Q2 2023 Federal Agricultural Mortgage Corporation Earnings Call
Good day and welcome to the Farmer Mac's first quarter 2023 earnings conference call.
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I would not like to turn the conference over to Josh <unk> Senior director of Investor Relations and Finance strategy. Please go ahead.
Morning, and thank you for joining us for our second quarter 2023 earnings Conference call ends up inaccurate senior 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.
That 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's 2022 annual report and subsequent SEC filings for a full discussion of the company's risk factor on today's call. We will be discussing certain non-GAAP financial measures disclosures 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 morning are president and Chief Executive Officer, Brad Norton Who'll discuss second quarter business and financial highlights and strategic objectives, and Chief financial officer of part number 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 Bryan Bryan.
Thank you Joe and good morning, everyone. Thank you very much for joining us.
I'm pleased to report that for the second quarter 2023 farmer Mac once again surpassed previous records and revenues core earnings and that in fact, the spread building on the strength of our performance.
Our capital base remains strong, which along with our disciplined asset liability management and uninterrupted access to the capital markets supports our long term strategic growth objectives, and also serves as a buffer against market volatility and changing credit market conditions.
These results further demonstrate the resilience of our business model and the success of strategic initiatives designed to grow the company profitably, while fulfilling our mission to rural America, and generating shareholder returns across changing market cycles.
In the second quarter, we recorded core earnings of $42.2 million, reflecting a 37% increase over the same period last year.
We achieved gross new business volume of $2 $2 billion during the quarter, resulting in total outstanding business volume of $26 7 billion as of June 30th 2023.
Included in the $2 2 billion of new volume with incremental volume in the form of an acquisition of mortgage servicing rights on $600 million of farm <unk> Ranch loans held by a third party.
Since the strategic acquisition and expansion of our loan servicing functions in the third quarter 2021, we have looked for opportunities such as this recent acquisition the scale of this portfolio, while creating more process transparency and greater efficiencies across our loan.
Servicing platform.
This capability gives us more direct oversight and governance of our portfolio enhanced security more control over timely access to data and better visibility into loan performance from inception to maturity.
We will continue to work with our key partners to identify ways to capitalize on this initiative to create a more efficient process for our customers and their borrowers.
The volume growth we've seen in the first half of this year is largely attributable to the efforts. We've made over the last few years to diversify our business model across several key markets.
The agricultural finance line of business grew over $500 million in the second quarter predominantly due to the previously mentioned acquisition of new loan servicing rights and growth in our corporate egg finance segment.
There was good activity in corporate finance, reflecting our success in building our reputation in this market.
For example, during the second quarter, we were invited to participate in deals with very large well known counterparties and have received more inquiries in recent months than we have been able than we have ever seen before.
Opportunities in this segment are generally more accretive from a net effect of spread standpoint, the volume tends to be lumpy on a quarter to quarter basis.
We remain focused on this segment as it is a key component of our diversification strategy central to our mission and impactful for earnings and continual growth.
Activity in our farm and ranch segment continues to be moderate.
As a result of the higher interest rate environment, but prepayment rates remain at historically low levels during the second quarter.
We saw an increase in the number of loan applications and approvals during the second quarter, we fracked empowers adjustments to the new rate environment.
The agricultural mortgage market has been.
A shift to primarily variable rate products.
As borrower sentiment generally expect rates to decrease over the next five to 10 years.
Another key contributor to the increase in loan applications. This past quarter was the enhancement of our scorecard underwriting product egg express, which allows more loans was up to 65% loan to value ratios, which is an increase from our previous criteria of 55.
Percent maximum loan to value.
The expansion of this criteria allows us to better support our customers with a product that aligns with other lenders in the marketplace today and we can do this without increasing our credit risk appetite.
Turning to our rural infrastructure line of business. We saw continued healthy growth in the renewable energy segment during the second quarter.
Our participation in syndicated renewable energy transactions has increased the number of opportunities we can participate in with key counterparties.
The pipeline remains strong in the near term as we continue to focus on upsizing existing deals and bringing on new renewable energy opportunities.
We also continue to invest additional resources to further support the segment.
Offsetting growth this quarter was the maturity of a single large advantage security in the rural utilities segment the REIT.
And a net decrease in the rural infrastructure line of business.
During the disruptions in the banking industry in March many of our Counterparties opted to delay the refinancing of upcoming maturities to better navigate the market volatility and evaluate their capital and liquidity needs.
In recent months as market has stabilized we've seen many of those conversations resume we're having more discussions about our product offerings.
<unk> capital efficiency and liquidity conduit for our customers.
We anticipate that this will result in a growing volume pipeline as we look ahead to the second half of the year and into 2024.
Over the last few years, we've invested in our infrastructure by upgrading technology platforms processes and product offerings to improve the customer experience.
