Q3 2021 Federal Agricultural Mortgage Corp Earnings Call
Okay.
Good day and welcome to the farmer Mac third quarter 2021 earnings Conference call.
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Now I'd like to turn the conference over to a job when I was a director of Investor Relations and Finance strategy. Please go ahead. Good afternoon, and thank you for joining us for our third quarter 2021 earnings conference call I'm jumping Nazareth director of Investor Relations and finance strategy here at farmer Mac as we begin. Please note that the information provided during this call 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 we'd prefer to farmer Mac's 2020 annual report and subsequent S.
The SEC filings for a full discussion of the company's risk factors on today's call. We will also be discussing certain non-GAAP financial measures.
Closures and reconciliations of these non-GAAP measures can be found in our 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 from management. This afternoon are our president and CEO, Brad Northern who'll discuss third quarter business and financial highlights.
And strategic objectives, and our CFO apparent over mesh 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 I'll turn the call over to President and CEO, Brad nor at home right.
Thanks, Joe and good afternoon, everyone and thank you for joining us.
As you can see from this afternoon's press release, we're having another great year, thus far.
With many significant accomplishments, including the expansion of our internal loan servicing function.
In the third quarter and more recently getting of the fourth quarter, a newly structured syndicated agriculture mortgage backed securitization.
These accomplishments combined with our consistent financial performance and continued strong credit quality reflects our alignment with and our execution on our multiyear strategic plan.
We developed delivered another quarter of strong core earnings and net effective spread reflecting the disciplined structure of our asset liability management and pricing policies.
And the consistency and durability of our business model.
Our asset quality metrics remained strong with 90 day delinquencies and substandard asset ratios moving favorably on a quarter by quarter basis.
We're pleased with the overall portfolio performance and continue to see no material issues on the horizon.
Expanding our internal loan servicing capabilities through this quarter strategic acquisition reflects an opportunity for farmer Mac and will bring with it a myriad of benefits to our core customers.
The lending institutions are rural America, who are key parts of our seller servicer network.
We will use this opportunity to create greater efficiencies across our loan servicing platforms and we will harness this opportunity for more direct oversight.
The governance of a large part of our portfolio.
Giving us enhanced security more control over and timely access to data.
And better visibility into alone performance from inception to maturity.
We're also excited for the growth opportunities this strategic investment will enable as well as it will equip us with the talent and infrastructure to more effectively and efficiently service larger more complex commercial loans.
A key driver in our long term growth strategy.
This movement is an important example of our dual strategy is to broaden our business opportunities.
I'll also deepening relationships with our existing customers.
We believe that will ultimately enable us to provide increased capital to support Rural America and to deliver better customer service to our lender network in support of our ambition of increasing the access and competitive pricing for credit for the benefit of the country's farmers ranchers and.
Rural residents.
Okay.
I'm very proud of the $302 million newly structured and syndicated agricultural mortgage backed securitization that we closed in early October.
The success of this transaction is evidence of farmer Macs high quality credit our strong balance sheet and our consistent financial performance as well as the resilience of Americans farmers and ranchers.
Developing this capital flow to agricultural producers straight from the capital markets to them.
Exemplifies farmer Macs core mission to lower costs for empowers and improved credit availability.
While creating a well received a new investment opportunity for a leading institutional investors.
Apparel will provide more details on this transaction in a few minutes.
But looking ahead, we plan to build upon the securitization program over the next several years and eventually become a frequent issuer in the marketplace.
The overall tone of the agricultural real estate market remains positive.
Line values are projected to remain flat to slightly higher as we're seeing an increase in the number of public auctions with sales with some of the highest values of the year.
We've provided a gross $2 5 billion in new credit to Rural America in the third quarter, which resulted in outstanding business volume exceeded $23 billion at quarter end.
Our success continues to be driven by our consistent customer centric approach, which focuses on providing products and solutions that address funding needs through all agricultural economic cycles.
