Q4 2020 Federal Agricultural Mortgage Corp Earnings Call
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[music] assets.
Good day and welcome to the farmer Mac fourth quarter and full year 2020 earnings result, all participants will be in a listen only mode should you need assistance. Please signal our conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
Please note that this event is being recorded I would now like to turn the conference over to Brad Nord home. Please go ahead Sir.
Good afternoon, I'm, Brad nor at home and I'm very pleased to welcome you to our 2024th quarter and year end Investor Conference call.
We have a great report and a number of positive developments to present today.
Before I began I will first need to ask Keith Murray, Our general counsel to comment on forward looking statements that management may make today as well as farmer Mac's use of non-GAAP financial measures Steve.
Thanks, Brad.
Some of the statements made on this conference call may be forward looking statements under the securities laws.
We make these statements based on our current expectations and assumptions about future events and business performance and we may not be obligated to update these statements. After this call.
We caution you that forward looking statements are subject to risks and uncertainties.
Actual results may differ materially from the results expressed or implied by the forward looking statements.
Evaluating farmer Mac, you should consider these risks and uncertainties.
As well as those described in our 2020 annual report on form 10-K filed with the SEC. This afternoon.
In 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 our most recent form 10-K 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.
Thank you, Steve and good afternoon, everyone and thank you for joining us.
2020 was certainly unlike any year that I've experienced in my 40 year business career and I am proud to report that farmer Mac has once again demonstrated the resiliency and sustainability of our business model.
And disciplined growth of our business.
From the per that pandemic to social and political unrest.
Record low interest rates to the sitting up the new administration.
For the strong volatility in rallies and agricultural commodity prices.
2020 presented more uncertainties than any single period in recent memory.
And it has been challenging in many ways for so many people.
As a mission and purpose driven company that has always been acutely aware of our commitments to all of our stakeholders and those include you our shareholders our customers debt investors, our employees and especially the rural Americans, whom we are proud to serve.
I'm extraordinarily proud of the team at farmer Mac for executing on our ambitious strategic plan and for being able to trigger our business continuity plan. So that we don't Miss a beat.
Our employees debt this was flexibility.
Hard work.
And Grace.
So let's break some of the numbers apart.
Core earnings were a record $106 million for the year.
It's up about 7%.
Net effective spread was 93 basis points and that's trending upwards. That's at the towards the top line of our 90 basis point, plus or minus five basis points guidance.
Total outstanding business volume increased by greater than $800 million or 4%.
And new loan purchases in our farm and ranch line of business for $2 $5 billion that represents an 82% increase over last year, which by the way it was another record.
A significant portion of debt refinancing was done at lower market rates of interest, which means that we put more money in the pockets of farmers and ranchers and their families.
And keep in mind that well over 90% of these farm and ranch borrowers are family owned funds and we did that while also providing new capital to Agribusinesses and will infrastructure projects that increase the competitiveness the tax space and the viability of Rural America.
We did this while enjoying the uninterrupted support of our debt investors on.
And that's reflected in our tight borrowing spreads to treasury rates of interest.
And we also provided highly customized opportunities for those debt investors to get the structures that they want it.
Who originate loans for us and they do that recognizing that we are the leading secondary market source for purchase of those loans.
This.
Reciprocated their appreciation as measured by an increase.
Greater than 40% and our 2020 net promoter score that's the scorecard that measures their satisfaction with us.
Especially important during this last year when we operated on a 100% remote basis and we did that since March on loved it almost a year ago now.
Oh, it was made possible by our effective business continuity plan.
And during this period of time quite remarkably we on boarded 30 for new employees.
We provided strong benefits and work from home support.
And services to all of our employees.
And they were in basically productive.
I can't tell you how proud and grateful for all that they have done for farmer Mac under would've been very trying circumstances.
As you saw on our press release earlier this afternoon.
We announced a 10% for eight cent per share increase in our quarterly common stock dividend.
Now for this quarter will be at 88 cents per share.
In deciding to increase farmer Mac's common stock dividend and maintain our payout target of approximately 35 per cent.
The board of directors considered our strong capital position.
The consistency of and outlook for our earnings.
Our priority of capital to support our business and also to succeed our regulatory requirements.
This represents the 10th consecutive year.
The farmer Mac has increased its quarterly dividend from the prior year.
Farmer Mac remains a well capitalized financial institution with solid liquidity, a very strong balance sheet.
And strong credit quality.
We have maintained our consistent underwriting standards for credit approvals.
And we are continuing to closely monitor the impact of COVID-19, and I might add very recently in the last week in house.
The Texans Arctic freeze.
On our portfolio.
