industry tracked by the U.S. Bureau of Labor statistics with a lower unemployment rate June 2020, compared to June 2019, a testament to the essentially aldi and tenacity at the American food system employee.
But the agriculture sector is not without its challenges cobot 19 pace rates remain elevated counties with high levels of farm output and food processing commodity prices remain well below year ago averages.
Agricultural exports were sluggish in the second quarter due to reduced global economic activity.
However, farmers ranchers and rural electric cooperatives had access to several stimulus programs in the first half of 2020 that help offset these effects.
Let's see a distributed over $6.6 billion indirect payments to farmers and ranchers in June and July through the Corona virus food assistance program or seek that.
And the small business administration has distributed more than $7.9 billion in paycheck protection program or PPP loans. The business is involved in agriculture fourth street fishing and hunting.
Heading into August differentiate had nearly $24 billion, an authorized an unused funding to support the sector through the pandemic.
Despite economic headwinds credit quality of farmer Mac loan portfolio continues to be strong.
Loans past due by 90 days or more decreased in the second quarter, 2020% to 0.86% the outstanding farm and ranch portfolio was 0.31% across all four lines of business.
Drop is typical of the seasonal patterns and scheduled loan payments, but there were also a significant number of prior delinquent loans that shirt or paid off during the quarter.
No delinquencies in any of the other lines of business.
Individual loan risk rating held steady in the second quarter 2020, substandard loans totaling $310 billion across all lines all lines of business loans and guarantees.
Its volume is spread across 48 commodities and 219 counties in 30, United States.
These metrics are near historical averages as a percentage of farmer ranch as well as a total loans the guarantees.
The American food fuel and fiber systems continue to provide critical goods and services to millions at home and around the globe.
The strength across our economic engine that significant unfortunately, a reliable support system is in place for the sector to help stabilize the volatility in commodity prices and asset buttons and with that I'll turn it back to you Brad.
Excellent. Thank you.
I'd like to turn the call over to a part I'd to discuss the financial results in more detail apart.
Thank you Brad and good afternoon, everyone.
We had another great quarter on an operating leases I know it was also highlights the strength of our under underlying fundamentals.
So on balance sheet, and our ability to navigate the dynamic environment.
Our earnings this quarter was extremely strong and driven by asset growth across nearly all lines of businesses.
The size disciplined expense control relative to the price what though.
Consequently, ultimately could substantially lower funding costs.
I just have the capital market has remained strong.
Pipe market volatility.
Oh, though when the fed intervention, we have seen stabilization of the debt markets.
Adjusted to the first quarter.
We issued debt daily I'd be continued to maintain disciplined I said liability management policies.
We continue to issue debt across all price points antennas and spreads within historical ranges other GST issuances.
We have also been affected and using a callable debt instruments to mitigate the ongoing meet the payment.
Resulted from the voting interest environment I mean, that's not meeting our overall.
I'm pleased with issuances of smaller than other GST.
Enables us to price thought that competitor.
We frequently issue customized issuances to meet the needs of our ended up.
The pottage allows us to offer products, what optimized competitively across.
This is evident in our overall Ludovico funding.
1% to 1.29% less is 1.97% into first quarter.
We remain well capitalized and we have strong liquidity.
We maintained a total cash position.
$800 million as of June Patty.
Additionally, we opportunistically.
$79.5 million non cumulative perpetual series E preferred stock, which further enhance our capital position this quarter.
Issue it strengthened a tier one capital position I positions us well for babies group initiative.
But it also bus with us in case of unforeseen Stan.
Not only to financial.
Couponing increased $2.7 million $26.3 million for second quarter, twentytwenty compared to $23.6 million.
Second quarter 29 team.
Net effective spread was $46.5 million in second quarter Twentytwenty.
Good to $41.4 million it the same period last year.
Net effective spread percentage down a basis point was 89 this quarter and this was held well within our target range plus or minus five basis point 90 basis point.
We continue to defensively hold more liquid investment portfolio.
Hi amount of cash balance as I noted that meet held tied to the funding.
However, we did just with more cash has resulted in a slight reduction two basis points.
Net effective spread.
The 2.7 million dollar.
<unk> increased in cool.
It's primarily due to a $4 million after tax increase.
The second Fred.
A 300000 Donna.
<unk> decreased.
The provision for losses.