And that is to both existing as well as new markets.
Yeah.
Strong loan purchase growth and our farm and ranch line of business. This quarter was largely attributable to our proactive customer outreach and retention strategies.
We also added a net new $50 million commitment this quarter for a borrower to acquire and improve the economics of farmland in a federally designated opportunity zone.
This is our largest commitment to opportunity zones to date, and we funded $21 million of this commitment in the third quarter.
Farm and ranch as long term standby purchase commitment product also exhibited healthy growth reversing some of the general trends over the last years.
Regional farm credit system associations growth within their core sectors resulted in some of these lenders exceeding commodity concentration of moments.
Which provided an opportunity for farmer Mac to issue purchase commitments that provide relief from blending and concentration limits for these lenders.
Despite the ample supply of liquidity in the market from other sources, our institutional credit line of business grew over there or just under actually $500 million.
A reversal from prior quarters, largely driven by demand for short term liquidity funding by two of our largest counterparties.
This growth is a testament to farmer mac's ability to be competitive in price, while also being effective in execution to meet the needs of these customers and I might add while also being flexible and recognizing the needs of customers could change very rapidly.
In our rural utilities line of business, we successfully added $50 million of unfunded telecommunications loan commitments was one of our key customers.
This transaction reflects some of the positive momentum we've seen in broadband and renewable energy project finance.
We view these growing sectors as significant opportunities for farmer Mac over the next several years given the greater level of interest for rural electric cooperatives to develop and deploy broadband services and invest in renewable energy electric power generation.
As we look ahead to fourth quarter and build on the strategic plan and notable accomplishments of this quarter, we continue to see many opportunities.
We are confident the strength of our underlying business model, our strong capital position and our commitment to our customers. We will continue to support our ability to generate consistent returns.
Throughout various market environments and across economic cycles, as we have done historically.
With that I'd like to turn it over to a partner to discuss our financial results in more detail.
Thank you Brad and good afternoon, everyone I'm pleased to share with you another quarter of consistent earnings results, reflecting focused execution throughout the organization.
Farmer Mac's third quarter 2021 earnings result was driven by highest spread business volume and lower funding costs, given us strong access to debt capital markets.
Access to capital markets as the previous quarters remains extremely strong we've issued debt daily and continued to maintain our disciplined asset liability management practices, including a methodical transition out of LIBOR based issue.
Farmer Mac continues to increase activity in the social based asset debt and derivatives market and we've seen a significant uptick in silver activity, especially too in the derivatives market, which should aid the LIBOR transition in the loan market.
But year to date average balance of spread earning assets was $22 4 billion and this is comprised of $4 8 billion in cash and investments and $17 6 billion of loans and securities.
Farmer Mac's net effective spread for third quarter 2021 was $55 9 million.
This represents an 8% increase from $51 8 million in third quarter 2020 and.
In percentage terms net effective spread was <unk>, 99% compared to <unk>, 96% in the same period last year.
Year to date, our net effective spread has increased seven basis points.
Nine 9% compared to the same period last year and this is the result of net new business volume coupled with a decrease in funding costs.
There was also an increase in the cash collections accounts from <unk>.
Non accrual loan payments.
Effectively extending our liabilities in a low rate environment, we're able to adequately prepare for a potential rising rate environment, while retaining attractive pricing levels.
Also actively analyzing as I've mentioned before our duration and convexity matches on our existing portfolio and looking at our pipeline to ensure that we minimize our interest rate risk in the event of a sustained rise in interest rates.
Core earnings for third quarter, 2021 was $27 $6 million or $2 55 per diluted common share.
Third to $27 7 million.
Our $2 57 per diluted common share in the same period last year.
The year over year results were in line with our expectations and was driven by strong revenue increases in.
Core earnings were flat despite the increase in our cost of capital that resulted from our recent preferred issuance in the second quarter that we told you with that.
