Q2 2020 Federal Agricultural Mortgage Corp Earnings Call
[music].
Good day and welcome to the farmer Mac second quarter 2020 financial results Conference call.
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I would now like to turn the conference over to Brad nor at home President and Chief Executive Officer. Please go ahead.
Good afternoon Bretaa Norte.
Very pleased to welcome your tour second quarter 2020, Investor Conference call.
Before I begin velocity baldry, our general counsel to comment on forward looking statements the management may make today.
Well farmer Mac's use 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.
We may not be obligated to update you statement 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 statement.
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 posted on farmer Mac's website farmer Mac Dot com.
Under the financial information portion of the investors section.
A recording of this call will be available on our website for two weeks starting later today.
Hi, Thanks, very much for that and good afternoon, everyone and thank you for joining us I Hope. This finds you on your families all doing very well and being healthy unsafe.
Our second quarter of 2020 wasn't exceptional one that reflects farmer mac's execution on our business plan.
Disciplined approach resilient business model and singular focus on a sector of the economy that is among the most essential agriculture and the fluent that sustains us.
We recorded another quarter of solid operating performance was strong asset growth across multiple lines of business.
Record core earnings where else 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 NASA gross number.
So 1.7 billion, a new credits or roll America in the second quarter 2020.
The combination of historically low interest rates strong demand for a long term credit from our agribusiness and rural utility customers.
Our proactive approach to outreach to our customers and uninterrupted access to the debt capital markets as competitive spreads results in our abilities offer competitive pricing.
So 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, what's the country company wide reorganization that led to the creation of the Chief business Officer, and the senior Vice President for World infrastructure.
These positions 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 says to be more commercial.
And they underscore our commitment to building and maintaining strong relationships with customers.
When we do this right at translates into consistent volume growth and strong financial performance.
Turning to our financials core earnings call the record $26.3 million for the quarter.
Slotting double digit growth to a sequential and on a year over year basis.
Net effective spread it 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 on new applications.
Since March we have approved 392 payment deferment requests relay that to cope with 19 and that's through July 31st of this year.
Those are paying about deferral requests have total principal balance of $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, but the flexibility and assistance and their bowers need as they adapt to this new normal.
Although the environment remains 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 and Zach I'd like to take a moment to thanks, 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.
Weve increased our headcount operating remotely, adding additional talent to the team.
Our second quarter results are a testament to the culture, we have it 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 Zachary Parker Chief business Officer to give you an update on customer and market developments that.
Thanks, Rob.
We're very proud of our second quarter results like they have validated our customer acquisition and retention initiatives as Walter lack the success that we're achieving record body competitive interest rates across our product that and executing an efficient and effective loan Google and purchase process.
I think it to develop new products and solutions for our agricultural told these customers. These efforts have and will differentiate farmer Mac in the credit markets, we serve and are establishing a long runway for growth for farmer Mac.
Outstanding business volume growth in the second quarter 2020 was robust multiple lines of business contributed to net outstanding growth of $502.8 million.
The quarter reflects a record net volume growth in farm and ranch U.S. do securities and really rural utilities have combined to $748.7 million.
This growth was partially offset by a sequential decrease in long term standby purchase commitments.
I won't tell them trust and guaranteed securities in the combined $204.6 million as well as the decrease in institutional credit $41.3 million.
In our role utilities line of business loan purchase net volume grew $311.9 million during the quarter.
Compared to $98.1 million during the same quarter in 2019 due to increased loan purchase demand from or two primary counterparties in a rural utilities line of business.
Cobank and National Rural Utilities co-operative Finance Corporation.
This growth was jersey, largely driven and the result at historically low interest rates.
Don't 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 routine borrowers in this low interest rate environment, but also our ability to signet.
Secondly, increase our product utilization across and expanding seller network.
Actually a farm and ranch sellers, meaning a London got its transacting with farmer Mac. This year through a loan sale and decrease by over 40% can see period in 2019.
In addition, the number of agriculture lenders swung farmer Mac more than $1 million and loans. This year has more than doubled in the same period last year.
Yes, there are few specific metric the highlight how we are deepening penetration with our existing customers as well as broadening our available customer network through our collaborative approach to customer relationships pricey product structuring and efficient and effective execution.
As Brad 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 of approximately.
3% through March 20 Twond.
Turning to our U.S. do Securities line of 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 and you will see your fees, reflecting the positive effect of adjustment that we made two aquatic structure and the second half of 2019 <unk>.