And these increases were partially offset by $1.6 million offset by increases in operating.
Operating expenses.
By 16% in second quarter Twentytwenty.
The second quarter 29.
This is primarily due to increased compensation and benefits expenses.
Related to the annual higher cash bonuses.
<unk> increased headcount to support up.
General and administrative what she any expenses also increased from the pricing and this was due to continued investment in infrastructure.
Our strategic initiative.
Hello off note, both compensation and GE any expenses was lower than the first quarter of twentytwenty by $2.1 billion.
This quarter, we incurred.
Levels of expenses related to consulting fees sabu at conferences.
Which partially offset some of the increases in compensation in the fourth quarter of Twentytwenty.
We do however, intends to continue to make ongoing investment.
It does infrastructure as we believe that this will allow farmer Mac to more efficiently meet its up to me and enable greater revenue retention overtime.
Going forward, we expect operating expenses to increase commensurately.
Can you could.
Well, we plan to keep operating expense ratio relative to revenue within the range consistent with our historical averages we will continue to make infrastructure investment and I'd rather than Dallas into shot.
Well that these investments we will.
Well deeper off overtime.
Operations and business model will put show.
The provision to be allowance for loan losses.
$500000 recorded this quarter.
Largely attributable to new loan volume.
If somebody portfolio.
The increase was partially offset by improving economic socket.
Like uniquely affected the farm and ranch portfolio.
Specifically.
Improvements in commodity prices and expectation, but stable farmland values primarily contributed.
$1.7 million.
Farm and ranch portfolio deleted allowance for losses.
Oh money, but also substantially higher than first quarter, twentytwenty and increased by $6.2 million on and off the top.
This increase.
By decrease in the provision for credit losses of $3 million off the top.
I have met effect, Fred $1.8 million off the top I do reduction in operating expenses relative to the price club to $1.7 billion off the top.
The high net effective spread.
Beautiful <unk> overall average deposit balances.
It's actually lower funding costs in the second quarter.
Given.
Continued an uninterrupted access to that Dr.
Moving on I wanted to make one point on T.. So the new accounting standard we implemented a January one twentytwenty.
A few methodology incorporates provisioning levels that are predicated on loan growth.
Changes in our portfolio mix net charge offs and forward looking macro economic assumptions that drive our economic model.
In other words this is different from the previous method that that's driven by it could last approach based on historical trends.
I, just instead driven by projections of future expected loss.
And.
You can provisions of the leases unexpected credit loss.
Well be piece I'm, changing economic forecasts and changes in the credit composition balance sheet.
It's Michael Allison or improve from the quarter end forecast introducing some volatility.
Turning to capital now, we continue to coming very well capitalized.
I'm not 900 in $16 billion of Cole capital as of June Thirtyth, Twentytwenty exceeded our statutory requirement by $248 million 37%.
This compares to $815 million.
Capital as of March 31st, which exceeded our statutory requirement by $166 million 25%.
The increase in capital from the prior quarter, it's primarily due to the previously mentioned issuance see these preferred stock.
Well as a 23 million dollar increase in retained earnings in second quarter Twentytwenty.
Oh liquidity remained strong and it far exceed our regulatory requirements 522 days.
I've mentioned previously we are holding higher than historically held average levels of cash.
As we head into the second half of the.
We intend to continue to maintain a higher than acquired loveless cash and liquidity as we believe that this elevated position will allow us to weather any unexpected cashflow shop, given continuing economic uncertainty.
It will allow us to adequately fund to funds to meet I'll come to my team.
But it will also allow us to redeem the flexibility to maintain below.
But I'm the levels of liquidity.
If conditions change.
In conclusion, Photomask underlying financial fundamentals continue to reflect it very well capitalized balance sheet.
Stability in our core funding and the continued to maintain disciplined with asset liability management.
A strong access to capital market positions us to continue to successfully deliver on essentially mission and navigate these uncertain times.
[noise] more complete information about phenomenon second quarter Twentytwenty performance isn't the 10-Q, we filed today.
C.
And with that Brad I'll turn it back.
Thank you a partner.
Let me close by thanking all of our team members for their extraordinary efforts the past few months.
You know the Pandemics impact continues to weigh heavily on individuals on families on businesses.
On the farmers and ranchers way serve on agribusiness.
And this is something that.