We saw a $3 3 million after tax increase in net effective spread and a <unk> 7 million after tax decrease in the provision for credit losses, and these were partially offset by $2 million after tax increase in operating expenses, a $1 6 million increase in preferred stock dividend.
And the zero point $3 million after tax decrease in guarantee fees.
Operating expenses increased by 17% year over year and this was primarily due to increased head count as well as higher spending on software licenses and information technology consultants that we brought on board to support various core and strategic initiatives.
The increase in head count in the third quarter was related to the expansion of our internal loan servicing function that Brad mentioned as we welcome 10 members of our talented loan servicing group to the farmer Mac team in August.
Their expertise will allow us to offer without interruption the same level of service and quality service that our customers deserve and expect whenever they interact with us.
Through any of our peers body central services the.
The additional loan servicing expenses are expected to be offset over a multiyear period by additional revenue that will be reflected in highest spreads in our farm <unk> ranch and USDA lines of business, where we will not be paying a third party to sell the single loan that we will now so.
And this should make this initiatives neutral in the short term to accretive for us.
We expect to see higher operating expenses for the foreseeable future and this is primarily as we invest to modernize our infrastructure and handset technology platforms to support our revenue strategy and AD relevance across the organization.
We expect these efforts to continue and increase over the next 12 to 18 months as we innovate and grow our business and we'll continue to monitor the growth in operating expenses such that they remained commensurate with the growth in our revenue.
We've instituted a very disciplined approach to controlling personnel and non personnel costs and we monitor this closely through an operating efficiency ratio metric and we do a rigorous review of our results every quarter.
Our efficiency ratio and the third quarter 2021, with a 27% below our targeted 30% level.
As we upgrade our platforms and invest strategically in multi year technology commitments to improve customer service and enhance our competitive position our efficiency ratios are projected to stabilize at historical levels and remain under 30%.
Turning now to capital from that remains in a strong and well capitalized regulatory capital position farmer Mac's $1 2 billion of core capital as of September 30th 2021 exceeded our statutory requirement by $418 million or 69% of tier one capital.
Ratio was 15, 1% at quarter end remaining well above regulatory thresholds.
I also want to review our two recent accomplishments that Brad highlighted earlier on first the strategic servicing transactions during the quarter, we acquired the loan servicing rights with sizable portion of our farm <unk> ranch loan and USDA portfolios and we hired as I mentioned, a talented team from the seller of the servicing rights and invested.
And a servicing platform that we update this.
This will increase our interest income on the loans that we do service as they will not be as I mentioned any third party central servicer, retaining a servicing fee on those assets.
This additional interest income is expected to be partially offset by the increase in our headcount related operating expenses that I mentioned earlier.
The second transaction said Brad highlighted.
Is a $302 7 million newly structured and syndicated agricultural mortgage backed securitization that took place on October 14th. This deal was structured around two tranches of senior guaranteed tranche and a subordinated I'm guaranteed crunch.
<unk> was very well received by the investment community and resulted in an oversubscription of up to $2 3 billion in total investor demand with repeated tightening of pricing levels.
First of this transaction has provided farmer Mac with an opportunity to diversify funding sources and its revenue and fulfill our mission more effectively we expect to return to the market in 2022 with another similar securitization as we seek to make this a more programmatic effort for us in the future and.
An inaugural securitization transaction is great deal of work enterprise wide and the currently identifying ways to potentially execute these transactions more efficiently and thereby more frequently in the future I'm.
I'm looking forward to providing you more financial details on this transaction during our next earnings conference call. When we will discuss full year 2021.
More complete information about farmer Mac's third quarter 2021 performance is in our 10-Q that would be filed today with the SEC and with that Brad I'll turn it back to you.
Thanks <unk>.
In summary, our third quarter results were strong and continue to demonstrate the strong foundation for physical data growth and earnings here at farmer Mac into the future.