More effectively meet customer demand, our consistent and reliable credit availability as well as we increased loan limits authorized by the 2000 <unk> Barnwell [noise].
Our institutional credit liner business experienced a decrease of $41.3 million during the quarter.
Primarily due to the maturity of two bonds 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 volumes.
The decision by the one counterparty to not extend the maturity bonds during the quarter. It's directly a result, a build liquidity support provided by the federal reserve.
With respect to pay the French human capital markets during the quarter.
Which resulted in a tightening 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 of the sector. If you serve given impacts associated with a pandemic, which has created a window of opportunity political nickel incremental market share.
Core agricultural loan that can can you repeat bookings auctions, which in many cases, it's probably competitive pressures in terms of price structure and execution.
He will remain steadfast in our commitment to deliberate rocks backend Mcmullen Angel solutions to the agricultural community by working alongside a growing customer base.
One more dynamic unresponsive business model has transformed the way you deliver upon our mission and hasn't group customer satisfaction volume retention and penetration in existing and new market.
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 by doubling to be eligible loan size that sellers can offer to their borrowers from 750000 to $1.5 million since the launch about product in early 2019.
We have seen tremendous interest and utilization of this product throughout reseller network.
Given the simplified application process.
Score card based underwriting criteria and the receipt of a credit decision in many cases 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 uplift of our entire team has done nothing short of exceptional in assisting our clients you communities in which we said it.
As an organization, it's imperative that we continue to further promote or machine or me, they meet Donnie and making flexible and supporting our customers. During this volatile times.
Bob I'll turn it back to you Brad.
It's act thanks, very much I'd now like to turn to jacks attached to give you an update on the current agricultural environment, what's going on out there Jackson.
Thanks, Brad the carbon 19 pandemic continues to disrupt the general and agricultural economy.
The second quarter 2020, U.S. gross domestic product contracted at the fastest pace in history falling at an annualized rate of 32.9%. According to estimates from U.S. Bureau of economic analysis.
Well, the financial markets and corporate credit spreads have 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.
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.
Some consumer mobility and spending on food returned by June the virus resurgence in the south and West has slowed the pace of recovery and the services sector.
Despite the pandemic America's Foods system has been humming sales at grocery and food stores smashed records in March head of many state impose corn teams and they remained elevated in the second quarter as consumers rotated from food at restaurants in schools to food at home.
You asked me processing was curtailed a significant coated related worker outages in April and May recover to near capacity in June and July.
Drivers return to the road in May and June and ethanol production rebounded to nearly 90% of pre covered levels by July.
Culture 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 Audi and tenacity at the American food system employee.
The agriculture sector is not without its challenges cobot 19 case rates remain elevated counties with high levels of farm output and food processing commodity prices remain well below year ago averages and agricultural exports were sluggish in the second quarter due to reduced global economic activity [noise].
However, farmers ranchers and rural electric cooperatives have access to several stimulus programs in the first half from 2020 that helped offset these effects.
Let's see a distributed over $6.6 billion in direct payments to farmers and ranchers in June and July to the Corona virus food assistance program or see fab.
And the small business administration has distributed more than $7.9 billion in paycheck protection program or P.P.P. loans. The business is involved in agriculture fourth street fishing and hunting.
Heading into August the U.S.J. had nearly $24 billion in authorized an unused funding to support the sector through the pandemic.
Despite economic headwinds credit quality, a 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.
What is your old 0.31% across all four lines of business.
The drop as typical of the seasonal patterns and scheduled loan payments, but there were also a significant number of prior delinquent loans that cured or paid off during the quarter.
No delinquencies in any of the other lines of business.
Individual nonres grading held steady in the second quarter 2020, with substandard loans totaling $310 billion across all line all lines of business loans and guarantees.
It's volume is spread across 48 commodities in 219 counties and 39 states.
These metrics are near historical averages as a percentage of farmer ranch as well as a total loans the guarantees.
There can 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 systems in place for the sector to help stabilize the volatility in commodity prices and asset values and with that I'll turn it back to you Brad.
Excellent. Thank you.
I like to turn the call over to apart it to discuss the financial results in more detail apart.
Thank you Brad and good afternoon, everyone.
We had another great quarter on and off.
I never thought was highlight the fed profile on the underlying fundamentals.
So on balance sheet, and our ability to navigate the dynamic assignment.
I mean this quarter was extremely strong.
By asset growth across nearly all my life for businesses.
The size disciplined expense control relative to prior quarter.
Consequently, ultimately could substantially lower funding costs.