Some of our borrowers were adversely affected by COVID-19.
And the economic consequences on farmer Mac quickly quickly stepped in to provide payment relief.
As of January 15, 2021, we have approved and executed 472 payment deferrals related to COVID-19.
Those have total principal balance of about $432 million and represent about 2% of our total outstanding business volume.
As of the same day January 15th $22 $7 million of farm <unk> ranch the permits have been repaid in full.
And another $277 9 million of deferments for 88% of the loans differed.
We ended their deferral periods and none of those are delinquent.
This is a strong testament to both the need for flexibility.
During adverse economic conditions and to the strength and integrity.
For the borrowers who applied for and received this accommodation.
This is reflected in our 2020 results.
We've been able to stay focused and achieved many of our strategic plan initiatives.
On a much different business environment from what we originally projected.
Our culture has consistently pursue new channels and innovative ways to further our mission of helping both businesses and farmers and ranchers.
On the low cost financing they need.
Whether it is a large agribusiness loan.
Our renewable energy project finance.
Loan to a smaller family farm or a new broadband system financed through a rural electric cooperative farmer.
Farmer Mac's mission and business model provide for financing opportunities across all aspects of American agriculture and rural communities.
The core of the mission of farmer Mac inherently centers around the betterment of Rural America, and we continue to demonstrate the diversification and resilience of our business model throughout the inevitable agricultural economic cycles.
We are fortunate to have a board that has posed.
Posed a strong independent directors with diverse backgrounds expertise and qualifications.
There's strong low line with our management's long term strategic vision to build upon our history as a mission driven organization.
Our governance practices are uniquely designed to reward executives and board members with our Nonvoting C class stock and this fosters a performance oriented culture analyzed interest slip on management and our shareholders and our board.
Following us to focus on maximizing value creation associated with our mission.
Management and the board have recognized these characteristics are key contributors to our consistent sustainable long term performance.
And as a result, we have developed a new ESG policy intended to build towards enhanced reporting.
Of all the inherent environmental social and government governance practices that we have underway and aspire to GAAP.
Farmer Mac.
For the support of the board of Directors, we believe our unified commitment to farmer Mac's mission.
In conjunction with these efforts in the organization's talented and committed employee base.
Will enable us to take farmer Mac to new heights in the years ahead.
With that I'd like to turn to Zack Carpenter, our chief business Officer to give you an update on our customer and market developments Sac.
Thanks, Brad.
Before I begin I'd like to thank our farmer Mac team, who continue to demonstrate dedication to our customers their borrowers and our mission during this volatile and challenging environment.
In times like these our customers truly value our commitment to being a relationship oriented institution and our performance. This year reflects everyone at farmer Mac's extraordinary efforts as well as the strength of our franchise as we continue to fulfill our mission of providing affordable and efficient credit solution to the agriculture and <unk>.
For all communities we serve.
In 2020 outstanding business volume grew $806 million to 21 9 billion.
Primarily driven by our on balance sheet loan purchase product.
Farm, <unk> ranch, and USDA guarantees and rural infrastructure net loan purchase volume grew approximately 27% in 2020 or $2 1 billion.
This compares to net loan purchase volume growth in 2019 of $1 4 billion.
Which did include the portfolio purchase of seasoned rural utility loans from Colby, Inc. A $546 million ex.
Excluding that strategic portfolio purchase 2020, net non purchase volume growth was almost two four times greater than the same period in 2019, reflecting our continued focus on supporting agriculture and rural communities in a very challenging environment.
Gross loan purchase volume in our farm <unk> Ranch line of business was $2 $5 billion during the year and 82% increase compared to 2019.
This resulted in net volume growth of $1 $2 billion more than double the net volume growth in 2019 of $604 million.
The consistent growth we've seen in our farm <unk> ranch loan purchase volume reflects the success of our customer acquisition and retention initiatives.
Our ability to provide competitive interest rates across our entire product set and our efficient and effective execution and the loan approval and loan purchase process.
As we have noted on prior calls our focus in our farm <unk> Ranch line of business is to broaden our capital deployment to new customers, but also to deepen our penetration within our existing markets.
During 2020.
80% of the $2 $5 billion increase in gross loan volume origination was attributable to active lenders and Thats a lender that has transacted with farmer Mac in both 2019 and 2020.
Notably however, 20% was attributable to new or previously inactive lenders showing that we are expanding our ability to provide mission critical capital to new lenders at an increasing rate.
We also successfully deepened our relationship with our lenders as evidenced by an 80% increase in number of lenders selling us loan totaling $1 million or more versus 2019.