I'm pleased to announce today that we will be rolling out a pilot program to complete collateral valuations using technology, which if successful should reduce total loan processing times.
This pilot will begin with many Midwestern properties with a goal of launching the program more broadly in the first quarter of 2024.
As we've mentioned previously we are well into a significant upgrade of our treasury and cash management platforms and embarking on something similar with our loan purchase and processing platforms.
Our commitment to incorporating innovation and modernizing existing technology is expected to continue to differentiate farmer Mac and contribute to the transformation of the agricultural sector overall.
Our underlying business model strong capital position and uninterrupted access to the debt capital markets through the various market disruptions uniquely positions us to partner with our customers to help them manage their business and the rest are they face around future capital requirements and liquidity.
The foundation of our strategy is our consistent financial and operational execution, coupled with proactive management of our balance sheet and funding sources.
This has positioned us well in changing credit environments and is expected to continue to create more opportunities to enhance shareholder value and fulfill our mission.
So now I'd like to turn the call over to a partner with mesh our chief financial officer to discuss our financial results in more detail.
A part of.
Thank you Brad and good morning, everyone.
Our record second quarter 2023 results highlight a balanced well measured approach continued strong credit quality and resiliency across market cycles.
We achieved $2 $2 billion of gross new business volume this quarter.
Some of the key components included 675 million of wholesale financing from a large traditional comstock is in the pharma segment. The majority of which was the refinancing of the existing Atlantic Securities.
$563 million, if additional loans serviced for others.
$199 million in farm <unk> ranch loan purchases.
<unk> hundred $65 million in new corporate and finance loan purchases and unfunded commitments of $135 million in new utilities loan purchases $80 million, which was telecommunications and.
And $72 million in new renewable energy loan purchases and budgets.
Even after repayments maturities and acquisition of servicing rights. We grew about 300 million this quarter in our outstanding business volume and this speaks to the benefit of strategic decisions over the last few years that we've undertaken to diversify our portfolio.
Turning to core earnings core earnings of $42 $2 million or $3 $86 per share in second quarter 2023, and this reflects a 37% year over year increase.
This increase was driven by record net effective spread of $81 $8 million in second quarter 2023, compared to $69 million in the same period last year.
In percentage terms net effective spread in the second quarter of 2023 increased to 120 basis points and this was primarily driven by low cost access to capital and our ability to redeploy excess capital into higher earning assets as long as the continued trend towards higher spread.
Hello.
The capital that we raised Opportunistically when rates were at historical lows in 2020 in 2021 continues to reduce the need for us to raise more expensive dumb and callable debt in a rising rate environment, we continue to defensively hold about $600 million to $800 million in cash.
And other short term instruments in our liquidity portfolio or.
Not only does this help us whether potential market disruptions are xs and highly liquid capital generates immediate victims in our high nominal rate design.
This benefit is expected to continue to create downward pressure on our non-GAAP funding costs as the short end of the curve continues to increase with fed actions and the reinvesting of excess capital generates additional redone with an upward repricing of us shocked them investment portfolio.
While the rise in short term rates has provided and east symmetric benefit to earnings we project limited downside to earnings if rates decline in the future due to our proactive equity capital allocation strategy.
Specifically, we expect to redeem some of the benefit over the medium term as rates decline as we have started extending maturities in our investment portfolio. Again. These are all the practices that are highly consistent with our disciplined approach, which is designed to minimize earnings volatility.
All fundamental asset liability management approach, where we match fund the duration and convexity of our assets and liabilities in all REIT environment remains unchanged as it has allowed us to successfully navigate changing market environments and contain earnings volatility.
Our business has certain natural hedges that we have honed over time and this helps us be insulated from interest rate volatility. We see this as a key differentiator for us relative to other financial services entities, especially deposit depository institutions. For example, when interest rates rise prepayment Oh potentially.
Clients, but interest on excess cash or capital would likely increase.
And we would continue to have strong market access has been not relying on deposits as a source of funding.
Conversely, when interest rates decline loan purchase volume often increases, but prepayments also tend to increase and interest on our liquidity portfolio, usually ends, but we're able to manage our interest rate risk through exercising callable issuances and thereby we're able to maintain our margins. Although these natural <unk>.
This dynamics, our Knoxville sick oftentimes they do come to balance to mitigate volatility from changes in short term interest rates.
Our liquidity and capital positions are well in excess of all regulatory ratios and all projections show minimal change in our profitability and market value, regardless of the direction and size of any REIT shocks that we apply to stress our balance sheet.
Let's now turn to operating expenses.
Sensors increased by 21% year over year and this is primarily due to expenditures that are associated with our multiyear technology investment that we're making in our treasury and cash management system to enhance our trading hedging and reporting platform. This modernization effort is expected to position us to be defensive.
