Q2 2021 Federal Agricultural Mortgage Corp Earnings Call

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It may contain forward looking statements about the company's business strategies and prospects, which are based on management's current expectations and assumptions. These statements are not a guarantee of future performance and are subject to the risks and uncertainties that could cause our actual results to differ materially from those projected please refer to farmer Mac and <unk>.

20th annual report and subsequent SEC filings for a full discussion of the Companys risk factors on today's call. We will also be discussing certain non-GAAP financial measures disclosures and reconciliations of these non-GAAP measures can be found and 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.

Joining us for management and this afternoon are our president and Chief Executive Officer, Brad normal, who will discuss second quarter business and financial highlights and strategic objectives, and our Chief financial Officer of Parnell, Ramesh, who will provide greater detail on our financial performance select members of our management team will also be joining us for the question.

And answer period at this time and I'll turn the call over to our president and CEO, Brad and or at home Bret.

Well, thanks, very much good afternoon, everyone and thank you for joining us today.

I'm pleased to report that farmer Mac produced record core earnings this quarter.

We did that while expanding our net effective spread maintaining strong credit quality and for.

Further rationalizing our portfolio and in ways that are very consistent with our strategic plan.

These results largely reflect the continuation of the trends that have developed over the course of the last few years and <unk>.

Quoting excellent funding execution and the debt capital markets.

Upon the asset liability management.

And the ongoing shift and the composition of our portfolio.

For its higher spread loans purchase products.

We achieved record core earnings of $30 million during the second quarter.

And net effective spread above 1% for the first time and a number of years.

Our asset quality metrics remained strong with 90 day delinquencies and substandard asset ratios.

Moving favorably and other words, moving lower quarter over quarter.

And we're pleased with and overall performance for the portfolio.

And as you've probably read and the news, while the persistence of drought conditions and the certain parts of the American west are causing real pain real hardship for a number of farmers and ranchers and America west.

Particular on California, we really have not seen any evidence of this and our portfolio.

For loans and areas to commonly experienced exceptional drought conditions.

Or do not always have access to underground water as a primary or supplemental source farmer.

Farmer Mac's underwriting process provides for the assessment of anticipated long term water availability for the property.

And includes analysis on how that impacts the collateral value and the borrowers cash flow.

While we paid close attention to what is going on in America, and agriculture, and empathize strongly with people who are experiencing drought conditions.

We must state emphatically that the overall tone.

Agricultural real estate market today is very positive.

Commodity prices are strong and farmland values are projected to be stable or even slightly higher.

As we're seeing evidence of that and numerous public auctions and sales and in fact, a few of them have record high sales prices.

During this last quarter, we provided a growth $1.5 billion of new credit to Rural America.

This resulted in our extending business volume exceeding $22 billion at quarter end.

Our success continues to be driven by consistent customer centric approach.

Which focuses on providing products and solutions that address funding needs through all agricultural economic cycles and.

And to both our existing and our new markets.

Strong loan purchase growth and our farm and ranch and line of business. This quarter was largely attributable to our proactive outreach to our customers.

Farm and ranch as long term standby purchase commitment product also accept that and some growth.

A reversal from prior quarters.

Regional farm credit system associations.

Growth within our core sectors resulted and lenders.

Feeding commodity concentration limits and requiring additional need for capital relief.

And that is provided by farmer Mac's purchase commitment product.

Across our other lines of business, we continue to see increased levels of competition in terms of price structure and execution, primarily due to the historically low interest rate environment and the rate Federal reserve banks continued support of the lending market.

And our USDA guarantees line of business. In addition increased competition, we're seeing lower demand for the product and shirt.

Regions due to strong increase in commodity prices and other words because for it.

Farmers' financial health is stronger they need the guaranteed program less.

This has also resulted in a higher increase and the high coupon and USDA loans paying off compared to 2020.

Although we've seen maturities our institutional credit line of business.

We did successfully fund for new AG vantage bonds with our rural infrastructure counterparty.

For an aggregate amount of $375 million.

We also funded a $25 million advantaged bond with a new counterparty that we believe offer significant agricultural.

Holdings and growth potential.

The successful funding execution of these institutional counterparties.

As a testament to farmer Mac's focus on expanding its customer and business relationships.

And challenging ourselves to find more efficient and effective ways to provide our customers with.

With the flexibility and assistance their borrowers need.

