Q2 2023 Federal Agricultural Mortgage Corporation Earnings Call
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 Nord Holmes, who will discuss.
<unk> second quarter business, and financial highlights and strategic objectives, and Chief Financial Officer, a 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 will turn the call over to President and CEO Brad normal.
<unk>.
Thank you Joe and good morning, everyone. Thank you very much for joining us.
I am pleased to report that for the second quarter 2023 farmer Mac once again surpassed previous records and revenues core earnings and net effective 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 32023.
Included in the $2 2 billion of new volume was incremental volume in the form of an acquisition of mortgage servicing rights.
$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 to scale this portfolio, while creating more process transparency and greater efficiencies across our <unk>.
Own 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 have 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 AG 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 continued growth.
Activity in our farm <unk> 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, reflecting borrowers 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 AG Express.
Which allow us more loans with up to 65% loan to value ratios, which is an increase from our previous criteria of 55% 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 this segment.
Offsetting growth this quarter was the maturity of a single large egg vantage security in the rural utilities segment that resulted in 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 and we're having more discussions about our product offerings as potential 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.
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 am 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 risks 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 our partner <unk>, Our Chief financial officer to discuss our financial results in more detail.
Ah Parnell.
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.
The gross new business volume this quarter.
Some of the key components included $675 million of wholesale financing from a large traditional counterparties in the farm <unk> Ranch segment, the majority of which was the refinancing of existing Atlantic Securities.
$563 million.
Additional loan.
Robert.
$199 million in farm <unk> ranch loan purchases one.
<unk> hundred $65 million in new corporate finance loan purchases and unfunded commitments.
$135 million in new rural utilities loan purchases $80 million of which with telecommunications and.
$72 million in new renewable energy loan purchases and purchase commitments.
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 was $42 2 million or three.
$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 $60 9 million in the same period last year.
In percentage terms net effective spread in second quarter of 2023 increased to 120 basis points and this was primarily driven by low cost excess capital and our ability to redeploy excess capital into higher earning assets as long as the continued trend towards highest.
Spread bogie.
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 expenses, Tom and callable debt in a rising rate environment. We continue to defensively hold about 600 to 800 million.
With cash and other short term instruments in our liquidity portfolio.
Not only does this help us whether potential market disruptions.
<unk> and highly liquid capital generates immediate returns in our high nominal rate.
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 our short term investment portfolio.
While the rise in short term rates has provided an asymmetric benefit to earnings.
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 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 of 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 prepayments also tend to do.
Clients.
But interest on excess cash and capital would likely increase.
And we would continue to have strong market access as the not reliant 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>.
MS dynamics are not closing often they do counterbalance to mitigate volatility from changes in short term interest rates.
Our liquidity and capital positions are well in excess of all regulatory ratios and our projections show minimal change in our profitability and market value, regardless of the direction and size of any rate shocks that we apply to stress our balance sheet.
Let's now turn to operating expenses.
<unk> increased by 21% year over year and this is primarily due to the expenditures that are associated with our multiyear technology investments that we're making in our treasury and cash management system to.
To enhance our trading hedging and reporting platform. This.
This modernization effort is expected to position us to be defensive against 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 risk and expenses.
We will continue to closely monitor our efficiency ratio as we continue to make investments in our loan infrastructure and funding platforms and <unk>.
Our loan processes to accelerate growth, we may see some temporary increases above the 30% level.
Our credit profile remains very strong in aggregate despite economic headwinds.
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 2023.
As of June 30, and 90 day delinquencies reflect 17 basis points of 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.
Increase was primarily attributable to new telecommunications business volume and the rural infrastructure portfolio, and new agricultural storage and processing volume in the agricultural finance portfolio.
Sequent to quarter end and entity purchased the assets and assumed liabilities of a single agricultural storage and processing loans 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.
And we therefore expect to release during the third quarter.
The allowance for loan loss attributed to this loan which was approximately $4 6 million as of June 30th.
Now turning to capital.
Farmer Mac's $1 $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 our tier one capital.