<unk> cyber and fraud threats and also allow us to scale, our portfolio and diversify our product offering.
We expect our run rate operating expenses to increase at a pace above historical averages over the next several years given plans to continue to make investments not team and our infrastructure to support our growth and strategic objectives.
Our operating efficiency is 27% year to date and below our strategic plan target of 30% and this is primarily because revenue growth increased at a significantly higher beef and expenses.
We will continue to closely monitor our efficiency ratio.
We continue to make investments in our loan infrastructure and funding platforms and innovate our loan processes to accelerate growth. We may see some temporary increases above the 30% level.
Our credit profile remains very strong and aggregate despite economic headwinds we saw a seasonal decrease in 90 day delinquencies from the first quarter as well as the repayment from a single $16 million permanent planting loans that became delinquent in first quarter of 2022.
As of June 30th 90 day delinquencies reflect 17 basis points.
Our entire portfolio.
As of June 30 of 2023, the total allowance for losses was $19 1 million, reflecting a $1 $1 million increase from first quarter of 2023.
The increase was primarily attributable to new telecommunications business volume and the rural infrastructure portfolio, and new agricultural storage and processing volume in the agricultural Salon portfolio.
Subsequent to quarter end and entity, but just the assets and assumed liabilities of a single agricultural storage and processing alone that was subject to bankruptcy proceedings in the first half of the year.
As a result of this farmer Mac has received proceeds from this bankruptcy field and we therefore expect a relief during the third quarter the entire allowance for loan loss attributed to this loan which was approximately $4 6 million as of June 30.
Now turning to capital.
Farmer Mac's, one $4 billion of core capital as of June 32023 exceeded our statutory requirement by $566 million or 70%.
<unk> capital increased sequentially, primarily due to an increase in retained earnings.
One capital ratio improved to 15, 9% as of June 30 of 2023 from 15, 7% as of March 31st.
Largely due to strong earnings results and higher retained earnings.
Maintaining credit standards that reflect a risk profile, coupled with strong levels of capital is a fundamental part of our long term strategy.
In conclusion, our entire team delivered exceptional quarterly results so far.
<unk> the key metrics that we highlight on each call while staying within our credit framework, notably we delivered a record 19% return on equity this quarter and stayed well below our efficiency target of 30%.
We believe that our balance sheet, it's continued to be well positioned for uncertainty and we're more optimistic than ever to deliver on our long term strategic plan objectives.
And with that let me turn it back to you.
Thanks, So parnell.
Our business model is resilient and diversified and our balance sheet is very healthy.
We operate with high capital levels, and believe that we're well positioned to deliver earnings growth and strong profitability for the remainder of 2023 and into 2024.
We've emphasized that our ability to issue long dated fixed rate debt in all rate environments and economic cycles is a core competitive advantage that when combined with our approach to asset liability management helps to produce consistent spreads and provides forward visibility to future earnings.
I'm extremely proud of our team and the excellent progress that we're making on our multi year strategic initiatives.
We remain focused on our mission to increase the accessibility of financing for American agriculture and rural infrastructure.
We are aligned across our organization and with our customers to bring even greater efficiencies and lower cost and providing financings to lenders for the benefit of their farm and ranch agribusiness and rural infrastructure customers.
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 the question and answer session.
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Charter question. Please first started them too.
Today's first question comes from Bill Ryan <unk> with Seaport Research partners. Please go ahead.
Morning, Thanks for taking my question and very nice quarter.
Just kind of looking at your mix of business, obviously changed a little bit in the quarter you talked about the acquisition of the servicing asset.
Some acceleration of corporate AG finance.
So we've got six months left to go in the air but how do you see the mix of business kind of playing out through the rest of 2023, that's the first question.
Okay.
And it's important one as we've emphasized we're pleased with the increasing diversification of our business.
We think it brings more stability through.
Through different economic cycles, and we tried to emphasize some of the reasons for that in the call today as we look out bill to the rest of 2023.
With increasing.
Acceptance and I guess experience with higher interest rates, we're optimistic that we'll see some increase in farm and ranch applications.
We do expect to see more.
Fertility with corporate finance, primarily because of our growing credibility.
In that market sector, including with leading syndicate banks.
The overall credit demands are not necessarily increasing but our presence is.
I think looking out to the rest of the year and then looking forward. The next couple of years.
In terms of a percentage increase projection, but starting from a small notional base, we see probably the greatest growth in renewable energy.
So I'm kind of looking out towards the end of the year. Our continued growth in renewable energy is still small it's just starting to move the needle.
Hopefully some higher levels above corporate finance, and our farm and ranch and at the end of the year at the balance will probably shift slightly towards.