We have stated in the past that we won't do AG advantage when the margins are too thin.

Quarter, we were able to find a number of situations where that wasn't the case.

While we had limited loan purchase activity other closed from a rural utility Counterparties.

We do see positive momentum and the broadband and renewable energy project finance pipeline.

We view this growing sector has significant opportunity for farmer Mac over the next several years given the greater level of interest from rural electric cooperatives to develop and deploy broadband services and invest renewable energy generation as well as renewed interest from a federal policy perspective and <unk>.

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When I joined farmer Mac nearly 3 years ago.

I took steps to do a couple of simple things at farmer Mac among them.

Farmer Mac, a more commercial institution, making sure that we were listening to and responding to the needs of our customers.

And coming up with more competitive and.

And responsive products and delivery systems.

This vision really had attached to it meaningful business volume objectives that required our team to develop innovative approaches and how we acquire and retain customers and how we develop and deliver new products.

We also took into consideration the appropriate investments in people and infrastructure required to meet our long term plans.

I am really proud to say that our consistent financial performance.

Over the last 3 years.

And effective execution and a highly competitive lending environment, where there's an abundance of liquidity each day.

Is the direct result of the team's dedication to <unk>.

To successfully broadening and deepening our business that's come about by learning to listen to and respond to our customers' needs.

This ultimately helps us support our mission.

Developing and delivering more credit products that are a benefit to all of rural America.

As part of our efforts to identify opportunities to reach a larger audience.

We recently engaged and that joint marketing campaign to promote our white paper that we call authored with American Bankers Association.

It's available on our website.

The multi week promotional campaign and is intended to shine light on agricultural mortgage market and the United States and farmer Mac's role and helping agricultural lenders grow their business and relationship with the customers ultimately to benefit all of those and rural America.

This is Ben and an exciting opportunity for farmer Mac to demonstrate to a wider audience. How our mission is helping create tangible benefits and <unk>.

Culture marketplace.

So in summary, we are very pleased with our second quarter results and we generally expect the positive trends, we've seen and the first half of 2021 to continue.

While the emergence of the Delta variant and create some level of near term uncertainty, we're confident that our current infrastructure strong capital position and <unk>.

And to our customers.

Well, if our employees resilience and demonstrated ability to execute on our plans while.

Working from home.

And is going to help us navigate whatever comes our way during the remainder of the year.

And with that I'd like to turn the call over to our par and our Chief financial Officer to give you a little bit of additional insight into the financial results for the quarter.

Alright.

Thank you Brad and good afternoon, everyone.

I'm pleased to share with your common that's a record second quarter for this.

It reflects focused execution throughout the organization and flat just noted.

And my second quarter 2021 earnings growth.

It was driven by highest credit business volume.

Substantially lower funding costs, given us strong access to debt capital market.

Return on equity flow.

On stockholder with 18% year to date and this is well in line for that historical average.

Despite the continued investments, we're making took their foot on strategic growth initiatives.

Notably, we exceeded a 100 basis points this quarter for net effective spread and that's it.

You did on 90 basis points, plus or -5 basis points guidance.

You had previously provided.

Capital markets remain for.

We issued that daily and we preferred capital of 125 million and historically low rates for a.

And we've continued to maintain a disciplined asset liability management practices.

And cool and methodical transition out.

For <unk> instrument.

So year to date average balance spread on.

On the assets with $22.3 billion.

Which is comprised of $4.8 billion and cash and investments and $17.5 billion of loans and for Jackie.

Farmer Mac's net effective spread for second quarter 2021.

$56.6 million.

A 22% increase for $46.5 million and second quarter, 2020 and percentage terms. This translates to a net effective spread that I mentioned previously of 1.1% Covid highly favorably beautiful 8.9% and the same period last year.

Overall compositional shift this quarter for $395 million.

Net new highest credit farm and ranch loan purchase product.

And with a net decline of $100 million and advantage bonds, but on Lewis credit.

Combined with our effective on the execution with the primary drivers of our record net effective spread increased during the quarter. You have to date, we have successfully issued $6.6 billion and long term debt funding across for the Cherokee spectrum with increases in the pipe line and great for Daniel.

And by extending our liabilities, we were able to adequately prepare for potential environment and pricing levels that are better your profit.

We're also actively analyzing our duration and convexity marches on both on existing portfolio and pipeline to win.

And so duffy and minimize our interest rate growth and the event of a sustained rise and interest rates.

