Q1 2024 Federal Agricultural Mortgage Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the farmer Mac first quarter 'twenty 'twenty four earnings conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
At any time during this call you quite and you get assistance. Please press star zero for the operator.
This call is being recorded on Monday may six 2024.
I would now like to turn the conference over to MS. Charlton Angela.
Charlton Angela: Our director of Investor Relations and Finance strategy. Please go ahead ma'am.
Charlton Angela: Good morning, and thank you for joining us for our first quarter 'twenty 'twenty four earnings conference call.
Charlton Angela: On top of Nazareth, 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 strategies and prospects, which are based on management's current expectations and assumptions. These statements are.
Charlton Angela: 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.
Charlton Angela: Please refer to farmer Mac's 2023 annual report and subsequent SEC filings for a full discussion of the company's risk factors.
Charlton Angela: On today's call. We will also be discussing certain non-GAAP financial measures disclosures and reconciliations of these non-GAAP measures can be found in our most recent Form 10-Q and earnings release posted on our website farmer Mac Dot com.
Charlton Angela: Under the financial information portion of the investors section.
Charlton Angela: Joining us from management. This morning is our president and Chief Executive Officer, Brad and Oracle, who will discuss first quarter business and financial highlights and strategic objectives, and Chief Financial Officer, a part of Ramesh who will provide greater detail on our financial performance Black members of our management team will also be joining us for the question in the air.
Charlton Angela: Third period at this time I'll turn the call over to President and CEO Brad.
Charlton Angela: Ed.
Bradford Todd Nordholm: Thank you Don good morning, everyone and thank you for joining us.
Bradford Todd Nordholm: Our team has once again delivered excellent results demonstrating our unwavering commitment to grow farmer Mac profitably, while fulfilling our mission to rural America, and generating strong shareholder returns across changing market cycles.
Bradford Todd Nordholm: The year is off to a strong start as we recorded core earnings of $43 $4 million, reflecting a 12% increase over the same period last year.
Bradford Todd Nordholm: We provided $1 $4 billion in liquidity and lending capacity the lenders serving rural America, while maintaining our strong capital base disciplined asset liability management.
Bradford Todd Nordholm: And uninterrupted access to the capital markets.
Bradford Todd Nordholm: The overall earnings story continues to be consistent with diversification and resiliency of our business model supports our long term strategic growth objectives, while also providing a buffer against market volatility.
Bradford Todd Nordholm: And change in credit markets.
Bradford Todd Nordholm: I'd like to highlight two noteworthy transactions that we've recently completed.
Bradford Todd Nordholm: First the successful execution of our four farm series securitization transaction.
Bradford Todd Nordholm: Farmer Mac remains committed to developing a vibrant and liquid agriculture mortgage backed securities market.
Bradford Todd Nordholm: Central to our core mission to improve credit accessibility in Rural America.
Bradford Todd Nordholm: This initiative is our opportunity to transform the agricultural mortgage market industry with new efficiencies.
Bradford Todd Nordholm: The lower the cost for the borrowers.
Bradford Todd Nordholm: We are very pleased by the tremendous support we have seen from our customers and investors for this program.
And remain committed to being a regular issuer in the market with a set of securitization products that align our borrower and investor interest.
Bradford Todd Nordholm: The second transfer transaction worth, noting is the acquisition of a $57 million pool of farm <unk> ranch loans from a single agricultural lender.
Bradford Todd Nordholm: This acquisition underscores farmer Mac's track record of providing agricultural lenders solutions for their capital planning, especially if there is there is uncertainty about how capital regulation will evolve over the next few years.
Bradford Todd Nordholm: We have consistently presented our product offerings as a capital efficiency and liquidity tool for our customers in both the agriculture finance and rural infrastructure lines of business.
Bradford Todd Nordholm: We believe that this just because the relative value of farmer Mac brings to our banking and financial services partners.
Ultimately the agricultural and rural borrowers.
Bradford Todd Nordholm: Even greater when credit is a bit tighter.
Bradford Todd Nordholm: Our funding advantage and our disciplined approach to asset liability management allow us to further deliver upon our mission to build a trusted secondary market for credit build America.
Bradford Todd Nordholm: We believe pool purchases within the agriculture, finance and real infrastructure lines of business and serve as important opportunities.
Bradford Todd Nordholm: Volume generation over the next few years.