Ever so slightly towards.
Farm and ranch and corporate agribusiness, just because they're larger books of business here at farmer Mac.
I want to emphasize that the survey is saying is very strategic for us. It is not a huge driver of top line or bottom line.
Earnings results.
But.
It provides us with a way to create more opportunities for how we create valuable relationships with our seller servicers.
It gives us more immediate access to data.
That for example, among other things supports our securitization programs.
And it allows us to focus.
More on operational excellence and servicing not just for our own operation, but for our seller servicers to so you're going to continue to hear about that but.
But it's not going to be a large break out a number in our earnings for at least the next couple of years.
Okay, and if I might you okay.
Sure Bill I'm, sorry to interrupt, but a part of wanted to add something to that just to augment what Brad said on the common REIT space. You know, we're also seeing increased demand for our advantaged facilities, we expect that to be another area of atrophy compositional shift as you look out for that.
That's true.
And it makes it very good point in an advantaged tends to be very lumpy. So one that expected or unexpected new ache vantage facility in the back half of the year can move the needle by hundreds of millions of dollars.
On the modernization efforts, obviously, we saw the acceleration in expenses this quarter she'd been broadcasting for last couple of quarters.
What is the kind of the timeframe you're thinking for the modernization effort is going to go through 2024.
Our 2025 and the other part of that is did you say the expense run rate you kind of expect it to return back to historical levels. After this quarter I just wanted to be clear on that.
Yeah, you know I think a couple of points I'll do let me just unpack your question into.
Two places one the modernization effort that they're referring to that's begun has to do with our treasury platforms and what.
What we're looking at and the good news here is that you know we expect to see an acceleration in the timeline. It was won through 'twenty 'twenty four, but we'll probably see some modest Ah <unk>.
Acceleration into this year and that is likely to put a little bit of upward pressure on the operating expenses that we expect to feedback fully be completed by the end of 'twenty 'twenty four at the latest if anything maybe by the middle of 'twenty 'twenty four it should all be completed so that's probably going to create a little bit of lumpiness just in our operating expense.
We are as we start to move forward some of that into it into this year and then we're also embarking on some other types of innovation that are a little bit more offensive in nature. Some modernization, but you know things that we've done on our learning platform origination front, so that would probably get layered in in staggered in some of those.
But it's unlikely to spill well into 'twenty 'twenty four and into 2025, but it's too early to really ask the team, but magnitude of it is but most of the modernization efforts that would lead you to the treasury platform that we have a pretty good handle on so given all of that and Ah you know thinking through just how the recent bond that might shift you know we think that.
Will it still be able to maintain that efficiency ratio of 30%.
Suddenly this quarter you saw also at about 27%. So we expect to see a little bit of an uptick are trending up towards that 30% that's still staying comfortably in that range.
Okay. Thanks for taking my questions I'll hop back into the queue.
Yeah.
Thank you and our next question today comes from Gary Horton a private Investor. Please go ahead.
Thanks for taking my call.
First a few questions. If you don't mind first my favorite one was what we were charge offs for the quarter.
Yeah.
Zero.
Euro once again.
Too I was looking at the interest margin, which was pretty remarkable 120 basis points I noticed there's something called.
Fair value hedges on fair value hedge relationships, which I have no idea what that is that added about seven basis points and it looks.
<unk>. This was a unusually good core what what is that and is it basically.
Nonrecurring or just volatile over time.
Yeah. So Gary this is just a fundamental to a business model because when we.
When we look when we talk to you about core earnings and net effective spread are we really take out the effect of derivatives that we engage in purely for.
Risk management treatments and no volatility that we're not planning a prop trading book or anything like that but what it does do is as interest rates continue to fluctuate you know, there's an inverse proportion to the those derivatives Cynthia I'm actually going to see some noise. That's really a result from that so anything that's really a fair view.
Will you hedge has the effect is impacting our P&L.
But that's really why we have this metric of core earnings and net effective spread because that gives you a little bit more of a pure look at what actual margins that so essentially that's.
Again since we're not really doing this for trading purposes to make.
Do anything other than really manage our interest rate risk all of this will really revert to the mean over time, if we hold these assets to maturity, which is really how you look at it. So that's that's really what I can say about that number that you're looking at there is some volatility, but you know, it's not really meaningful to us from a product.
Okay.
Maybe the 100 basis points might be a little more.
Practical.
That's right, that's right and and we continue to anchor our expectations as a metric of somewhere between 90 to 100 basis points, maybe picks up between 95 to 105 basis points because of the diversification of our revenue streams as well as well as time would be opportunistic issuances that'd be done that does not factor in any.
Fluctuations from these types of hedging that actually has the effective probably normalizing also bringing us back to the mean, so the 120 basis points.