Capital ratio improved to 15, 9% as of June 30 of 2023 from 15, 7% as of March 31.
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.
So in conclusion, our entire team delivered exceptional quarterly results, surpassing 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 is continued to be well positioned for uncertainty and we're more optimistic than ever to deliver on our long term strategic plan objectives and without Brad Let me turn it back to you.
Thanks <unk>.
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.
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 multiyear 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 costs and providing financings to lenders for the benefit of their farm <unk> 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.
To ask a question you May press star rewards on the telephone keypad.
If you're using a speaker phone.
Please pick up your handset.
And if you use to.
The majority of your question. Please first star then two.
Today's first question comes from Bill Ryan with Seaport Research Partners. Please go ahead.
Good 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 in corporate AG finance.
So we've got six months left to go in the year, 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.
It brings more stability.
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.
<unk> 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 opportunity 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.
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.
Kind of looking out towards the end of the year continued growth in renewable energy. It still small it's just starting to move the needle.
Hopefully some higher levels of corporate finance and.
Farm and ranch and at the end of the year at the balance.
We'll probably shift slightly towards.
Ever so slightly towards.
Farm and ranch and corporate agribusiness, just because theyre larger books of business here at farmer Mac.
I want to emphasize that the survey, saying is very strategic for us.
It is not a huge driver of topline or bottom line earned.
Earnings results.
But.
It provides us with.
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 youre going to continue to hear about that but.
But it's not going to be a larger breakout number in our earnings for at least the next couple of years.
Okay.
Bill Im sorry to interrupt, but a part of wanted to add something to that just to augment what Brad said on the <unk> space. We're also seeing increased demand for our advantaged facilities, we expect that to be another area I would see compositional shift as you look out for that.
That is true Bill Panamax at very good point and AG vanished tends to be very lumpy. So.
One <unk>.
Expected or unexpected new AG vantage facility in the back half of the year can move the needle by hundreds of millions of dollars.
Okay and a follow up question.
The modernization efforts, obviously, we saw the acceleration in expenses this quarter, which had been broadcasting for last couple of quarters.
What is the kind of the timeframe youre 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.
Yes.
A couple of points Bill let me just unpack your question into two.
Two places one the modernization effort that you're referring to that's begun.
<unk> has to do with our treasury platforms and.
What we're looking at and the good news here is that we expect to see an acceleration in the timeline. It will run through 2024, but we'll probably see some modest.
Acceleration into this year and that is likely to put a little bit of upward pressure on the operating expenses that we expect to see back fully be completed by the end of 2024 at the leaders 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.
So that we as we start to move forward some of that.
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 things that we've done on our loan platform origination front, so that will probably get layered in in staggered in some of those efforts are likely to spill well into 2024 and into 2025, but it's too early to really ask the team.
But the 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.
Thinking through just how the recent bond that might shift.
We think that.
We'll still be able to maintain that efficiency ratio of 30% of it certainly this quarter you saw us at about 27%. So we expect to see a little bit of an uptick.
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.
Thank you and our next question today comes from Gary Gordon Private Investor. Please go ahead.
Thanks for taking my call.
First a few questions. If you don't mind first my favorite one.
What were your charge offs for the quarter.
Zero zero once again.
Two I was looking at the interest margin, which is pretty remarkable 120 basis points I noticed there is something called fair.
Fair value hedges on fair value hedge relationships.
Idea with that is that added about seven basis points and it looks.
Volatile this was unusually good core what what is that and is it basically.
Nonrecurring or just volatile over time.
Yeah.
So Gary this is a very fundamental to our business model because when we.
When we when we talk to you about core earnings and net effective spread we really take out the effect of derivatives that we engage in purely floor of risk management treatments and no volatility, but we're not planning a prop trading book or anything like that.
But what it does do is as interest rates continue to fluctuate.
There is an inverse proportion to the.
Those derivatives since we are naturally going to see some noise that really results from that.
So anything Thats really a fair value hedge has the effect of 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, though 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 we 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.
Not really meaningful to us from a profitability.
Maybe the 100 basis points might be a little more practice.