As Brad mentioned the results of our 2020 net promoter score highlight a strong relationship with our lender network and their satisfaction and working with farmer Mac reached all time highs.
Another key component of our strong loan purchase volume growth in farm <unk> Ranch is our strategic initiative to pursue larger more complex loan exposures, which we generally define as loan in excess of $10 million, the agricultural producers and agribusinesses that support agricultural production excluding.
Fiber processing and other agricultural supply chain production.
This is a relatively new area of growth for farmer, Mac that provide borrower and sector diversity accretive yields as well as new relationships.
During 2020, we executed approximately $370 million of gross new loan purchases in this emerging growth initiative.
For these larger loan exposures.
Which may have different risk profile from other farm <unk> ranch loan we have obtained additional resources to support the strategic initiative as well as implemented methodologies and parameters that help assess credit and other risks based on the appropriate sector borrower construct and transaction complexity.
Our pipeline remains at a healthy level as we continue to broaden our relationship in this new territory and across the agricultural lending background.
For our farm <unk> ranch growth continues to outpace the broader agricultural credit market.
Our agricultural mortgage loan portfolio for net loan purchases in our farm <unk> Ranch line of business grew 17% over the last 12 months compared to the year over year growth rate of the total agricultural mortgage loan market of approximately 5% through September 2020.
It was on 20th also a record year for our USDA guarantees lines of business.
Added $778 million of gross loan purchase volume for the highest volume ever recorded in a single year.
The net volume growth of $254 million reflects the positive effect of the product structure adjustments, we made in an increasingly competitive interest rate environment. Our continued focus on key customer relationships with our financing partners as well as the increased USDA loan limit authorized by the 2018 for them though.
Net loan purchases in our rural utilities line of business increased by $589 million during the year, which reflects steady non purchase demand for March primary rural utilities, Counterparties National Rural Utilities Cooperative Finance Corporation and Cold Lake.
Net loan purchases in our rural utilities line of business increased by $589 million during the year, which reflects steady non purchase demand for March primary rural utilities, Counterparties National Rural Utilities Cooperative Finance Corporation and Cold Lake.
Also included in our new rural utilities volume growth at $64 million of loan purchases that support the rural NRG initiatives and our strategic plan.
The pipeline on the renewable energy sector remains strong as our rural utilities team has been doing an outstanding job of enhancing our foundation and infrastructure to build its reputation as a key player in the renewable energy market.
Partially offsetting the record $2 1 billion in net loan purchase growth for scheduled maturities and repayments in our institutional credit line of business.
Our institutional credit line of business experienced a net decrease of $701 million in 2020.
Primarily due to the reduced need for incremental liquidity from some of our larger AG vantage customers.
We continue to see significant liquidity support on the market, which is a direct result of the federal reserve actions to continue to facilitate the functioning of the capital markets.
As such investment grade credit spreads for large financial institutions remain at historically low levels.
We do continue to look for new and innovative ways to support these customers other liquidity directly provide financial support to farmers ranchers and rural communities in the sector we serve.
However, we also must be appropriate stewards of our capital and in times like these where there is significant available liquidity for these customers. We tactically must determined winter refinanced maturing securities based on the current market price and return dynamics.
As marketing conditions and credit spreads moderate over time, we expect to continue to broaden our relationships with these important customers.
In 2020, some financial institutions did pause capital deployment to the sectors, we serve given the impacts associated with the pandemic. However.
However, the core agricultural and rural utilities lenders continues to be continue to compete for transactions, which in many cases is causing competitive pressure in terms of price structure and execution in closing.
We will continue to work alongside our growing customer base and build upon on a more dynamic and responsive business model that has led to improved customer satisfaction volume retention penetration in existing and new market entry.
And transformed the way we deliver upon our mission.
During 2020, we tested on our infrastructure by upgrading technology platforms processes and product offerings to improve the customer experience.
For example in the fourth quarter of 2020, we increase the eligible loan size for our AG Express scorecard products from $750000 to $1 5 million.
Product enhancement has allowed our lender network that provides faster execution further borrower and is thus yielded increased volume and positive feedback from our customers.
In fact during the fourth quarter of 2020, the first for quarter excuse me first full quarter, incorporating the larger eligible loans on it.
Average approximately 120 aggregate suppress loan applications per month, well above the overall 2014 average of 84 loan applications.
In addition, a total add express loan application volume for the fourth quarter of 2020 with approximately $220 million, which is about 45% of the total I Express loan application volume for the entire year of 2020.
According to its popular underwriting solution as a major part of our strategic plan to broaden and deepen our business and we are on track for an entirely new online portal for submitting Aegean Express launch this spring.