Those continue to be the same reasons that we talked to you about before.
Diversification from a revenue streams are compositional shift towards higher earning assets as well as the continued payoff of those opportunistic issuances that'd be done that's brought down our overall cost of funds as a nominal rate environment to REIT breathless.
Okay. Thanks, a lot.
Okay.
Last question is about the dividend.
Obviously.
That's a decision for early next year, but just looking at the numbers. So your current dividend of $4 40.
Something like 30% of your current operating earnings run rate My impression is your dividend payout target is about 40%.
Even at 40%.
If you're near your maintain your current ROE V that leaves the growth in our capital looks something like 10, 11%.
Which I would think it would be a challenge to us and you're sitting there with $700 million of excess capital.
It seems like there is a lot of excess capital on the books and being generated how do I think about the dividend.
There's a discussion.
Yes sure.
First Gary.
I don't think I've ever mentioned, 40% I think we have mentioned mid thirties.
A number of times and in some of these above Oh above expected returned yours, maybe as the loaded it down into the low thirty's or as you would know now 30%.
You know you won't be surprised to hear that we will evaluate the actual dividend.
When we get our 2023 numbers.
Kind of a year and I for one I'm very hopeful that we can.
Continuing to execute on our strategic plan and that means putting.
Stronger growth on segments of business that will consume capital.
And so I'm pleased that we have this cushion.
It gives us credibility with our regulators.
It also gives us a lot of leeway.
And being opportunistic to grow faster in some of these segments.
If the market opportunity presents itself, that's Mark contrast to a lot of commercial banks today I'd note.
So you know we're in a great position well evaluate the dividend at year end, we will.
Taking into consideration our board well all the things that we have in the past growth rates capital consumption.
And probably you know a gravitation towards that.
Thirties target again.
But we still have half the year left to go.
Okay. Thank you.
Yeah.
Okay.
Thank you and our next question today comes from Brendan Mccarthy with Sidoti. Please go ahead.
Great. Good morning, and thank you for taking my question.
If you can expand on the loan servicing growth in business volume in and what the spread looks like on that business. It looks like the <unk>.
Total a widening and yes to 120 basis points was primarily driven by farm <unk> Ranch.
Wondering if he brought some provide some insight on the spread on the loan servicing the loan servicing business volume.
Yeah, so the loan servicing.
Spread.
It's really a fee income.
Is very very.
Very similar to what you'd see in other loan servicing operations for different types of loan assets in other sectors commercial loans for example.
Commercial mortgage loans and so you know were talking you know think of it in that in the teens basis point.
Range.
It's important to us and as I said earlier, it's not something that has a huge impact on topline or bottom line revenue today, but it is strategic.
Do I hear a loan servicing we have access to.
Payment data on those loans almost instantaneously versus two to three week delay with third party Servicers as an example that gives us the ability to make more immediate decisions.
Decisions are if they're in and identify any potential issues. It also is very supportive of our securitization efforts, which require a very very tight reporting.
So it's very important in that regard.
The 600 million approximately that was added this quarter.
What's acquisition from one of our large seller servicers.
I'm with whom we have a great relationship.
And are they just concluded that it wasn't strategic for them.
But it is for us and the other thing I'd note is that while the topline and bottom line revenue numbers.
Don't move the needle that much today. It is highly corita accretive there are huge economies of scale in this business and so for example, with our existing loan servicing operation we were able to take on this additional $600 million with very very minimal incremental expense it almost all goes.
Right to the bottom line. So we'll continue to look for opportunities in the future, particularly when our interest and an existing seller servicers interests are aligned.
And are you now hope to hope to grow it further.
Great. Thank you and then one more question.
In the rural utilities business I know you mentioned there was one single maturity that drove the sequential decline there.
What was the size of that.
That loan.
So Brendan yeah, a lot of thought this tends to be a bit lumpy and this was around 500 million but.
Stay tuned because you know as we look out into Q3 and Q4.
Youre going to probably see a renewing those some of that which will probably recalibrate backup so sometimes the Q over Q picture can be a little misleading, but you know as we said in.
In response, we Wanna be all your questions.
Continue to see some lumpiness in these advantage.
Maturity because you know what we're also actively been doing a number of them that problem that could have an offsetting effect.
Great. Thank you that's helpful.
One final question just it looks like in the farm and ranch business I guess volume would have been down sequentially. If it weren't for that are you know large loan servicing acquisition.
What are the what are the business trends like in that business now is our higher interest rates really weighing on that business in the second quarter.
Yeah, well higher interest rates are they significantly slow prepayments, but keep in mind that these loans are regularly advertising loans and so it's not that we're getting prepaid a bunch of loans because they are refinancing with other people that theyre, making regularly scheduled payments that's what's driving most.