We will continue to rely on the same principle of serving our mission of increasing access to and reducing the cost of capital for the benefit of agricultural rural communities and really the people who are there.
The agricultural economies, we continue to manage our capital prudently focused on consistently building shareholder value for the long run.
And delivering peer leading operating efficiency, while making investments to position. This company for continued growth.
We see over the next few years.
And now operator, I'd like to see if we have any questions from anyone on the line today.
Thank you we will now begin our question and answer session to asking question about those stores and one of them you touched on phone.
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And today's first question.
Thomas from Gerry Gould, Vice President Investor. Please go ahead.
Okay. Thanks for taking my question a couple of things if you don't mind.
One my math, hopefully I got it right says that a there were no charge offs in the third quarter or actually it looks like for the year to date.
Is that correct or am I missing something.
No Gary that is correct.
Okay terrific.
Second on the the.
Asset back securitization.
At least my understanding as reasons for doing it are lower financing costs or take some risk off the balance sheet and free up capital.
Farmer Mac, you've had excellent access to the markets and low cost of funds and plenty of excess capital.
So I guess I'm curious about why how that security securitization.
It helps you.
Yes, Gary and I'm going to ask apparently to jump in here and a medicine and elaborate some of these points, but you know when we think about.
The benefits that you just mentioned more financing cost free up capital.
Transfer.
Now that may be true, we haven't fully realized lower financing costs yet.
But as it becomes programmatically expect to come down, but another very important objective here Gary is for us to be always.
Diversifying and deepening our sources of funding.
At the beginning of the pandemic, we had ex <unk>.
Extraordinarily great access to debt capital in the markets.
We never take that for granted and by tapping into a different investor market for a different form of issuance by farmer Mac.
We can make sure that we have even further diversified and deepened.
Our sources of liquidity.
Let me just turn to a partner to kind of.
Elaborate on.
Some of these different benefits because they really are significant and over.
Over time, we expect them to become even more valuable to us.
Thank you Gary I think that's a that's a very.
A good question.
Suddenly this allows us to better diversify our funding sources, but especially on the long end.
Maybe talk a little bit on the point that Brad just talked about at the start of the pandemic. We did see very good access, especially at the short end of the call, but when were fully reliant on debt capital markets. It will be debt capital markets on the long end of the curve, especially in times of volatility.
That leaves us with only one source of funding and so by diversifying our sources of funding, especially on the long end. So mind you the securitization transaction really targets. The 15 to 30 year sector. I think it's important for us to continue to have that so that's that's one reason why we did that the second piece of this does allow us to also fulfill our mission more.
By offering a lower cost of financing, but also at a tenant especially as rates.
Unlikely to rise.
<unk> continue to be competitive in that long end of the curve. So that's another point and then finally you talked about capital absolutely. We are very well capitalized institution. Our reasons for doing this is not just for reasons of capital efficiency, but that said a transaction like this is incredibly capital efficient and allows us.
To continue to.
Really deploy our capital in a way that makes a lot more sense as we diversify our product line. So those I think are the primary reasons, we entered into this transaction.
And I hope that.
Gary just hasten to add that.
If it sounds like we were concerned about something in that motivated.
To do this that's really not the case at all we've been having fabless access overcapitalized.
I think when you look to us as the leadership of farmer Mac.
Entrusted us with your investments with your capital investments when you look to US you want us to be proactive and always looking for new and better ways of doing things that makes the organization stronger.
Even more resilient in the future even more profitable in the future and that's really what we're trying to do here.
Okay great.
A quick question or two on the servicing.
Business that you bought.
Where are these.
Business, where they are they servicing for others that you'll get these on a one and then two you said that there's more long term benefits and certain short term is the expectation that more and more of your portfolio is serviced by yourself as opposed to third party.
While we've been sitting here for this call.
Arnaud and sharpen I have been joined by our General Counsel, Steve Mallory by our Chief Credit Officer, Mark <unk>, and our Chief business Officer, Satcom Burger and Zach.