This newly redesigned <unk> express origination platform will provide customers a new online pathway to sell loans to farmer Mac using enhanced technology and processes.
By bringing this platform fully online we are on the path to becoming a more commercial and efficient.
Ultimately, helping us fully deliver upon our mission.
I expressed as one of the many product offerings, we provide for smart support for small farm and family farms in this challenging environment.
During 2020, approximately 50% of the total number of loans purchased in the farm <unk> Ranch.
Line of business, where loans to small bonds.
Which is the prime day as farm debt generated less than $350000 and annual gross sales of agricultural products.
We continue to innovate product offerings on the financing solutions that allow our lenders to support small farmers and family farms, especially in this challenging environment.
As we look to 2008 2021 on beyond I am extremely excited and energized about our multiple growth opportunities, but also our ability to continues to support our customers in such a challenging environment, we consistently listen to our customers and find innovative ways to support and meet their financing needs.
We are focused on executing a straightforward customer oriented strategy and we believe continued execution of this strategy will enable long term growth profitability and create value for all of our stakeholders, but more importantly allow us to fill fulfill our mission and the more holistic way.
I'll turn it back to you know Brad.
Thanks very much.
I'm going to turn to Jackson.
Packaged in a moment here to give you a overview of what's going on in the agricultural economy, but before I do I'd like to just mentioned debt. We do anticipate that we will have a new chief credit officer.
Starting at farmer Mac.
In the next couple of weeks I look for.
Forward to introducing that new chief credit officer to you.
As soon as possible, but in the meantime, I'd really like to commend the credit team and that includes my Jurgens, Danny Odom adult Gustafson, along with Rob mains in our enterprise risk officer, who stepped into.
We've got good bench strength here at farmer, Mac and they've done a wonderful job to assure that we provide consistent underwriting.
And consistent application of our underwriting standards to our business.
And with that I'd like to turn to Jackson, our chief economist to give you an update on what's going on out there in agricultural economy Jackson.
Thank you Brad like most industries, the agricultural and rural economies experienced heightened volatility in 2020, the COVID-19, pandemic reshaped food and fuel demand in the early and middle parts of the year, putting considerable stress on the U S food supply chain occur.
According to U S census, data sales to food and beverage places fell by 53% compared with a year earlier.
D. C report showed outbreaks occurred in more than 200 meat and poultry processing facilities, forcing many to restrict output or close entirely for a short period of time in April and May of 2020.
Plant closures led to increases in food prices and decreases in livestock prices, both detrimental to local and national economies.
Demand for core range like corn, and soybeans dropped in mid 2020 with fewer miles driven hitting ethanol production and stiff competition from Brazil, driving down export demand for soybeans.
87% of all COVID-19 related farmer Mac loan payment deferrals were approved during the second and third quarters of 2020 due to the unpredictable conditions.
Despite these pressures early in the year, the agricultural and food sectors endured with a rebound in economic condition to end 2020 <unk>.
He consumption at home Rose considerably U S census data shows an 11% increase in sales at food and beverage stores in 2020 compared to 2019.
The SDA research demonstrates that farmers and food processors take a higher net margin of the food dollar spent at home. So the shift of consumer spending to food at home could offset some or all of the losses from sales to restaurants and schools.
Consumer mobility increased steadily in the second half of 2020, we're storing fuel demand and pushing ethanol production back to 88% of 2019 levels by December.
Our record setting government support payments to farmers and ranchers helped to offset the midyear disruptions. The USDA estimates total foreign program payments to farmers at over $46 billion for the year, a combination of cyclical farm programs payments from the trade oriented market facilitation program or MFP forgivable loans.
From the Paycheck protection program or PPP, and two rounds of Corona virus food assistance program payments or <unk>.
Finally reduced global supply of grains and increased export demand for grade.
Line to push world grain prices to seven year highs.
CA corn and soybean cash price indices closed the year, 30% and 42% above 2019 levels respectively.
On the major agricultural commodity is only cattle and dairy prices did not end the year higher than when it began.
Higher commodity prices combined with elevated government support payments lifted farm income and profitability in 2020 USD.
USDA projections for net farm income and net cash farm income in 2020 of the highest levels since 2013 at $121 $1 billion and $136 2 billion respectively.
The benchmark $100 billion is an average year for farm income. So both 2020 metrics are well above historical averages.
In nominal terms the Usda's estimate for 2020 net cash farm income will set a new high if it holds beating out 2014, the peak of the agricultural Super cycle.
Total USDA estimates for 2021 show a stable income outlook of 111 $4 billion in net farm income and $128 $3 billion in net cash farm income due to a sizable reduction in government support payments, but an offsetting increase in green cash receipts.