I asked us to the capital market has remained strong.
Despite market volatility.
Oh, though when the fed intervention, we have seen stabilization, but that's not too.
Relative to the first quarter.
We issued debt.
I think continued to maintain disciplined asset liability management policies.
We continue to issue that across all price point.
And that Fred within historical ranges other T S.
We have also been affected and using callable debt instrument to mitigate the ongoing meet the payment that resulted from the voting interest environment I think that's not maintained drugs.
I'm pleased with extensive knowledge, but how did you see this enables us to price thought that category.
We frequently issue customized issuances to meet the.
And in Boston.
Disadvantage allows us to offer products, what the optimum competitively across the club and this is evident in our overall loulo eat a funding this quarter.
1.29% less is 1.97% into first quarter.
We remain well capitalized.
Strong liquidity.
We maintain a total cash position over $800 million.
<unk>.
Additionally, we opportunistically.
$79.5 million non cumulative perpetual Cds preferred stock, which further enhance our capital position this quarter.
Issue it strengthened our tier one capital position and positions us well for a baby growth initiative.
But it also buffer that Keith unforeseen [noise].
No.
Sure.
Cool funny.
$2.7 million.
$26.3 million, the second quarter, twentytwenty compared to $23.6 million.
Second quarter Plenti 19.
Net effective spread with $46.5 million.
Second quarter Twentytwenty.
Ted to $41.4 million.
The same period last year.
Net effective spread percentage down a basis 0.8 to nine this club, though and this was held well within our target range plus or minus.
<unk> 0.9 to <unk> point.
We continue to defensively hold more liquid investment portfolio.
Hi amount of cash balance as I noted they need help prior to dependent.
However, we did just with no cash has resulted in a slight reduction two basis point, you know net effective spread.
The 2.7 million dollar.
The increase in cool.
It's primarily due to a $4 million after tax increase.
Net effective spread.
A 300000 dollar asked about equally if it though to provision for losses.
And these increases were partially offset by $1.6 million I forgot increase.
[noise] [noise] operating expenses increased by 16% in second quarter Twentytwenty compared to 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 that.
General and administrative but she any expenses.
Absolutely.
For the pricing it and this is due to continued investment in infrastructure.
<unk>.
So do you think initiative.
However.
Both compensation I'm see any expenses were lower than the first quarter of twentytwenty like $2.1 million.
This quarter, we incurred lower levels of expenses related to consulting fees.
I'm confident that Oh.
All of 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 in our internal infrastructure.
But this will allow phenomenon to more efficiently neat stuff.
And enable greater revenue retention overtime.
Going forward.
Expect operating expenses to increase.
Activity with Bethany.
Well, we plan to keep operating expense ratios.
Deferred revenue within a range consistent with historical averages, we will continue to make infrastructure investment and I'd, rather the talent into shops.
Well, that's even definitely we expect well tapered off over time as our operations and business model that show.
That's really seem to be allowance for loan losses of $500000 recorded this quarter was largely attributable to new loan volume.
Some of the portfolio.
Increase was partially offset by improving economic socket that uniquely impacted the farm and ranch portfolio.
Specifically.
Improvements in commodity prices and expectation, but stable farmland values primarily contributed.
$1.7 billion.
Farm and ranch portfolio completed allowance for losses.
Our money, but also substantially higher but first quarter twentytwenty.
An increase of $6.2 million on an after tax.
This increase was driven by decrease the provision for credit losses of $3 million off the top.
Hi, I'm that affect Fred.
$1.8 million Oncotype and a reduction in operating expenses relative to the price club to $1.7 million off the top.
The high net effective spread with attribute.
Hi, overall average asset balances.
It's actually lower funding costs in the second quarter.
Given.
Continued an uninterrupted access to that gap.
Moving on I wanted to make one point piece of the new accounting standards, we implemented on January one twentytwenty.
You methodology incorporates provisioning levels that are predicated on loan growth.
Changes in our portfolio Nick.
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 this isn't fine it could last approach based on historical trends.
Instead, driven by projections of future expected loss.
And.
You can provisions of the leases unexpected credit loss.
Well be based on changing economic forecasts and changes in the credit composition of our balance sheet.
It's Mike listen only improve from the quarter end fault that introducing some volatility.
Well I think the capital.
We continue to remain very well.
[noise] farmer Mac $916 million of Cole capital as at June Thirtyth, Twentytwenty exceeded our statutory requirement like $248 million up 37%.