Turning to quote on it.

Core earnings for second quarter, 2021 grew 14% to put $10 million or $2.77 per diluted common share.

$2006.3 million for $2.45 per diluted common share and the same period last year for you.

The increase and core earnings was primarily due to an $8 million after tax increase and net effective credit and this was partially offset by $2.2 million to other after tax increase and operating expenses and $1.9 million increase and preferred stock dividends from our recent series G preferred issue.

Our operating expenses increased by 20% year over year and this was primarily due to increased head count and higher spending on software licenses and consult and information technology consulting to support various core and strategic initiatives.

These increases were offset by lower levels of expenses that were related to consulting fees travel and consciously.

However, and as we've mentioned previously these decreases all day likely to be temporary unexpected for normalized post pandemic once normal activity.

We expect to see higher investments for the foreseeable future primarily to modernize their infrastructure to enhance our technology platform to support our revenue strategy and.

And we'll continue to add.

And across the optimization of the growth while we expect these assets increase over the next 12 to 18 months as we innovate and grow our business, we do expect to see a tapering off and expense growth.

We have instituted a very disciplined approach to controlling both our personnel and non personnel expenses and we monitor our operating expense Alicia we do a thorough and rigorous review of our results each quarter at the management team on.

The efficiency ratio and the second quarter 2021 at 26% and this was below our targets plug and perf.

And level.

We continue to upgrade our platforms and invest strategically and multiyear technology commitment.

We hope will improve customer service and our competitive position on.

Wyszynski machines are projected to stabilize at historical levels and remain under 30%.

We benefited from an improving macro environment.

And then $5 million.

Our total allowance for credit losses for March 31st 2021, bringing us to $16.6 million.

June 'twenty 'twenty 1.

Turning now to capital and we Opportunistically strengthened our capital levels through our successful issuance of $125 million and Cds.

He and his team quickly talk on the property for me.

The addition of Quickbooks capital.

And with a strong increase our tier 1 capital ratio in the quarter.

14% as of March 31 to.

For 15, 3% as of June 21.

And that $1.2 billion of core capital as of June 30 of 2021.

And our statutory requirement by $483 million for 71%, putting us and a very robust provision.

Additionally, and March 2021, our board of directors reinstated our share repurchase program, which had been suspended since the first quarter of 2020.

The plan was reinstated on its previous zone and has a remaining authorization of up to $9 equal and dollars.

And and extended exploration date of the program March 2020, 2 we have not repurchased any shares and the first half of 2021, and the box and will affect the intent to repurchase stock.

We view repurchases I spoke accretive and consistent with our strategic objective.

Overall and in conclusion, we are very pleased with the consistency and other South Dakota and this is reflected both on our profitability and it's posted consistent credit quality and our capital adequacy.

More complete information about farmer Mac's second quarter 2021 per common and our 10-Q, we filed today with the SEC and.

And but that Brad touched on the platform.

Great. Thanks, so much and Parnell.

The results we've generated thus far in 2021, I think are reflective of a business for farmer Mac business that can expand profitability.

While successfully surfing, our mission of increasing access to and reducing the cost of credit.

For the benefit of agriculture, and Americas Rural communities.

We continue to manage our capital prudently focused on consistently building shareholder holder value for the long term.

Additionally, we continue to develop peer leading operating efficiency, while making investments to position the company for continued growth as we see over the next few years.

Overall, I'm very very pleased with the results so far this year and very very.

I'm excited about the future that we have here at farmer Mac.

And now operator, I'd like to see if we have any questions from anyone on the line today. Thank you.

Excellent. Thank you, ladies and gentlemen, and the floor is now open for questions. If you do have a question. Please press star 1 on your telephone keypad at this time, if youre using a speakerphone and we just ask that while posing your question and just pick up your handset to provide favorable found quality once again, ladies and.

And if you do have a question or comment. Please press star 1 on your telephone keypad at this time, please hold as we poll for questions.

And.

And our first question comes from Greg <unk> with Sidoti. Please go ahead Sir.

Hey, guys. Thanks for taking my questions I guess, he got on assets because you're at.

And your highest net effective spread year.

And that we've seen and some time.

What is the scenario here that brings it down because I'm, assuming the farm and ranch side is rather sticky in terms of if you are putting on longer duration loans here, but is the most likely scenario that we see sort of decrease for liquidity in the system and mixed just hurts you with more institutional credit card.