Most of the net change in farm and ranch.
Farmer Mac hosted its now annual.
The seller summit in des Moines in June .
And it was a anecdotal, but I think what we heard there was that.
For those who have the direct engagement with those farmers and ranchers that there is a bit more optimism that volumes are starting to come back and as I mentioned in my opening comments.
That may be largely attributable to just.
Borrowers getting used to a higher interest rate environment and realizing that they do have opportunities to expand there.
Their farm and ranch operations and that maybe they want to borrow.
Borrow fixed rate or maybe variable rate.
Given their outlook for interest rates and so that slightly more nuanced examination of.
Borrowing opportunity.
We're hearing about amongst farmers and ranchers, we hope to see that show up in some incremental volume in the third and fourth quarters.
Great. Thank you that's all for me.
Thank you Andrew next question today comes from before summer.
Please go ahead.
Hey, Thanks for taking my questions.
And I got a lot of comments and I have a lot of questions are just you know I think you guys continue to.
It would be very humble in terms of how you guys perform but just absolutely phenomenal.
It's showing up in the share price.
To some extent, but I don't think it's fully.
Reflected and I.
I appreciate.
The facts are trying to highlight the growth opportunities, but they just seem really a phenomenal so that's kind of where.
So my comments or questions are going to go but.
Even the recent performance just on a six months basis, a very very strong in light of what you're seeing performance within the financial sector, especially banks.
Doing a horrible job with a duration matching.
You guys are showing an ability to.
Karl your loan book and actually have spreads improve.
That is right.
It's almost bordering on amazing that's very very good.
There was a previous question on the dividend and this is something I talk to Calpine, I think Brad and the coroner and the past slide.
Slide 15, there is a change from second quarter to third quarter.
As an investor I appreciate that and I think other investors need to look at that as well.
And I'm sure. There's some work that went into putting in this slide.
With this dividend CAGR discussion so the first question.
Farmer Mac fastest dividend grower over the last 12 years within those cohorts S&P 500, Russell 2000 is that are we the fastest.
Dividend CAGR largest.
But for us that that is exactly a question I've been asking them, where we're going to get to the bottom of that because I I think we may be.
And when you look at the absolute consistency on top of that it is a remarkable story and to your first point I'd just like to note that we have always consistent the comparisons with banks.
As Comparables are are really not relevant.
And the current situation that banks face with stating that commercial loan notional rates.
Increasing deposit costs and the challenges that that presents to them on maintaining margins in contrast to us.
It's something that we are talking to investors more about because we think this current environment is a real opportunity for us not to compare ourselves to commercial banks, but to differentiate ourselves from commercial banks are asset liability.
Model and practices are almost the exact opposite of banks and that we have the call option on the liabilities are not the issuer of the liability.
Okay. That's helpful. I'll say it publicly but I've said this privately with you guys.
Do you have a situation where the sell side analysts are going to compare you to other financial companies and I agree that's not.
True.
Talk to you and said this in the past.
Rightly or wrongly, but I think that the company is a GSE needs to be valued based on previous valuations of other GSE is.
Predating the craziness of the financial crisis like.
Fannie and Freddie and if that's the case, then you know appropriate valuation at least on a p/e basis, not even getting into the.
The fact that there should be discussion on the dividend growth model from a valuation perspective, but a p/e of 15 or higher given your performance seems to be more reasonable.
That might be something you want to think about discussion and say Hey look you know Fannie and Freddie pre financial crisis trading at 15.
<unk> 15 times.
For a number of years and you know certain dividend yield.
The yield number you know this is our benchmark because thats what we are unfortunately, the peer group would only be a couple of companies, but you guys are a very unique situation and it's not been the company's not being valued and in that way.
You know the stock price should have a two in front of it it's it's severely undervalued.
Once again, that's just my opinion, but I'm always trying to.
Help you guys and I know you're trying to be humble.
Humble in terms of how youre performing but it's it's pretty phenomenal what you've been able to accomplish so that's just a comment.
I wanted another club with another question on the hiring you talked about continuing to grow.
Can you give us an update on the current head count and how many open positions are we looking to fill.
And the remainder of the year.
Yeah. So thank you so much for those comments and I think you know we.
Really appreciate it you know in terms of our head count we've suddenly seen.
A much better picture in terms of Ah Ah Yeah. When you look at it on a relative basis. You know, we we want to be at full complement of about 185 and that includes embarked on and so on.
I believe our current headcount is closer to 172, but that's right and you ended the second quarter at the end of the second quarter. So you know that's not to say that we'll be successful in.
And really getting to that 185 number but that's really what we think of as full complement in terms of filling all of those positions. So we expect to see you know this you know.
So do you know it's still open positions.