This compares to $850 million of cole capital as at 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 issuing a fee these preferred stock.
Well I was a 23 million dollar increase in retained earnings in second quarter Twentytwenty.
Oh liquidity remained strong and far exceed our regulatory requirement by 122 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 up we intend to continue to maintain a higher than acquired loveless cash and liquidity as we believe that this elevated position.
The weather any unexpected cashflow shop, given continuing economic uncertainty.
It will allow us to adequately fund to funds to meet optimism.
But it will also allow us to retain flexibility to maintain hello.
But at the levels of liquidity.
Okay conditions change [noise].
In conclusion farmer Mac's underlying financially sound fundamentals continue to the flex it very well capitalized balance sheet.
Stability, you know couponing and the continued to maintain disciplined with asset liability management.
Our strong access to capital market positions us to continue to successfully deliver on essentially mission and navigate these uncertain time.
[noise] more complete information about farmer Mac second quarter Twentytwenty performance.
The 10-Q, we filed today with the FCC.
And with that Brad I'll turn it back.
[noise]. Thank your 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 and families on businesses.
On the farmers and ranchers way serve on agribusiness.
And this is something that.
Really causes us great concern and as 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 a modified 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.
Our sources of pride for employees.
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 surfing Rural America.
We work hard everyday to continued build upon strong reputation as the nation's trusted secondary market.
Or.
Credits 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 positioned 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 financial institutions surfing Rural America during all times.
And this is especially true during times of economic pressure and uncertainty.
So now I'd like to see if we have any questions from anyone on the line today.
We will now begin the question 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.
Hey, guys. Thanks for taking my questions. I'm first question is just on the ER business volume growth I assumed interest rate environment had a big part of it. So just how should we think about that does that pull some did that's pull some demand forward or is this may be going to be a couple of 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.
Hey, Greg Brad here to great great to hear from your we really appreciate.
Your question I know that Zack get into the details of this 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.
Actually there have been the 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 and Oh another reason for optimism.
It's actually might just add some some some detail.
About both initiatives as well as interest rate environment.
Yeah, and Friday night, Great. Great question, you know clearly interest rate environment [laughter].
Hi helped in terms of demand for long term credit.
I think there's been I've taken it cuts both ways right. It's a competitive market out there I mean, it's other active members that are also competing alongside our core reseller 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, where 50% larger than we had an acceleration same period in 2019.
And as I mentioned, you know sellers selling over $1 million alone more than doubled something period. So.
He showing the active nature of our sellers is a key metric we look to see if we're broadening our product utilization is taking place. In addition, we're also effectuating a lot of rate modification 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 a lower interest rates, the but also keeping that bar or I'm back on our balance sheet looking back in time, you know I farmer Mac I think it it'd be difficult to go back to see a very similar time period or you can go back post financial crisis Kinda Steve.
A 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's that's also driving this this volume the feedback we received from our sellers is that you know our customer focus our flexibility and working with them is really driving their interest to bring more volume to us, which you can be seen by our E.
Preceding sell their market share.
Great. That's helpful. And then just one more I think on the expense from operating expenses were up around 16% and you mentioned an increase in head count you've always had a very efficient head count so I.
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 is there going to be a continual hiring for couple of more quarters or was this kind of a a onetime bump.
And headcount.
Yeah, you know, we I think you're going to see some additional headcount from now through the end of the you're a gray again, 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 pet L., you'll see that you know compensation employee 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 think a.
Tougher luck at the <unk> going forward.
Whatever wherever we end up with that you in a and Comping 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 30 basis points.
I'm going into this year, we expected that they would hit 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 huh onetime complex.
That's in the first quarter associated with bonuses that we haven't accrued for because of a unexpectedly strong finish because a 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.
So those 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 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 are active management of those expense levels in that range or expect that as we do that we will be adding additional people.
Through the end of the your and some going into the next year.
But that when we managed 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 a on the coal [laughter] [noise].
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.
Yep.
The leases stated book value on the balance sheet to go down and after deducting the preferred and what.
I would call it would take place to cause it to go back up.
Yeah, David I'll I'll, let a partner 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 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 do but I do you hit it pretty accurately and and you're absolutely right. You know we do have yeah. Some of these fluctuations that comes from our accumulated other comprehensive income you might have noticed that we had a fair amount of volatility into first quarter end. It says Oh it was out of the hedge accounting treatment.
You know as a result to five derivatives and you know that's really gets reflected within Oh, you see I calculation, which which does.