Practical.
That's right that's right and we continue to anchor our expectations as a metric of somewhere between 90 to 100 basis points, maybe picks up it would be 95 to 105 basis points because of the diversification of our revenue streams as well as well as some of the opportunistic issuances that we've done that does not factor in any flaw.
<unk> from these types of hedging that actually help your perspective, really normalizing us, bringing us back to the mean.
The 120 basis points booked.
Both continue to be same reasons that we talked to you about before.
<unk> diversification from a revenue stream compositional shift towards higher earning assets.
As well as the continued payoff of those opportunistic issuances that we've done that.
Down our overall cost to funds as a nominal rate environment.
Right.
Okay. Thanks.
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.
There's something like 30% of your current.
Operating earnings run rate and my impression is your.
Dividend payout target is about 40%.
Even at 40%.
If you're near your maintain your current ROE.
<unk> growth in the capital of something like 11%.
Which I would think it would be a challenge to us and youre 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.
For discussion.
Yes.
First Gary.
I don't 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.
Above expected returned errors that maybe diluted it down into the low thirty's or is now 30%.
You won't be surprised to hear that we will evaluate the actual dividend.
When we get our 2023 numbers.
Kind of at year end.
I for one am very hopeful that we can.
Continuing to execute on our strategic plan and that means putting.
Stronger growth.
Segments of business that will consume capital.
And so.
Im 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, yes, if the market opportunity presents itself.
Our contrast to a lot of commercial banks today I'd note.
So.
We're in a great position will evaluate the dividend at year end, we will.
Taking into consideration our board will all of the things that we have in the past growth rates capital consumption.
And probably a gravitation towards that.
Mid thirties target again.
But we still have half the year left to go.
Okay. Thank you okay. Thank you.
Thank you and our next question today comes from Robert Mccarthy with Sidoti. Please go ahead.
Great. Good morning, and thank you for taking my question.
Wondering if you can expand on the <unk>.
Loan servicing growth in business volume in and what the spread looks like on that business it looks like the.
Total widening in MBS to 120 basis points was primarily driven by farm <unk> Ranch.
I was just wondering if you brought some provide some insight on the spread on the loan servicing the loan servicing business volume.
Yes, the loan servicing spread.
Spread.
Is it really a fee income.
As Barry.
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 we're talking I think of it in that and the team's basis point.
Range.
It's important to 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.
Doing our loan servicing we have access to.
Payment data on those loans almost instantaneously versus two.
Two to three week delay with third party Servicers as an example.
That gives us the ability to make more immediate.
Decisions, if there 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 was the acquisition from one of our large seller servicers.
Firm with whom we have a great relationship.
And 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 Bottomline revenue numbers.
Don't move the needle that much today it is highly accretive accretive they're a 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.
The bottom line. So we'll continue to look for opportunities in the future, particularly when our interest and at existing.
Seller servicers interests aligned and.
Hope to hope to grow 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 Brandon yes.
This tends to be a bit lumpy.
And this was around $500 million, but.
Stay tuned because as we look out into Q3 and Q4.
Youre going to probably see.
Renewing some of that which will probably recalibrate backup so sometimes the Q over Q picture can be a little misleading.
As we said.
In response to <unk> question.
Continue to see some lumpiness in these advantage.
Maturity because.
We're also actively reviewing a number of them, that's probably going to have an offsetting effect.
Great. Thank you that's helpful.
Kind of.
One final question just it looks like in the farm <unk> Ranch business I guess volume would have been down sequentially. If it were for that large loan servicing acquisition.
What are the what are the business trends like in that business now is are.
Higher interest rates really weighing on that business in the second quarter.
Yes, well higher interest rates are.
Currently 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 of the net change in farm and ranch.
Farmer Mac hosted its now annual.
<unk>.
Seller summit in des Moines in June .
It was a anecdotal, but I think what we heard there was debt.
For those who have the direct engagement with those farmers and ranchers.
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 their farm and ranch operations and that maybe they want to.
Borrow fixed rate or maybe variable rate.