The USDA projects, a more typical year for government program payments in 2021, However, additional government payments for feed programs disadvantage producers in carbon bank development could provide a lift to the agricultural economy.
Farmland values held steady throughout much of 2020 after rising at approximately the rate of inflation for the last two years.
In most regions USDA estimated farmland values average Ah they were flat to slightly increasing in 2020.
The COVID-19 pandemic slowed public auctions and sales in the first half of 2020, but transactions picked up in the third and fourth quarters and value has trended higher in the fourth quarter.
Data from the Chicago Fed show, an increase in Midwestern land values of 4% in the fourth quarter alone and.
An improved profitability outlook combined with low market interest rates could provide continued support for land values into 2021 February estimates from the USDA projected 2% increase in farm real estate.
Values in 2021.
Historically increases in farm real estate values lead to increases in farm real estate secured debt, increasing our primary market in which farmer Mac transaction.
The combination of higher profitability rising land values and lower interest rates had a net positive effect on credit conditions during the fourth quarter of 2020.
Portfolio substandard ratings and default rates were elevated for much of the year, but as conditions improve to these rates fell back below historical levels.
Loans rated sub standard represented three four percentage of the farm <unk> ranch portfolio as of December 31, 2020, with risk rating upgrades and permanent plantings crops and livestock loans driving the improvement.
44% of the loans past due 90 days or more in the third quarter of 2020 cured or paid off by December 31, 2020, driving the percentage of loans seriously delinquent down to 0.54% of the farm <unk> Ranch books, or two 1% of all loans and guarantees.
It remains a significant concentration and seriously delinquent loans at the top 10 borrower exposures represent more than half of the 90 day delinquencies as of December 31 2020.
One large exposure to a specialized poultry processing facility remains the largest single exposure within the delinquent volume and the same loan resulted in the $5 4 million dollar charge off it looked in the fourth quarter.
Adverse credit activity in the fourth quarter is specific to individual conditions and not systemic risk evidenced by low overall default and charge off rates outside of this one specialized facility loan.
The World Energy industry has less cyclicality in the agricultural sector, but does trend with conditions and the general economy.
For levels of unemployment and adverse credit markets are typically associated with drops in energy demand such as lower commercial industrial or residential demand and increases in industrial ratings downgrades.
The economic distress caused by the COVID-19 pandemic has led to historic levels of unemployment as well as reduced energy demand from the commercial and industrial sectors. However, residential sales during the same period were up 2% compared to 2019 as resident spent more time at home during state local and self imposed quarantines.
Residential power sales are typically more profitable than those for our commercial and industrial consumers.
The recent Arctic freeze highly disrupted the power markets across Texas, but through February 25th we are not aware of any damage from the weather event that would result in a material credit losses.
Economic stress in the rural electric markets remain elevated but farmer Mac has not observed material degradation in the financial performance of its rural utilities portfolio.
While COVID-19 and related economic conditions continued to add uncertainty and volatility to the food agricultural and rural energy sectors. They all enter 2021 from a position of relative strength and farmer Mac has positioned to further that stability and with that I'll turn it back to you Brad.
Thank you Jackson.
Credit events at farmer, Mac, historically been unique to each business and in many cases to each individual borrower and that was certainly the case with the credit that we took a write down that we took at the end of 2020, which by the way was the same credit on which we took the <unk>.
Additional allowance at the end of 2019.
As is the case with our provision on the fourth quarter.
The increase in the total allowance for losses was primarily due to a borrower specific factor.
We really don't see this linked at all to macroeconomic or systemic factors on the overall agricultural economy.
And I hasten to add that we do remain committed to our historically high standards of credit quality, we have not changed our underwriting standards, but as we do look at ways to further execute on our mission and provide credit.
Two different parts of Rural America, there may be some circumstances on which farmer macs risk tolerance needs to flux to accommodate different agricultural conditions are borrowers.
When we evaluate these situations.
They will be assessed with diligence of care, that's led to our strong historical results and we will price for any additional risks that we take some.
Is that on a risk adjusted basis.
We have an expected outcome that is comparable to or even better than what we have on the overall current book of business.
And with that I'll turn the call over to appear on our Chief financial officer to discuss our financial results in more detail our Parnell.
Thank you Brad.
Before we get started with our financial results I wanted to comment that January 2021 marks my first year with common back as CFO.
Over the years farmer Mac performed exceptionally well despite the enormous challenges, we all face as a nation.
Our results and performance during 2020 reinforced the reasons why I just picked out to join US on May 19, which stems from our strategic vision strong caliber of the team.
Our dedication most importantly to our mission of providing low cost credit to Rural America.