Really costs assess great concern and there's a source for numbers sleepless nights.
But we are actively engaged with our customers, we're preparing not only to see this crisis through.
But also to execute on our strategic initiatives and the modify them as needed in order to merge with strength in a clear competitive path forward and I Dare say, even a clear competitive advantage going forward.
The farmer Mac, we've always believed the talent diversity and inclusion or.
Our sources of pride for employers.
And our customers and they contribute strongly to our financial performance.
That contribute to our ability to create value for our shareholders.
And for achieving our mission of serving Rural America.
We work hard everyday to continue to build upon strong reputation as the nation's trusted secondary market.
For.
Credit to Rural America.
And our second quarter results I think validate and further emphasize.
The value in partnership that we provide to our customers.
I remain very optimistic about the future even in these uncertain times and that's primarily from just knowing the ability of our team the strength of our balance sheet.
Power of our core operations.
We will continue to remain diligent well possession and focused on the future.
As I've said on a number of prior calls.
Farmer Mac was created in response to a crisis and its intended to be a resource for for national institutions Surfing Rural America drink all times.
And that's especially true during times of economic pressure and uncertainty.
So now I'd like to see if we have any questions from adding what on the line today.
We will now begin to question and answer session to 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 too.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Greg Pendy of Sidoti. Please go ahead.
Hi, guys. Thanks for taking my questions. I'm first question is just on the business volume growth I assumed interest rate environment had a big part of it's just how should we think about that does that pull some.
That's pull some demand forward or is this maybe going to be a couple quarter phenomenon is there any kind of point in history, where you can kind of I know this is an unusual time in terms of rates, but any kind of periods that we can look back to historically to get just to get a sense of you know how we should think about things going forward in light of a strong volume.
Hey.
Hey, Greg Brad here to great great to hear from year, we really appreciate.
Your question I've done a lot Zack get into the details. So that's I think the one thing I would like to emphasize at the outset.
Is that while there have been external factors such as the drop in interest rates are high levels of refinancing as an example.
That actually there have been a number of things that we've been doing associated with our strategic plan that have actually driven these results as well and that part is a more sustainable Oh and Oh, another reason for optimism.
It's actually much just add some some some detail.
About both initiatives as well as interest rate environment.
Yeah, and Friday no great. Great question, you know cleaning the interest rate environment [laughter].
Hi, it's helped in terms of demand for long term credit.
Okay, then I'd kind of cuts both ways right. It's a competitive market out there I mean, it's other lenders that are also I'm repeating alongside our core a seller network to provide that core capital to to the farmers and ranchers, though we look to serve so you know I think with this volume growth.
As Brad mentioned highlights a lot of the initiatives you put in place to repeat and attract new business. So you know a couple things I noted on in our prepared remarks in terms of deepening and broadening our penetration you know in fact, our active sellers are almost 50 times for 50% larger than we had an acceleration.
Same period in 2019, and as I imagine you know sellers selling up over $1 million alone more than doubled something periods. So.
I'm showing the active nature of our sellers is a key metric we look to do you see from abroad need and our product utilization is taking place. In addition, we're also effectuating a lot of rate modifications to keep the borrowers on our balance sheet working with our sellers to just drop the rate keep the maturity the amortization the same.
And executing people rate not to help facilitate a the customers even the lower interest rates, the but also keeping that bar or back on our balance sheet looking back in time.
Farmer, Mac I think it'd be difficult to go back to see a very similar time period or you can go back post financial crisis Kinda Steve.
Relatively similar rate environment.
But I think it's gonna be hard to ascertain the same nature of the retention in the relationship strategy put in place that that also driving this this volume the feedback we received from our sellers is that our customer focus our flexibility and working with them is really driving their interest to bring more volume to us which he can be.
Seen by our increasing sellers market share.
Great. That's helpful. And then just one more I think on the expense front I'm operating expenses were up around 16% and you mentioned an increase in headcount you've always had a very efficient head count so high.
Assuming you are adding you know I'm more people.
Within the company how do you think you can I you know how should we be thinking about that I mean, there's there's going to be a continual hiring for couple of more quarters or was this kind of a a onetime bump.
And head count.
Yeah, you know, we I think you're going to see some additional headcount.