Bradford Todd Nordholm: As financial institutions continue to manage the capital efficiency loan and deposit growth and liquidity needs.
Bradford Todd Nordholm: That coupled with our securitization capability enhances our ability to offer low cost liquidity at scale to the rural utilities, we serve.
Bradford Todd Nordholm: It's worth, noting I think that the internal operational expertise and ability to execute.
Bradford Todd Nordholm: Securitization overlaps with pool purchases and it's really a new competency developed at farmer Mac within the last few years.
Bradford Todd Nordholm: The rural infrastructure Finance segments showed strong business volume growth in the first quarter 2024, primarily driven by increased investment activity and additional financing for renewable energy projects. In response to continued strong demand for our renewable electric power generation.
Bradford Todd Nordholm: <unk> and storage.
Bradford Todd Nordholm: The pipeline remains strong in the near future and we have plans to invest additional resources to explore new opportunities.
Bradford Todd Nordholm: Our agricultural finance line of business grew during the first quarter. Despite the seasonally large number of payments related to loans that are on the annual payment cycle.
Bradford Todd Nordholm: The rise in market interest rates that has persisted this had a direct impact on the farm and ranch product interest rate.
Bradford Todd Nordholm: Yes, generally exists an inverse correlation between farm <unk> ranch loan purchase volumes.
Changes in the farm and ranch product interest rates with higher product interest rates slowing portfolio loan prepayments.
Bradford Todd Nordholm: The net effect of these forces contributed to positive farm and ranch loan purchase portfolio growth in the first quarter of 2024, as new farm <unk> ranch loan purchases outpaced loan prepayments.
Bradford Todd Nordholm: We believe our pipeline will continue to grow for the remainder of the year.
Bradford Todd Nordholm: Lightning bank liquidity and the forecasted decline in farm income relative to prior years is expected to drive more loan volume.
Bradford Todd Nordholm: <unk> pool purchases.
Bradford Todd Nordholm: While uncertainty persists about future changes in monetary policy.
Bradford Todd Nordholm: Borrowers are adjusting to higher interest rates.
Bradford Todd Nordholm: And we are are offering products that are more tailored to the current rate environment.
Bradford Todd Nordholm: Our wholesale finance products within the agricultural finance line of business presents strong relative value to our counterparties relative to market interest rates.
Bradford Todd Nordholm: We expect the continued diversification of our products versus the broader market to drive continued growth in this area.
Bradford Todd Nordholm: As we look forward, we're encouraged by the momentum we've seen since the start of the year.
Bradford Todd Nordholm: We believe that we're well positioned to make continuous progress.
Bradford Todd Nordholm: Long term strategic growth initiatives to further our mission efficiently and innovative place.
Bradford Todd Nordholm: Against this backdrop of broader market uncertainty.
Bradford Todd Nordholm: Our website, an investor and marketing materials are beginning to reflect our efforts to use brand and deepen our connection with stakeholders and a compelling and uniform way.
Bradford Todd Nordholm: Fourth the expansion of our mission driven work it helps build a strong and vital Rural America.
Bradford Todd Nordholm: The initiative is intended to highlight our distinctive position as the secondary market partner.
Bradford Todd Nordholm: Fosters greater connections between Wall Street, and main Street America, as well as across the entire value chain.
Bradford Todd Nordholm: Real growth innovation and prosperity.
Bradford Todd Nordholm: Americas rule and agricultural communities.
Bradford Todd Nordholm: In no small part the fuel for that growth also comes from our active creation.
Bradford Todd Nordholm: Our investment opportunities for the capital markets and strong access to capital.
Speaker Change: So at this time I'd like to turn the call over to a part of our mission.
Speaker Change: Our Chief Financial Officer.
Can you discuss our financial results in more detail.
Speaker Change: Thank you Brad good morning, everyone.
Speaker Change: Maybe 24 results highlights.
Speaker Change: Measured approach and continued strong credit quality.
Speaker Change: Across market cycles.
Speaker Change: We achieved $1 4 billion.
Speaker Change: Gross new business volume this quarter and this was primarily driven by loan purchases of renewable energy.
Obviously discuss farm <unk> ranch foods, such as a new exotic securities.
Speaker Change: In corporate segment.
Speaker Change: After the repayments and maturities.
Speaker Change: About $400 million.
Speaker Change: During the first quarter.
Scott: Tony This is Scott.
Scott: This speaks to the benefit of the strategic decisions that rod.