Incredibly proud to be a part of this team and I look forward to continuing to collectively execute on on exact exciting vision and 2021.
So for it goes into the annual results I'd like to provide a few highlights around our fourth quarter results.
For earnings with $26 $4 million on $2.45 per share as compared to $27 $7 million in third quarter 2000 for banking.
Net effective spread increased 5% sequentially to $54 $5 million and our outstanding business volume.
$65 2 million for some time.
Tokyo 2020 to $21 $9 billion, primarily due to repayments and maturities in our institutional credit line of business as I've mentioned, the fed's intervention and stabilizing market conditions develop.
Good and other sources of alternative and cheaper funding for non tobacco.
Yes.
Turning to our 2020 full year results, earning for strong and driven by growth in higher spread business volume continued disciplined general and administrative or G&A expense control and.
We saw substantially lower funding costs, given us strong access to debt capital market and the strong relationships that we have maintained and built without them that showcase our access to the capital markets remain strong throughout this unprecedented deal.
Should that daily and we continue to maintain our disciplined asset liability management policies and practices that interest.
And a consistent net effective spread.
Farmer Mac's net effective spread for 2021 $97 million.
This represents a 17% increase from $168 6 million in 2019 in percentage terms net effective spread improved to 93 basis points compared to 91 basis points left you.
The $28 $3 million for your increase in any yet.
New highest spec business volume as well as a decrease in non-GAAP funding costs on.
Our effective use of callable debt instruments to mitigate prepayment risk for low interest rate environment has allowed us to widen our overall spread in 2020.
Total bonds have proven to be a very attractive tool for us and hedging downside interest rate risk and we have seen a substantial price either for that optionality.
I think for best for Steepening yield curve, especially at the long end of the curve.
We are very carefully analyzing on duration and convexity matches on both sides of the balance sheet to ensure that the minimized our interest rate risk as rates rise.
In general on net effective spread as well cushioned against rising rates.
We're also seeing strong demand and pricing success at the long end of the curve and our debt funding, which should help us as the income statement.
Just to give you a little additional perspective throughout 2020, we felt very favorable pricing and demand for our debt and the greater than 60 attendance, especially and in these tenders. We added 1 billion for more than 2020, I think that 2000.
19.
I mentioned previously the option on our callable issuances remain true.
Practice.
And even if rates rise it would be a good hedge for us against the payments if the rate and then do you mean flat for decreases.
The disciplined approach of managing our portfolio duration and convexity.
Has allowed us to have a consistent performance in our net effective spread.
Turning to core earnings now of core earnings for 2020 grew 7% as Brad mentioned to a record $106 million and this is $9 or 33 cents per diluted common share compared to $93 $7 million on core earnings.
On $8.70 per diluted common share in 2019, the year over year increase in core earnings was primarily due to the increase in any assets that I mentioned previously which are.
Partially offset by $7 5 million after tax increase in operating expenses.
These increases are related to continued investments in compensation and employee benefits.
So for a $3 $9 million increased stock dividends due to the two issuances that we did in 2023.
$3 6 million after tax increase in the provision for loan losses.
Operating expenses increased by 18% in 2020 compared to 2019 and this is primarily due to increased head count high bonus expenses and one time separation payments to an executive who resigned during the first quarter of 2020.
G&A expenses modestly increased relative to last year due to increased spending on licenses for software technology and these were offset by lower levels of expenses related to consulting fees travel and conferences.
I should note that the reduction in such expenses as he was temporary and we expect these to normalize post pandemic once normal activity.
We plan to continue such investments for the foreseeable future primarily to modernize our infrastructure and handset technology platforms that will support our revenue strategies to attack all planned and we'll continue to add relevant talent across the organization.
While we expect these efforts to continue and increase over the next 12 to 18 months as we continue to innovate and grow our business. We will continue to closely monitor our efficiency ratio, which ended the year at 27%, which was one percentage point higher than in 2019.
Going forward, we expect operating expenses to increase commensurately with revenue growth, but to stay within a range that is consistent with our historical performance, we intend to stay below a 30% operating efficiency level.
We also foresee that over time and as we scale our business using technology that people start to get even more efficient in the execution of our business and it is very likely that our efficiency ratio will stabilize at historical levels.
As of December 31st 2020, the total allowance for losses was $17 $6 million interest represents an increase of $5 million from December 31st 2019.
As we've mentioned to you previously we adopted and implemented on January one 2020, and we had a fairly significant reserve in the first half with you and this is mainly due to pandemic related deterioration of economic forecast.
Those increases started.
Low in the second half for thank you as macroeconomic conditions and related forecast improved and as the parameters of problem loans remains strong.