Potentially coming back in other words total volumes will go up but your mix will have much lower spread business coming in there is that is that fair to say.

Yeah, Hey, Hey, Greg, It's Brad and.

<unk> always for your participation.

I appreciate the question and I'm going to ask Zack Carpenter to jump in here with a little different a little additional color on our portfolio composition of our assets next but I'd just note.

At the outset that.

And he asked is really driven by the whole portfolio. So when we price and assets that we put on that portfolio. It's staying there for a while so it moves up and down relatively slowly.

Obviously attractive or more attractive execution and the debt capital markets can also have a faster impact.

On it as we rollover maturities frankly, and the debt capital markets are spreads are at record lows right now so it's hard to see that we're going to see much.

<unk>.

Upward movement, and any us from rolling over maturities of debt instruments, and the debt capital markets.

But with that just as a as a little bit of a preface and common I'll turn to Zack carpenter to provide a little bit of discussion about how is that any assets.

Impacted by for example, above average growth and farm and ranch relative to the rest of the portfolio or above average growth and.

Agribusiness and larger complex credits for example, or maybe below average growth in rural utility and.

And lower margin assets that we have Zach or you are you available to jump in here.

Yes, Thanks, Brad and Greg Great question, and I think you've kind of hit it on the head with the compositional mix and we've seen.

2020.

Our balance sheet at least from a volume perspective shift and to these on balance sheet higher earning.

And assets and we continue to see strong growth and farm and ranch and a component of that farm and ranch businesses.

Our agribusiness value chain lending portfolio, which has significantly higher any yes compared to many of our other business lines and so as we get further into the year and put more loans on and that business, we're going to see some accretion higher and that space and that being said.

And at some point and time and we saw some positivity and our rural utilities advantaged products, those are lumpy and events and opportunities and they are much lower and yes then.

Some of our other portfolio so as we see some.

Changes in the capital markets that warrant us to help our customers and in that space. Those are lumpy pieces of volume that will tend to shift the NDS and he is.

Slower and then the other piece of the puzzle is our fee based and off balance sheet products right those are more.

And we kept a fee to those and as those decreasing and become a less of a component of it.

We see that fee business decrease, but the <unk> increase given the on balance sheet loans purchase products. So what I would say is we continue to see strong growth and farm <unk> ranch and on purchase and asking it and that's going to drive it going forward and some of the mix coming on from the AG vantage and and rural utilities loans that we would see later on this year would potentially.

Taper that off a bit but well we continue to see the strong growth on non.

Agribusiness line and that'll continue to help upward on the on the yes perspective.

That's very helpful. And then just just I guess some of the flow.

For the rural utilities some of that yes.

If there is.

And bill passed and that might be and I know it will take time.

If you are a beneficiary, but that's kind of the sweet spot is.

Is it fair to say within within your divisions there is for <unk>.

And infrastructure both perspective.

Yes.

Greg.

Most likely thing that we would see and an infrastructure bill that would.

Positively impact really until this portfolio would be around broadband and and renewable energy.

And both of those would have.

On the.

The renewable energy certainly has higher margins for broadband it would depend on what any kind of federal program or stimulus how it was structured and what it meant for credit quality, but.

And I think at this point, we would anticipate that both broadband and renewable energy over time over a few years.

And it could pick up nicely from.

The infrastructure Bill funding and that both could be further accretive to us obviously, we want to see the details of what's really in there and the feasibility of of what is and that federal.

Infrastructure plan.

And so it would relate to actual loan opportunities before really being confident and projected just how much that could be but.

Directionally, it's certainly positive.

That's very helpful. Thanks, a lot.

As a reminder, Thats star 1 if you do have a question or comment.

Yeah.

Okay.

And there appear to be no further questions at this time I'd like to turn the floor back over to Brad.

Well thank you.

You may have noted that we attempted to.

Make a few changes and our call today, we attempted to make it a little bit shorter.

Providing more time for questions or just for going home at 5 o'clock on a very very nice Thursday afternoon.

We appreciate your attendance very much.

We'll have our next regularly scheduled call in November when we will be reporting on our third quarter 2021 results.

We look forward to sharing information with you of course at that time and as always if you have questions you'd like to follow up with any additional.

Information and additional questions just get in touch with US we're always very pleased to speak with you.

So with that thank you very much and have a good evening.

Thank you, ladies and gentlemen, and this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.

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