Scott: That we've undertaken over the last few years to diversify our portfolio and create opportunities in all interest rates.
Scott: Core earnings.
Scott: $43 4 million.
Well $3 96 per share in the first quarter of 2024.
Scott: This reflects a $1 5 million decreased sequentially and $4 $5 million year over year increase the sequential change in core earnings was primarily due to lower net effective spread.
Scott: This was driven by some seasonality related to non accrual loans that were recorded in the first quarter.
Scott: We often see an increase in non accrual loans.
Scott: First and third quarters of every year.
Scott: This is related to the annual and semiannual payment schedule for the majority of our farm <unk> ranch loans.
Scott: It does tend to reverse with famous flow set of codes and subsequent quarters.
Scott: We also encountered a modest increase in our floating rate funding costs. During the first quarter and this was driven by certain dynamics in the sofa credit market that spills into the fourth quarter of 2023.
Scott: But youll have your increase in core earnings was driven by $4 6 million after tax increase in net effective spread and a $2 1 million after tax decrease in our provision for credit losses, and this was partly offset by higher operating expenses from increased head count increased stock compensation.
Scott: <unk> expense and investments in technology projects.
Scott: In percentage terms net effective spread in the first quarter of 2020 full with 114 basis points compared to 119 basis points in the fourth quarter of 2023, and consistent with 115 basis points in the same period last year.
Scott: Over the course of 2023, we achieved record levels of net effective spread as we benefited from the rapid rise in short term rates and reinvesting about excess capital. We generated additional was done with the upward repricing of a short term investment portfolio.
Scott: Capital That'd be Reeves Opportunistically when rates were at historical lows in 2020 and 2021.
Scott: <unk> done extremely well to also rising wage environment and ongoing market uncertainty.
Scott: As we look ahead.
Scott: Treasury desk will be opportunistic and taking advantage of favorable market conditions for GSE people and pre fund new issuances, while refunding maturing debt without taking excess risk we just.
Scott: Just stopped in the first quarter as we saw a reversal of the unfavorable credit widening that occurred in the fourth quarter 2023, and we took advantage of tightened levels by pre funding.
Scott: We continue to hold approximately $800 million in cash and other short term instruments in our liquidity portfolio.
Scott: Does this help us whether potential market disruptions are extra isn't highly liquid capital generates immediate returns in a high nominal.
Scott: We project limited downside to earnings if.
Scott: If rates decline in the future due to our proactive and prudent capital allocation strategy.
Scott: Where are we on lodging and leering duration to minimize volatility.
Scott: Specifically, we expect to retain some of the benefit over the medium term, even if rates decline.
As we've started extending maturities and our investment portfolio.
These are our practices that are consistent with our disciplined approach designed to help minimize earnings volatility.
Scott: Despite some macro headwinds we continue to see strong access to debt capital markets.
Scott: The flight to quality investment, which allows us to be very well positioned to fund new asset opportunities as they arise.
Scott: As Brad highlighted in his comments, we are very pleased with the execution of our fourth from CBS transaction in April we received more than three times. The demand for this latest offering and this is really a testament to farmer mac's reputation with institutional investors.
Scott: What is the overall market appetite for the underlying agricultural asset class now.
Scott: Not only with demand strong, but we were successfully able to expand our investor base and also introduce new classes of senior notes to address the cash flow demands of capital markets and this interest rate environment.
Scott: The consistent farm series issuances every year for the last four years had not really built a strong foundation.
Scott: Our future market liquidity, but also led to improved execution economics and greater efficiencies in service date for the <unk>.
Scott: Cultural mortgage backed securities market.
Scott: Securitization of many beneficial aspects for farmer Mac. It allows us to diversify our funding and Hans and optimize the balance sheet by efficient deployment of capital and also enables our growth strategy.
Scott: Getting new ASIC opportunities into our conduit.
Scott: Turning to liquidity of capital both remained extremely well in excess of all regulatory requirements.
All projections show minimal change in our profitability, coupled with limited exposure to movements in interest rates, where the market rates go up or down.
Scott: As of March 31, 2020, full followed that CAD 295 days of liquidity and this is another important data point that validates our resiliency against short and medium term market disruption.
Scott: Operating expenses increased by 8% sequentially and 15% year over year.
Scott: This is primarily due to the expenditures that are associated with head count.
And increased stock compensation expenses as well as investments in technology projects.