Start to get chipped away at between now and year end, but you know as we get to that full complement number I think you'd see 'twenty 'twenty four Hudson's spillover as well and that's also another reason why we think our efficiency ratio is a little depressed right now and as we start to get to that full complement.
You've got to see it going back up to about 30%. So that's really just to give you a handle on how we how we think about managing the business and and you know and.
In line with him about revenue projection.
Just to add to that the force that.
180.
Plus number is.
Full employment, you've always got some vacancies associated with turnover our turnover rates are well under 10% in fact, they're down this year compared to last year I think last time I looked through the first half of the year on a annualized basis like six 7%, which is extremely healthy I think.
But even when you apply that to the 180, you know you end up with something less than we don't discount or.
Employment budge.
Budgeted employment number by a natural number of vacancies that we might have happened so.
I don't view the.
Current head count as a weakness is not.
Not executing on plan as you know.
A couple of the positions are ones, who have just decided to go slow on a couple of them are because of turnover. So I.
I think we're in a very comfortable range here.
Certainly within 10% of our target employment.
Okay, and then on the farm and Ranch book.
We've had a number of transactions announced with them.
California.
Banks are doing transactions.
I think on a previous conference call. There was a discussion about potentially seeing some loan books shake loose is that still a possibility are there any ongoing discussions and then would those loans potentially.
Able to be acquired at some type of a discount to the outstanding balance.
Oh, it's a great question and we're keeping.
On what's happened with the failed, California banks name of Silicon Valley Bank I think we mentioned on our prior call, but as an example, they have a 750 million something like that of <unk> loans.
But those right now are are held by the successor organization. So we're keeping an eye on it there are other banks that.
Last quarter had significant capital pressures.
<unk> attributable to their mark to market investment portfolios and I think I speculated on the last call that maybe some of them would be in a position of having to do a bit more selling there are a couple of financial institutions.
Where we're having discussions about may.
Maybe purchasing a larger portion of their agriculture mortgage loans than we have in the past they maybe hold fewer on balance sheet and sell more to us.
But nothing dependent upon that where we are saying something that.
Could result in.
Some.
Higher numbers.
During the remainder of the year is around egg vantage.
From some of the institutional investors in agricultural mortgage loans, I think insurance companies that do direct origination.
They are showing some increased appetite for egg vantage product.
And so stay tuned on that because that's something that could end up should could show up in our numbers that towards the end of the year. Some of those facilities take a long time to put together. So we might put it that's associated gathering it spills over into 2024, but that is an area where we're seeing.
Some unexpected additional demand.
Okay. That's helpful and then.
I think it's worth spending some time talking.
More about the renewable energy book I'm on page 14 of the 10-Q.
You got your June 30th 2022, I'll say any balance 148 million June 30th 2023, $327 million, that's 122% year over year growth in that.
Our loan book and you didn't say that but that's that's a really big number the wheel starting to spin.
I think there was a comment in the past you know that that's going to be.
1 billion dollar book at some point.
Where does that book.
Head at the end of ended this year I mean, that's that's really impressive growth.
Yeah, I think if you take the.
The first half of the year and kind of use that rate of growth on a notional dollar basis for the second half that's probably baseline it could exceed that.
We are committing additional resources to this area for example, we haven't announced it yet, but we just had.
<unk> had an acceptance or a very senior experienced renewable energy executive.
Who will be charged.
With bringing a bit more organization and both internal.
Farnell administration, but then we're aggressive external outreach.
For those programs and that reflects our optimism about our opportunity to.
Kind of double this book every year for the next couple of years with that $1 billion.
Being in the sites are just a few years out and so and we think it could double again after that so youre.
Youre, saying a commitment of additional resources internally and that reflects our cautious optimism.
Optimism, but our confidence in the depth of this market and the comparative advantages that farmer Mac has from a funding of national reach standpoint.
And being a player in that market.
Okay. That's very helpful. I was hoping you'd mentioned something like that of 100 of hiring discussion building.
Building on the energy loan book comment I wanted to get a better understanding how this business works, but.
I see some companies like Hannon Armstrong and <unk> that are doing these renewable energy projects and funding.
<unk> I think it's more of like a design build but.
Can you help people understand is there a difference between like let's say a farm and ranch loan I'm I'm, a farmer I wanted to do a project I build a barn or something that's kind of I don't want to mischaracterize at all but just to simplify it you know maybe thats more of a one and done but from what I've seen with some of these are renewable energy companies.
Maybe design build.
Maybe more project oriented if you can get.
Hooked in as a project finance or.
Project E.
Is there an opportunity to be funding on B C D projects that they've been lining up.
You know going forward.
Yes.
So for individual projects, our sweet spot is probably the projects that will require about $5 million to $25 million worth of debt, where we're taking all of it. So that's gonna be it take two weeks that that's going to be a 10 to 15 million dollar solar project.