To put much of this transaction.
Transaction together, along with Rob mains head of operations and Mario has really had a huge team effort, but in terms of the strategic intent.
In the near term as well as intermediate term business strategy and relationships.
I'll, let Jack answer that question and give you some some good color on that Gary.
Okay. Thanks, Gary Great question.
As Brad indicated we see a lot of near term immediate benefits as well as long term benefits and I'd say more in the immediate.
Prior calls we've talked about enhancing our infrastructure predominantly as we enter new lines of business.
As Brad indicated and upon a commented on creating new products and services for our customers and solutions for farmers and ranchers, we need to continue to evaluate evaluate and enhance our infrastructure to be able to support those new products.
And a key component that this new servicing platform and team gives us the ability to execute on more complex and increasing loan products that we see in the market I would say in the medium to longer term benefits.
We do anticipate consolidating I'd say, a fairly broad central servicing platform that being said, we expect to fully work with a lot of our key central servicers to really make a more efficient process for their customers our customers and a farmer in a ranchers and really what that means is getting more functionality with data getting quicker access to <unk>.
Data, so really that we can make more.
More access to capital for farmers and ranchers in a much more efficient way, we do anticipate.
The increasing portfolio that we will service an important I mentioned that the benefits that we will receive but overall, we plan to work more strategically with our key central servicing partners.
Okay. Thanks, one last question.
I haven't seen anything I'm no expert on this but in the infrastructure Bill that's being proposed now or any other legislation by expected legislation by the New administration is there anything that's particularly relevant to farmer Mac.
You bet.
Well, let's just talk about what what isn't there a lot of emphasis.
Transportation and transportation infrastructure.
I say well what does that got us to a farmer Mac well that has a lot to do.
With the farmers and ranchers in agribusiness is around the United States, Gary because they are all very dependent on efficient truck.
Shipping port facilities across the country I mean.
The portion of U S agricultural commodities that are exported various by crop, but in many cases over 50%. So to the extent that we can improve transportation infrastructure that is a big win for for Rural America.
So that's a positive I can't we can't quantify that for you, but it is a positive.
There is fund allocated for broadband to that as an economic development matter for Rural America, improving the ability for.
<unk> businesses to operate competitively again in competitive.
World economy for our rural communities in rural businesses and farms to continue to attract.
Talented young people, who expect great access to to Internet based services frankly, there is a very large portion of activity that goes on in farms in production agriculture today, increasing about around what we would generally call position agriculture.
We're using broadband and satellite based technology too.
SaaS, what's going on in the fields to optimize decision, making for our planting for application of inputs for harvesting.
These all benefit these activities all benefit from improved.
Broadband access so yeah.
Yes, there renewable energy we are financing.
Renewable energy, specifically solar and wind projects in Rural America.
That's an important economic development opportunity for rural America, its important business opportunity for us.
And then even with.
Other aspects of proposed legislation.
And even cop 26, we see discussion about.
Renewable.
Fuels, specifically biodiesel.
We see a discussion about methane capture and.
Renewable.
Gas.
These are all things that are at the convergence of agriculture and energy in Rural America.
And so we follow this very closely and frankly.
Very little downside and quite a bit of upside although difficult to quantify.
Okay terrific. Thank you thanks for your time.
Thank you we appreciate it.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one at this time, we will pause momentarily to assemble our roster.
Hello, Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over a modem for any closing remarks.
As always we appreciate your interest.
Yeah.
Really.
Had a number of calls over the last few weeks wondering what's going on in stock performance.
We're going to continue to focus on the fundamentals of building this business here at farmer Mac and.
And we see actually as I mentioned earlier in my comments.
Pretty good environment looking out over the next couple of quarters for doing just that so again really appreciate your interest. Thanks for joining US today. If you do have any follow up questions. Please reach out to us.
Reach out to a job and.
In particular.
Thanks again.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.