From now through the end of the your hi, Greg and it'll probably significantly slowed down next year, but a couple of things I'd like to emphasize about that we're paying a lot of attention to headcount expense and when you look at our us P.L., you'll see that you know compensation.
Quite benefits are a large part, but we also have a lot of June as well. So as we go to the 2021 budgeting process, we're really going to be taking I pick up a.
Tougher luckity <unk> going forward.
Whatever wherever we end up with that Gionee and comp a balance.
We're gonna be looking at the total expense.
Relative to.
Our business.
And I think we've highlighted in the past.
That our total operating expenses, usually run in a band between about 25 in 30 basis points.
I'm going into this year, we expected that they would had 30 or even track a little bit higher frankly, what's happened. This year is that in the first quarter. It did on nudge that 30 basis point level, but we had additional cost onetime complex.
Benson the first quarter associated with bonuses that we had an accrued for because of a unexpectedly strong finish to the year.
Now when you look at that number you'll see that it's dropping back and the 26 27 basis point range.
And that's something that we're paying a lot of attention to is a part of mentioned, we expect expenses will grow approximately proportionately to the business.
But to be more specific we want to hold that operating expense level and that 25 to 30 basis point range and we don't foresee other than you know any onetime event or we don't see that are our recurring expense.
Says are gonna go outside of that range for any reason over the next four to six quarters and over time as a part of mentioned as we have become a more mature organization with some of this essential infrastructure built then we would hope to manage it to a slightly.
Lower level, even at the bottom of that range or even slightly below but look for our management. Our active management of those expense levels in that range expect that as we do that we will be adding additional people.
Through the ended the year and some going into the next year, but that when we manage to that expense ratio. Our profitability will continue to expand a commensurate with our volume growth as long as we keep maintaining that 90 basis point net interest margin, which is the other key management metric for us.
Great. That's very helpful. Thanks, a lot guys.
Our next question comes from David Idleman of Idleman variant capital. Please go ahead.
Yeah. Thank you it's nice to have so many a high powered people on the call.
But one of my questions was I notice in the news release, you Didnt show a book value and if I calculated it was down a little bit from the last quarter, maybe that's because of the hedges and if so could you kind of explain.
What.
Yes, the at least as stated book value on the balance sheet to go down and after deducting the preferred and what.
Well <unk> would that take place to cause it to go back up.
Yeah, David I'll I'll, let a part of get into the details of that but you're exactly right. It is the mark to Mark nature.
Of our swaps of our hedges or where are we have asymmetric accounting treatment of that.
And you know those are all term structures that are mashed off against liabilities that we have.
It is the volatility of those on a mark to market basis that results in the volatility of our well both GAAP earnings as well as our book equity. So I think directionally over the last two quarters.
There's ah interesting illustration of that although at a partner comment a little bit more detail.
Yeah, I think but I do you hit it pretty accurately and and you're absolutely right. You know we do have yes, how do these fluctuations that come from our accumulated other comprehensive income you might have noticed that we had a fair amount of volatility in the fourth quarter and this is.
Don't have the hedge accounting treatment you know as a result, if ive derivatives and that's really gets reflected within Oh, you see I calculation, which which does have caused some degree of volatility in our equity. You'll also note that some of that has your thought because we had mentioned in the first quarter where.
You know we had a favorable they've also this particular quarter. So some of that has actually and closed off but in aggregate. Our book value of equity is higher than the same period last year and again as you noted. This is it just talked about adding on the additional preferred stock I think important thing to note with.
With respect to the fluctuations that you see when they're not you see I. Some derivatives is because we use derivatives as you know as a risk management to Oh, we fully expect a the value with these derivatives to pull back to fall at different times, and we really exclude this when thinking about Oh of course.
Earnings for this particular movies and both the hedges on our operating statements as long as those that hit our balance sheet and that's why I think our on net effective spread is such a good measure of the consistency in our earnings I didn't think it's important to maybe I recognize that some of the fluctuation that you've seen the book value.
Do you know within our balance sheet of our equity Oh really does result, primarily from these solid cash flow hedges Oh does hit our you see on but I'm happy to you know how to position with you offline about this as well [noise].
Okay. Thank you.
[noise]. Our next question comes from Chip.
Tradition asset management. Please go ahead.
Thank you good afternoon my.
Question will be about the loans under cobot 19 permit.
My lead into that has two pieces. The first is that for the last.