How about the net new loan volume growth in the rural utilities portfolio.
And the impact for the previously mentioned specialized poultry loan contributed to the overall increase on the allowance for loan losses.
Farmer Mac also recorded a direct charge offs for $5 8 million.
Primarily related to the same favorite poultry loan debt farmer Mac is deemed a portion to be uncollectible at this point in time and this is really just due to the specialized nature of the facility.
Under the accounting standard the highly specialized nature of power generation and transmission utilities results in significant losses, given default estimates that drive our model assumptions.
This is true even though the actual probability of default is very low and it's important to note that as of December 31st 2020, farmer Mac's $2 $8 billion and outstanding really get Timothy loan purchases and long term standby purchase commitments have no historic or current delinquencies.
Likewise, our farmer Mac farm <unk> ranch portfolio continues to perform very well and our sub standard assets and 90 day delinquencies remain below historical levels adjusted right.
Turning to capital.
We remain on extremely well capitalized for absolute financial institution with strong liquidity and a robust balance sheet farmer Mac's $1 billion of core capital as of December 31st 2020 exceeded our statutory requirement by $325 million of 40%. This brings our tier one capital ratio.
To $14 one per cent from 12, 9% and this represents an increase of one 2% from the prior year.
On the credit did just strong retained earnings as well as the successful issuance of two separate tranches of preferred stock.
To provide additional detail on these two issuances, we did on $18 million series E preferred stock issued for me and $120 million T vs. Extra put stock in August both of these issuances.
Described and the favorable levels of pricing relative to private issuances given that we also redeemed our series a preferred stock.
The pricing that we received on our series F issuance in August.
On liquidity as I mentioned remains strong and its far exceeds our regulatory requirement heading into 2021.
We'll continue to maintain a higher than required level of cash as we've talked throughout in 2020, and they should bolster on liquidity and allow us to weather any unexpected cash flow shocks given continuing economic uncertainty.
Also allow us to adequately fund deferment should we need to to meet our customers' needs and it'll help us retain the flexibility to maintain lower but unbilled.
Simple levels of liquidity as market conditions change.
I've mentioned, we are very pleased to announce each cent per share increase in our first quarter common stock dividend. This would result in a total of 80 cents per share and it represents a 10% increase from a year ago and an annualized dividend yield on our classic common stock or approximately 4% based on the.
The average closing price.
We believe that our strong earnings and capital position support this dividend increase and our long term target payout of 35% of core earnings.
Conclusion, we finished the year on a strong note with record earnings.
Visit volume demand and uninterrupted access to debt capital market.
Look forward to our near term and long term growth opportunities with a firm belief that on liquidity and capital position will enable us to navigate uncertain times day effect.
And with that Brad I'll turn it back to you.
Yeah.
Our partner Thank you very much.
We've given you a bit more detail on our comments today and I know, we're eager to turn to your questions. So really I just like to leave you with.
My closing thoughts.
That is that farmer Mac is really our mission and purpose driven company.
We are here determined to improve the economic conditions of Rural America.
Increasing the availability and reducing the cost of credit for farmers for reinsurance for Agribusinesses.
Infrastructure that supports them.
We do this with a disciplined and allows consistent and predictable returns to our shareholders as opposed to extent possible.
I have the utmost confidence that we have the right team in place to continue executing on this so that we can take farmer Mac.
For the next level, while continuing to produce strong financial results strong shareholder value and we can do that while strengthening the communities and our customers across Rural America, whom we serve.
And so with that operator, I'd like to know on soup, we have any questions.
In response to these comments thank you.
And we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble the roster.
And our first question today will come from Greg <unk> with Sidoti. Please go ahead.
Hey, guys. Thanks for taking my questions.
Just a couple of questions I had first of all I don't want to oversimplify the.
The 90 day delinquency trend and I know you gave some color on the press release, but it is that when you guys mentioned commodity groups.
And then you talked about the storage processing facility is it fair to say you got.
Relief commodity groups from the higher commodity prices is that the general underlying trend there.
Hey, Greg Brad here, and thanks, very much for coming on today.
Yeah, our 90 day delinquencies have trended down or classified credit has trended down.
So.
That trend in positive directions.
We really can't point to any one commodity group debt as a result of that.
As you know, we historically have not had any delinquencies in our rural infrastructure portfolio that continues to be the case.
In our institutional credit, we really don't have it. So you know when we talk about these delinquencies were talking about the farm and ranch portfolios.
And as you know, it's well diversified 'twenty.
23% something like that upper Midwest 25 per cent, California. It's also very well diversified by different crop types are over 100 different crop types financed.