Given their outlooks for interest rates and so that.
Slightly more nuanced examination of power.
Borrowing opportunity that 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 from me.
Thank you and our next question today comes from go forward.
Please go ahead.
Hey, Thanks for taking my questions.
I got a lot of comments and I have a lot of questions.
I think you guys continue to.
It would be very humble in terms of how you guys perform but just.
Absolutely phenomenal.
<unk>.
Showing up in the share price.
To some extent, but I don't think its fully.
Reflected in.
I appreciate.
The fact, youre trying to highlight the growth opportunities that they just seem really.
So nominal so that's kind of where.
Any comments or questions are going to go but.
Given the recent performance just on a six months basis.
Very very strong in light of what you're seeing performance within the financial sector, especially banks.
Doing well.
Horrible job with duration matching.
You guys are showing an ability to.
Grow your loan book and actually have spreads improve.
That is.
It's almost bordering on amazing.
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 in the past.
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 am sure. There is some work that went into putting in the slide.
With this dividend CAGR discussion so the first question.
Farmer Mac fastest dividend grower.
Last 12 years within those cohorts S&P 500, Russell 2000 is that are we.
The fastest.
Dividend CAGR largest.
For us that that is exactly a question I've been asking and we're going to get to the bottom of that because 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 really not relevant.
And.
The current situation that banks face with stagnant commercial loan notional rates and increasing deposit costs and the challenges that that presents to them on maintaining margins in contrast to us.
Is 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 not the issuer of the liability.
Okay. That's helpful. I'll say it publicly but I've said this privately with you guys.
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's.
Predating the craziness of the financial crisis.
Fannie and Freddie and if Thats the case then.
Appropriate evaluation at least on a p/e basis, not even getting into the.
The fact that there should be.
<unk> 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 discussions that you are looking at.
Your party pre financial crisis trading at <unk>.
15 times.
For a number of years.
Certain dividend.
Yield number.
As our benchmark because thats, what we are unfortunately, the peer group would only be a.
A couple of companies, but you guys are.
A very unique.
Situation in it.
Not being the company is not being valued in that way.
The stock price should have a two in front of it.
Severely undervalued.
Again, that's just my opinion, but.
I was trying to.
Help you guys and I know you are trying to be.
Humble in terms of how youre performing but it's pretty phenomenal what <unk> been able to accomplish so that's just a comment.
I wanted another kind of 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 we really appreciate it.
In terms of our head count.
We've suddenly seen.
Much better picture in terms of.
When you look at it on a relative basis.
We want to be at full complement of about 185 and that includes the <unk> and so on.
Leave our.
Current head count is closer to 172, but thats right and we ended the second quarter at the end of the second quarter. So.
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.
13 are still open positions.
Stock to get chipped away at between now and year end.
But as we get to that full complement number I think you will see 2024 have some 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'd start to see it going back up to about 30%. So that's really just to give you a handle on how.
How we think about.
Managing the business.
In line with Tom about revenue projections.
Just to add to that the first that.
That 180.
Plus number is falling.
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 look to the first half of the year on an annualized basis like 67%, which is extremely healthy I think.
But even when you apply that to the 180.
With something less than we don't discount our.
Employment.
Employment number by that natural number of vacancies that we might have happened so.
I don't view the.
Current head count as a weakness.
Not executing on planets.
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 <unk> 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 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.
To be able to be acquired at some type of discount to <unk>.
Outstanding balance.
It's a great question and we're keeping an eye on whats happening.
And with the.
Failed, California banks name with Silicon Valley Bank I think we mentioned on our prior call, but as an example, they have a $750 million something like that.
<unk> loans.
But those right now 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.
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.
Maybe purchasing a larger portion of.
Their agriculture mortgage loans than we have in the past.
Maybe hold fewer on balance sheet and sell more to us.
But nothing definitive on that.
Where we are saying something that.
Could result in.
Some.
Higher numbers.
During the remainder of the year is around AG vantage.
From some of the institutional investors in agricultural mortgage loans. Thank you insurance companies that do direct origination.