Three years, probably under both this.
Management team and prior management.
Cautionary.
Statements regarding.
Hey, normalized 1%.
90 day delinquency number would represent reversion to the mean.
And.
That should be watched for and we know that in the management world cautionary statements eventually come true true, which is not a criticism.
It's just.
The way it is so.
Nothing has happened that brings.
Does that number even close to 1% sense.
The other and you've gotten this question several times is skew.
Ken.
Open mainstream press these days.
Without seeing.
Stories with exam anecdotal examples of farmers being.
Going bankrupt or not just dairy farmers, but.
Farmers and ranchers.
And even the Wall Street Journal, which is pretty friendly to the current administration.
Printed up something on that last week. So the news there's been nothing that bad yield results have been nothing but good.
That's great.
So we're now at loans under coded 19, deferment, which don't.
Show up in your 0.31% delinquent loans statistics could you flush out.
Where are you see that go in and.
Are you still concerned about reversion to the 1% main or are we have we got a new normal.
Chip that's a that's a.
Difficult question to answer we won't given our very best and I'll ask also ask Jackson to jump in if he has additional perspective on this since he works is so much of this data.
It farmer Mac I don't think we see a lot of.
Of evidence that.
Reversion to a 1% 90 day delinquencies.
Is really a normal for us as you note.
We've consistently been below that.
And even in this quarter.
We saw a seasonal decrease and 90 day delinquencies are from where we were in the first quarter that is a very normal seasonal pattern.
At the end of the second quarter or 90 day delinquencies are higher than they were a year ago, ER and very very slightly higher than they were two years ago.
So we're seeing the seasonal pattern kind of follow itself the level of deferments that we granted and we reviewed eat it each and every request.
And tried to be a generous are recognizing that this is the time of great economic stress for a lot of people, including some farmers and ranchers yeah. It's hard to make a lot of generalizations about the deferments that work Ranted you know everything.
From wind race with retail tasting rooms or two.
Companies that Oh, ranchers and farmers that were impacted and many other ways.
As you know that the the highest level of deferments, where for a period of six months that runs off at the end of the or that actually July one to January one of 2021.
And that level Deferments I think result was equal to about 1.8% of total principal outstanding. So if they do rough math. It every single one of those from US all the sudden a after recapitalizing those payments and we amortize who knows if every single one of those bars was then.
Able to meet the next payment we would be above 2%, but we don't believe that that's going to happen.
We are not able to provide you with a good forecast today of what percentage of those borrowers to whom with Brad to deferrals.
We'll be well prepared to resume making payments after having this cash flow relief event the payment deferral.
From what we've seen with the other delinquencies, we would kind of expect those to follow a more normal seasonal pattern, but what percentage of those deferred French resolved in bars and able to then they subsequent paying much very very hard to forecast.
Oh, we've been running a laws stress tests and analysis.
Make sure that were prepared if it's a higher percentage or we think it'll be lower but if it is a higher percentage, where we think we're well capitalize a and making a sufficient earnings to be prepared to whether it I'm just not prepared I'm afraid to give you a more precise forecast right now.
Yeah, we do have some additional color that you can add or additional thoughts it you'd like to add or Zach for that matter.
Well, yeah, I think he's a great job Brad in your description there and your and your responsibility I'll comment on is the 1% I mean agriculture is a highly cyclical business. So you know you put the 1% in there as a historical average to farm and ranch and say because that's where we do average all the kids, yes, you're going to have some higher in some lower but that that number kind of goes up.
And down around that 1%. So that's why it's out there it's more the historical average not to say, we're always going to be below it always above it but that said there for context.
Okay. Let me just toss in another item and it's really the only thing that I think about a lot.
And that is one of your prior answers to that question by someone else is that what we're all reading about in the press our operating.
Loans, not mortgages and you don't do operating loans you do mortgages.
And I'm just scratched my head on that a little because there has to be some read through does they're not between farmers that are.
Not able to.
Cover their operating costs.
And the cash flow that they need to stay current.
On their mortgages it just seems like.
This should be a worry.
Yeah, well you look at the overall delinquencies so the sector.
And.
On average agricultural lenders do have higher delinquencies on agricultural loans on average than we do and you are correct.
Chip to point out that that is primarily around operating loans, we consider the read Newell and brought the condition of operating loans to be an important bellwether for us our borrowers.