Scott: Expenditures associated with our multiyear technology investment and our Treasury and cash management system to enhance trading hedging and reporting platforms, partly contributed to the year over year increase in expenses.
Scott: Modernization effort is expected to position us to more effectively defend against cyber and fraud threat.
But also allow us to scale, our portfolio and continuing to diversify our product offerings such that they are in alignment with our growth strategy.
Scott: And our business and funding opportunities.
Scott: We also continue to make investments and strategic focus areas, such as renewable energy and continue to modernize our infrastructure, including our servicing and loan platform to support our growth and strategic objectives.
Scott: All of this has resulted in an operating efficiency ratio that is 30% for the first quarter of 2024 and I'll note that it's well in line with our long term strategic plan target.
Scott: Well continue to closely monitor artificial fee ratio and manage it as we've done such that we expect to remain at or below our long run average of 30%.
Scott: Noted some of the increase in efficiency ratio. This quarter was related to stock incentive compensation, which is seasonal with most awards granted during the first quarter of each year.
Scott: As we make investments in our infrastructure and funding platform and innovate our loan processes to accelerate growth. We may see some temporary increases that would result, if the efficiency ratio rising about the 30% level.
Scott: Our credit profile and our performance there remains stable highlighted by continued strength across the agricultural and rural infrastructure portfolios.
Scott: Hosted another quarter without any charge offs and benefited from a $1 9 million relief from a total allowance and this was largely a result of one rural infrastructure alone that improved its outlook during the first quarter.
Scott: 90 day delinquencies as of March 31, 2020, full reflect 27 basis points across our entire portfolio and this is in line with the same period last year.
Scott: Generally it's a higher delinquency levels at the end of the first quarter and third quarter due to the annual and semi annual payments for.
Scott: Most of our farm <unk> ranch loans.
Scott: In fact that I noted previously from the non accrual loans are associated with annual payment cycle.
Let me now turn to capital.
Scott: Farmer Mac's one $5 billion.
Scott: Of core capital as of March 31, 2024 exceeded our statutory requirement by $612 million for 70% goal.
Scott: <unk> capital increased sequentially and this was primarily due to an increase in retained earnings.
Scott: Tier one capital ratio as at March 31, 2020, full improved to 15, 5% from 15, 4% at year end largely.
Scott: Largely due to higher retained earnings as I mentioned previously.
Scott: Maintaining credit standards that reflect our risk profile.
Scott: Coupled with the strong levels of capital is a fundamental part of our long term strategy.
Scott: We expect our long term capital position and a strong capital position.
Scott: Allow us to be resilient.
Scott: And continue to be a source.
Scott: Low cost liquidity for our customers and borrowings, even though the evidenced difficult times.
Scott: In conclusion our.
Scott: <unk> delivered strong quarterly results, maintaining the key metrics that'd be highlight on each call while staying within our credit framework, notably we delivered 17% return on equity this quarter and stayed well in line with our efficiency target of 30%. We believe that our balance sheet is well positioned for uncertainty and when.
Scott: More optimistic than ever to deliver on our long term strategic plan objectives.
Scott: Brad Let me turn it back to you.
Bradford Todd Nordholm: Okay. Thank you very much Arnaud.
Bradford Todd Nordholm: Before we turn to questions and answers I want to let everyone know that we will be hosting our first ever Investor day event on Thursday May 16.
Bradford Todd Nordholm: Beginning at 10, a M eastern time.
Speaker Change: Our results and consistent performance through our market cycles have resulted in a very strong momentum in the markets.
Speaker Change: And we want to use this event does not cause me to further educate the broader investment community.
Speaker Change: Our organization, our core mission to increase the accessibility of financing for American agriculture and rural infrastructure.
Speaker Change: We will provide a link to access the live webcast and it'll be available at our website.
Speaker Change: You're interested in participating in person it'll be in New York City based event and please reach out to our Investor Relations team as we still have some space available.
Speaker Change: And now operator, I'd like to see if we have any questions from anyone on the line today.
Speaker Change: Thank you Sir.
Speaker Change: <unk> and gentlemen, we will not begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone phone, you'll hear a prompt at your hand has been raised Jewish did decline from the polling process. Please press star followed by the number too.
Speaker Change: If you're using a speaker phone please lift the handset before pressing Keith.
Speaker Change: Our first question comes from the line of Bose George from K B W. Go ahead. Please.