They are showing some increased appetite for our egg vantage product.
And so stay tuned on that because that's something that could end up.
So 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 114 of the 10-Q.
You've got your June 30 of 2022 outstanding balance of $148 million June 32023 $327 million.
122% year over year growth in that.
Our loan book and you didn't say.
But that's that's a really big number.
Starting to spin.
I think there was a comment in the past.
That's going to be.
$1 billion book at some point.
Where does that book.
At the end of <unk>.
This year I mean, that's really impressive growth.
Yes, I think if you take the.
First half of the year and kind of use that rate of growth on a notional dollar basis for the second half thats, probably a 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 an acceptance or.
Very senior experienced renewable energy.
Executive.
Who will be charged.
With <unk>.
Bringing a bit more organization and.
Both internal administration, but dan or 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 just a few years out.
So and we think it could double again after that so.
Youre, saying a commitment of additional resources internally and that reflects our.
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 had mentioned something like that under the hiring discussion builds.
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.
Okay.
<unk> I think it's more of like a design build but.
Can you help people understand is there a difference between let's say a farm <unk> ranch loan I'm, a farmer I wanted to do a project I build a borrowing or something that's kind of.
I don't want to mischaracterize at all but just to simplify it maybe that's more of a one and done.
From what I've seen with some of these renewable energy companies.
Maybe design build.
Maybe more project oriented if you can get.
Hooked in as a project.
Financer.
On project E.
Is there a an opportunity to be funding on the CD projects that they've been lining up.
Going forward.
Yes.
So for individual projects, our sweet spot is probably the projects that we require.
$5 million to $25 million worth of debt, where we're taking all of it. So that's going to be it take two weeks that that's going to be a $10 million to $50 million solar project.
That's going to be.
Somewhere in the range of 10% to 50 megawatts 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, 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.
Our strategic.
The companies you mentioned as examples of potential strategic partners, Yes, we are talking with them.
And.
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.
As long as we're competitive and responsive to become really a preferred supplier of project finance debt and New project After project after project.
And also provides an opportunity.
And one of the names you mentioned as an example for us too.
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 bond underwriting.
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 lastly on your comments those would 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 is committed to be sold to someone.
So that is true for when that is true for solar we're seeing.
Heightened opportunity with anaerobic digesters, whereas the.
Ill 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 is 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.
Already.
Okay.
On the preferred developer owners I don't know that there are.
They are.
There are sponsor owners in there that have multiple projects that we financed at the same time, but I don't think that there are serial <unk>.
Financings in there yet.
Okay, I mean, I don't want to put words in your mouth, but in theory.
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 a syndicate of banks.
There are a handful of Japanese and European banks that lead the two to three four or $500 million syndicates and us 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 and humor me.
Renewable energy portfolio question, but I, just think there's just a huge opportunity that needs to be discussed and needs to be understood by shareholders and last question maybe more for <unk>.
You had talked about the securitization cadence.
It seems like we're getting to be doing something twice a year.
So should we be expecting something 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, Thank you yeah.
We were successful in doing one this year.
I have been on a cadence of one per year, so far I think.
The rate environment.
Has suddenly slowed down as you can see in our numbers the long term fixed rate.
Purchase of farm, <unk> ranch, which tend to be the best candidates for securitization.
Said.
The team is they actively contemplating when we might do another one and if it's not Q4.
Likely very early in Q1 of next year, we'd be targeting 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 rural assets in the securitization space, we're not ruling out.
Some 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 the Parnell keep up the good work and the rest of the team you're doing.
Eight job, we just got to get people understand what youre doing.
Yes.
Okay.
Thank you ladies and gentlemen, this concludes our question and answer session.
The conference back over to Rod Martin for any closing remarks.
Yes.
Good well. Thank you all for the questions and active participation in this call. It means a lot to us.
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 very very deep commitment to American agriculture and rural infrastructure.
We emphasize that we have 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 thats getting better coordinated that is getting more effective every day.
That we execute here so in summary, the future is very bright we appreciate your support and as always please reach back to us with 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.