That's gonna be a you know somewhere in the range of 10 to 50 megawatt solar project covering somewhere between 50 and 250 acres.
And so a lot of these are being done in rural America.
Some are being done on <unk>.
Warehouses, but were always looking for that connection to rural America and it could be because the buyer of the electricity is that electric co op or corporation that is serving rural America could be because it's located in rural America.
So that's one part of it another part of it is the.
Much larger deals, where we may participate in the bank syndicate.
For that project and you've seen that.
<unk> done that in a couple of very very large wind projects again set in rural America.
The credit metrics are pretty much always the same these are low investment grade triple B minus double b plus credit metrics very well establish while used we're not doing anything very different or creative is just the natural national outreach and focus on rural America.
The strategic.
The companies you mentioned as examples of potential strategic partners, Yes, we are talking with them.
And a very very current discussions and you are correct in that if they are serial developers.
And there are many others out there.
It provides an opportunity to.
You know as long as we're competitive and responsive to become really a preferred supplier of project finance debt and do project after project after project.
And also provides an opportunity.
And one of the names you mentioned as an example of this.
To look at opportunities to do pools fund pools are project finance loans that they may be doing.
Very similar in a way to our advantage.
Type a bond underwriting.
So yes. This is.
A real opportunity for us.
And.
There is an opportunity to build relationships that can deliver recurring business opportunity.
Okay, and just just to interject on your comments those that have a power take off agreement as part of the.
The financing structure.
So you do we don't do a speculative renewable energy projects, where the power isn't committed to be sold to someone.
So that is true for when that is true for solar we're saying.
Heightened opportunity with anaerobic digesters, whereas the I'll put us really renewable natural gas getting the hedges right. So we lock in our key margin.
<unk> margin on those is key there as we've said before there's a growing convergence between energy in American agriculture, and we want to be there.
Okay, Perfect and then does that loan book reflect.
That balance of 327 are there customers that we've done.
Multiple projects was in that number.
Alrighty.
You know on the preferred developer owners I don't know that there are.
They're there.
There are sponsor owners in there that have multiple projects that we've been asked at the same time, but I don't think that there are serial financings in there yet.
Okay. I mean, so I don't want to put words in your mouth, but in theory that that.
We could see an acceleration of growth if those relationships start to develop.
Yes.
The other the other recurring opportunity is on the large deals with the syndicated banks.
There are a handful of Japanese and European banks that lead the two to three or four or $500 million syndicates and is and we are beginning to do business with a number of them.
And as we develop more of a reputation for them that provides another opportunity to be a preferred partner.
With another financial institution that case.
Okay perfect. Thanks for spending all in humor me on all the renewable energy portfolio a question, but I just think there's just a huge opportunity that needs to be discussed there needs to be understood by shareholders and the last question maybe more for a partner.
You had talked about you know the securitization cadence.
It seems like we're getting to be doing something twice a year.
Sure So should we be expecting something in the in the back half of this year and is that kind of what we're thinking and messaging to the market as we look towards.
2024.
Yeah, I mean, we we were successful in doing one this year, we've sort of been on a cadence of one for you. So far I think the the rate environment.
Has suddenly slowed down as you can see in our numbers that the long term fixed rate.
Purchase of farm and ranch, which tend to be the best candidates for securitization that said.
The team is they actively contemplating when we might do another one and if it's not Q4 are they likely you know very early in Q1 of next year, we'd be targeting are coming out with another issuance.
We're also.
In active discussion about other assets now that we have a good sense of the investor appetite for our rural assets in the securitization space, we're not ruling out.
All of our.
Assets within the rural infrastructure space, so that might be more of a longer term slower maturing strategy, but that's ultimately.
Okay. Once again, thank you for taking all my questions, Brian Apart keep up the good work and the rest of the team you're doing a great job of just gotta get people understand what youre doing thank you.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Rod Martin for any closing remarks.
Yeah.
Good well. Thank you all for the questions and active participation in this call. It means a lot to us.
Yeah.
If we haven't set it let me just set right now that we're very pleased but not at all surprised by the strong results of the second quarter.
We've got a great business model, we have a crystal clear focus on our mission our business purpose that goes from our board to our all of our employees to our executive team.
We have.
As a part of that a very very deep commitment to American agriculture and rural infrastructure.
We emphasize that we've got a very well honed asset liability management credit and enterprise risk management disciplines across this organization our operations are getting tighter every day.
I think that we have an outstanding team that is just getting stronger that's getting better coordinated that is getting more effective everyday that we are that we execute here. So in summary, the future's very bright we appreciate your support and as always please reach back to us.
Any follow on questions that you have.
Thank you.
Thank you Sir 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.
Okay.