Some degree of volatility in our equity you also note that some of that has your thought because we had mentioned in the first quarter, where you know we had a favorable. There's also this particular quarter. So some of that has actually and clean stuff, but in aggregate our book value of equity is higher than the same.
Oh period last year and again as you know to this it was talked about adding on the additional preferred stock I think the important thing to note 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 if it's not a trick to Oh, we fully expect a the value at these derivatives to pull back to fall over time, and we really exclude this when thinking about Oh core earnings for this particular reason both the hedges.
Our operating statement as well if those that hit our balance sheet and that's why I think our on net effective spread it's such a good measure of the consistency in our earnings I think it's important to maybe I recognize that some of the fluctuation that you've seen the book value you know within our balance sheet of their equity Oh really does without trying to.
Early fifties cash flow hedges that hit out you'll see I, but I'm happy to you know how to position with you offline about that as well.
Okay. Thank you.
[noise]. Our next question comes from Chip Oh of 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 in prior management.
Cautionary.
Statements regarding.
A 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 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.
That's a that's a difficult question to answer we will give our very best at all House also asked Jackson to jump in if he has additional perspective on this since he works with so much of this data, but it farmer Mac I don't think we see.
Yeah, a lot of.
Of evidence.
That a reversion to a 1% 90 day delinquency.
Is really a normal for us as you note.
We've consistently been below that.
And even this quarter.
We saw a seasonal decrease and 90 day delinquencies are from where we were in the first quarter that isn't very normal seasonal pattern.
At the end of the second quarter or 90 day delinquencies are higher than they were a year ago and very very slightly higher than they were two years ago.
So we're seeing the seasonal pattern kinda follow itself.
The level of deferments that we granted and we reviewed each 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 deferment is that were granted.
You know everything from wind race with retail tasting rooms.
Two.
The company is that Oh, ranchers and farmers that were impacted and many other ways.
Yes, you know that the the highest level of deferments, where for a period of six months.
It runs off at the end of the are actually July one to January one of 2021 and that level Deferments. I think result is equal to about 1.8% of total principal outstanding. So if they do rough math. It every single one of those for much of a sudden.
After recapitalizing those payments and we amortize who knows if every single one of those borrowers was then on able to meet the next payment we wouldn't 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.
What percentage of goes borrowers to whom we granted deferrals.
Well 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 to from France resolved in bars unable to them that make the subsequent pay much very very hard to forecast.
Oh, we've been running a laws stress tests that analysis.
Make sure that were prepared if it's a higher percentage Oh, 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 I'm just not prepared I'm afraid to give you a more precise forecast right now.
They also do have some additional color that you can add or additional thoughts it you'd like to add horse act 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%, whereas the historical average to farm and ranch and say because that's where we gathered all the period, yes, you're gonna have some higher in some lower but that that number kind of moves up.
And down around that one person. 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 or always above it but that's in there for context.
Okay. Let me just policy in another item and it's really.
The 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.
Sure.
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 as a 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 renewal and rent 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 due in January in July.
And we've been very pleased very relieved.
That's the level 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 a number of chapter 12 bankruptcies, yes that is 8% higher but it's not 50% higher it's still a number in a hundreds not a number in 2000.
And the overall ability.
Oh.
Farmers and ranchers United States to service the debt 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 existed in 2030 years ago. When we peaked out to take 30 cents of every farm dollar earned was paid to cover interest expense today were more 12 13.
Not much lower percentage, which makes a interest rate changes in movements in cash flow a lot easier to two to continue to service. The data. 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 <unk>, 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 the 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 exome 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 about 65 $70 a share.
What we have filed 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 their financial condition only associated with reorganization, where there I'm going to be and our disposing of their classy 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 fix.
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 refinanced 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 lock in yen.
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 being 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.
Oh really went to accomplish anything for us and would really kind of go against the asset liability management discipline that we have oh match funding each of these loans we make.
Hey, Thank you.
Okay.
That's kinda thanks.
One thing you know just note it to what Brad said the cost actually for us to issue cognizant that you know at the its spread relative to tragedies that has actually decreased in recent months.
So you know so it continues to remain a very vibrant tool for us they'd be well continue to have feeling good access to market condition.
Even some news.
This concludes our question and answer session I would like to turn the conference back I've heard of Brad nor at home for any closing remarks.
Right.
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.
Oh response to questions you have may have about farmer Mac, we truly hope to.
Craig a reputation with you are being very responsive and transparent.
So again. Thank you we're very proud of our performance. During this time and I'm pleased to 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.