My farmer Mac so.
To try to say that is attributable to.
Any one commodity really doesn't work, but I would add debt during 2020.
Did see a record level of federal transfer payments under a couple of different programs, including those intended to.
Help address.
Financial issues associated with tariffs imposed imposition of tariffs and also.
From COVID-19, and those transfer payments ended up being at a record level and contributed to farm income being at a record level at least for the.
Through the last cycle I think we'd have to look back to 2012 2013 before we saw anything close to what we had this last year. So looking ahead. This year, we do see an expectation of some continuation of those payments, although not quite at the same levels.
And we haven't forecast as Jackson mentioned for <unk>.
Strong net farm income in 2021.
In great part attributable to very very strong rally in many agricultural commodity prices over the last quarter. So the fundamentals are really showing up yet.
On the economic health of American Agriculture, and of course, that's what farmers want and that's what we like to see.
Okay, Great. That's helpful. And then just moving over just it looks like for the year, you had about $64 million in solar and wind I guess the majority of that solar how should we be thinking about that you mentioned earlier a team in place and just kind of.
How the outlook, how should we be thinking about the outlook in 2021.
Sure Yes, the majority of that was solar we actually did close one wind transaction.
But our.
Our expectations are going forward is primarily in the great majority.
Solar finance opportunities.
Overtime, we expect debt that will be a growing line of business.
Certainly do administration by the administration is putting an emphasis on renewable energy and decarbonization of the economy.
We havent seen specific policy proposals, yet that might drive that but I think the general tone of the political climate is.
Sure. It makes us very bullish for renewable energy so as you know.
Earlier in 2020, when we really.
Had our systems and some of our master agreements in place.
Start generating business.
We fully expect debt.
Over the course of 2021 and into future years that we will see continued growth in that business, you know looking out five years or more.
It will become.
A very important line of business at farmer Mac that begins to move.
Moving to Neil So where we're happy with the 64 million in 2020.
And then how long Uh huh.
How far out is it typical solar day I'll go or is it too early to.
No no not at all.
So the solar project for the answers that were due our classic project finance.
These are loans that are underwritten to credit metrics that are you know if you pulled out.
Moody's or S&P report on typical underwriting metrics for.
Large scale.
Solar project Peninsula R. R.
Guidelines are very much in line for that so one of the principles evidence that generally the loans are amortizing over the life of the fixed price power purchase contract on that facility. Sometimes that's 15 years, sometimes that's 20 years, sometimes it's even 25 years.
So typically the amortization is against Ah, it's variable quarter to quarter against the projected cash flow on the facility. Obviously, a solar facility is going to produce.
Produce a bit less than most.
Climates, most environments in the winter than the summer.
So the amortization of Sculpsure to maintain our anticipated comp.
Constant a fixed coverage ratio and amortized fully over the life of the contract so that by the time that power purchase contract is expired 15, 2025 years out or alone is fully amortized and retired.
These loans are fixed rate and we typically have very strong prepayment protection on them. So these phones actually become some of the most.
Predictable performers from a non prepayment standpoint in the portfolio.
Right. That's helpful. And then just one more just on the expenses did I hear correctly in the sense that expenses are expected to be maybe outsized for the next 12 to 18 months and then normalizing more in line with revenue growth from an operating expense standpoint.
Yeah, I think that was a basically a part of our.
I'll comment on that I think for you know a better part of two years now we have.
Tried to manage your understanding and expectations that we're going to be spending a bit more money investing in technology and.
Frankly, our comments were ahead of our actual ability to spend money in 2019.
And our efficiency ratio gravitated towards I think it was about 26% that year. This year, we did start getting some of those expenditures primarily on the from pharma investment in our in our platform and a lot of that was you know hiring of new people, particularly in it and project.
Management.
And we do it.
Expense, we did question them up with debt.
Pardon I said there were about 27 per cent on efficiency ratio standpoint that is expenses for assets.
Last year and.
Or is she also mentioned we're going to keep that under 30% I think for the next year you know.
27%, maybe even 28 per cent is what you would expect to see but then a greater efficiencies should kick in from these are the investments that we're making and it should start gradually trending down on an efficiency ratio standpoint.
That's helpful. Thanks, a lot.
And again, if you'd like to ask a question. Please press Star then one.
Our next question will come from Harry Gorman with Terry Goldman Investor. Please go ahead.
Okay. Thank you I.
I saw your your interest spreads obviously widened out in Q3, and then again in Q4.
On the lines of business. It looked like a lot of it came from our U S D a portfolio in the utilities portfolio.
So maybe you could talk a little about what was going on in those two portfolios to widen the spread.
Yeah.