Who have mortgage loans with us and with others, having their season, all they're usually you're having their operating loans three new and it's something we pay a lot of attention to in January in July.
And we've been very pleased very relieved.
That's the level of operating long renewal is continued at a very high rate.
Not saying anything there that is causing us a huge amount of concern really that much concern at all.
But you're correct. There you know the Wall Street Journal.
The article last week cited you know an uptick of 8% I think in that number of chapter 12, bankruptcies, yes that is 8% higher but it's not 50% higher it's still a number in the hundreds not a number and the policy.
And the overall ability.
Farmers and ranchers United States to service the that service that they do have and our analysis remains good.
Low interest rates have certainly better contributor to that.
In fact, Jackson why do you just side some of the.
Data relative to.
That service coverage.
And cash flow coverage for the sector versus historic levels attributable to low interest rates I think that's very interesting an important part of the answer to chip's question.
Yes, it's a very different interest rate environment today than we had good that in a 2030 years ago. When we peaked out at say 30 cents of every farm dollar earned was paid to cover interest expense today were more 12 13.
Much lower percentage, which makes a interest rate changes in movements in cash flow a lot easier to two to continue to service. The debt. So just a very different picture in terms of leverage and debt service coverage.
Okay, well keep up the good work.
Thank you chip.
Our next question will come from Gary Gordon a private Investor. Please go ahead.
Hi, Thanks for taking my question actually two quick questions. Hopefully a one is a any update on a zion banks or.
Planned or a required sale of their a stake in farmer Mac.
And then to thinking about a debt financing with the tenure at a 50 basis points or so.
Are you a sort of rethinking the value of the call feature and your callable debt and is there any thought to a extending maturities.
On your debt against a rising rates from here.
Yeah, Gary that that's both both acts and questions in terms of Zions.
You. If you look you can find a securities filings out there, indicating that they have.
Occasionally sold additional shares generally when the stock has been above 65 $70 a share.
What we have filed and regarding our understanding of their situation and what they have filed is really the best current information available on that and that is that you know they are.
Yeah, but have a situation regulatory situation has nothing to do with their financial condition only associated with reorganization, where there I'm going to be and our disposing of their classes stock not their class eight but their class C. So we really don't have any further update other than to note.
That there have been a couple additional sales.
We have conversations with them about alternative approaches.
To the market, but I'm not nothing further really that weekend that we can.
Discuss or are aware of to discuss about their status.
As it relates to asset liability management, Zack I think provided a very clear description of how we have been proactively going to customers, who may have three five tenure or pick.
Trades with us even 20, a your fixed rates with us.
Yeah, and if those rates are really.
At a level today, where that customer could refinancing refinance away from us we've been proactive and offering them today's right.
And the way that we have maintained our net interest margin is by then really calling bonds that are callable and refunding, the new lower rate loan where at today's interest rates and basically re locking yeah no.
And net interest margin.
That meets our spread objective so we have found.
That in the debt capital markets, we really haven't been paying premiums for those callable bonds and as long as that the case.
That is a very low cost very valuable option for us that option Oh I've been callable is given the way we manage our.
Balance sheet.
Really.
A hugely more valuable option to US then apparently it is to debt capital markets investors. So for us to continue this approach rather than to extend maturities and a.
For example longer than the tenor of the fixed rate tenor of the loan or really want to accomplish anything for us and would really kind of go against the asset liability management discipline that we have oh.
Oh match funding each of these loans we make.
Hey, Thank you.
Okay.
That's contagious.
I'm thinking you know just note it to what Brad said the cost actually for us to issue called <unk> that you know, it's a it's a spread relative to tragedies that has actually decreased in the recent months. So you know so it continues to remain a very viable to for us.
But before I continue to have fairly good access to market condition.
Even seven years.
This concludes our question and answer session I would like to turn the conference back over to Brad nor at home for any closing remarks.
Okay.
Great. Thank you operator, and thank you all for participating we do appreciate the interest. We appreciate the great questions you ask and as always we are here in between these quarterly calls to provide additional.
A response to questions you have may have about farmer Mac, we truly hope to.
Great reputation with you are being very responsive and transparent.
So again. Thank you we're very proud of our performance. During this time and please be in touch with a well joppa. If we can follow up with anything.
Thank you all for participating.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.