Bose Thomas George: Hey, everyone. Good morning.
Bose Thomas George: I wanted to start just on the spread pardon me you noted the seasonality of the nonaccrual loans impacting the yield side and then the issue on.
Bose Thomas George: On the funding side both of these normalize into the second quarter should we see spreads go back to the <unk> 23 levels as long as interest rates remain fairly stable.
Bose Thomas George: Yes.
Speaker Change: Yeah, Hey, Bose nice to hear from you.
Speaker Change: There are those factors at work, we talked about the impact of the reversal of the interest accrual.
Speaker Change: Another point I'd like to make related to any S, which is at the heart of your calculation is that a good part of our volume growth came on late in the quarter. So we had a numerator or denominator rather they grew at the end of the quarter.
Speaker Change: As the numerator had been accruing through the quarter.
Speaker Change: So those are all factors no.
Speaker Change: As it relates to reverting or snapping back to 119, I think we would caution that it would snap back to exactly that level I think on prior calls we have explained that over time, we expect that 119 to 122.
Speaker Change: Slip I was asked on the last call well go back to.
Speaker Change: The one hundreds and I indicated probably to the hub.
Speaker Change: Teams are 100 teams so.
Speaker Change: So we do expect some erosion over time, but.
Speaker Change: Based on the first quarter results, some reversion towards that higher level should be expected.
And Bose I'll, just add one thing with respect to the widening that we saw in credit markets. This was a dynamic that persisted in Q4, you probably heard a you know the epilepsy transcript last year with the fed easing up on some of the differing activities that they are planning to undertake that should a little favorably into the market and in full.
Speaker Change: We started to see quite a few signs of that in Q1 of this year and we have.
Speaker Change: Very opportunistically pre fund it so just to give you a sense that there was a widening to the tune of about 15 basis points relative to sort of put spreads.
Speaker Change: In the fourth quarter of last year, we've seen that actually come in woods to be less than five basis points. So you know we pre funded at those levels, we got a little bit of negative carry in Q1 that also resulted in some erosion in our net effective spread coupled up with the non accruals and the volume dynamic that Brad just mentioned.
Speaker Change: Domestically, we should trend higher, but all things notwithstanding I think that high watermark of 118 basis points or 119 basis points, its a little unrealistic to system.
Speaker Change: Okay. Great. Thanks, that's very helpful. And then actually switching to the securitization that you guys did can you just talk about the spread impact of securitizations versus on balance sheet and then when you look at the spread and include sort of the risk based capital benefit.
Speaker Change: Sort of the overall ROE impact of using securitization.
Speaker Change: Hum.
Speaker Change: Thank you you know B as I mentioned, we saw some really.
Speaker Change: Favorable market dynamics in Q1, and we timed our securitization transaction extremely well.
Speaker Change: And so when you look at just the long term impact of the coupon that we received.
Speaker Change: Received relative to the U S was received in the market. We were extremely favorable when you compare that to the transaction that we did just about a year ago in terms of just the capital benefit we can come back to you on a lot of the specifics.
Speaker Change: With respect to just how accretive this transaction was but.
Speaker Change: I'll just say that you know just one data point you know as.
Speaker Change: As we look out over 18.
<unk> 18 year Horizon, we actually took a chunk of our cash flows and we've locked in a fairly attractive spread over the very long duration.
Speaker Change: So all in we.
Speaker Change: Expect to see you know a hurdle rate for any transaction that we do is about 30% our securitization transactions come in I wanted to see them at least double that it's not been something and then we also get the capital to lease that really starts to enable continued growth strategy.
Speaker Change: To be Tyler and yes product like telecom and renewable energy.
Speaker Change: Okay, great. Thanks very much.
Thank you <unk>.
Speaker Change: Our next question comes from the line of Bill Ryan from Seaport Research Partners go ahead. Please.
William Haraway Ryan: Hi, good morning, and thanks for taking my questions.
William Haraway Ryan: One oh.
William Haraway Ryan: A bit on the micro side, and then one macro but on the micro following up on the E S.
Thinking about.
William Haraway Ryan: The Treasury segment.
William Haraway Ryan: You talked about there was some pre funding I assume that's obviously where that took place you had a little bit of compression, but you've also historically talked about increasing the duration of the portfolio.
William Haraway Ryan: To what extent did that have an impact on the treasury and E S.
William Haraway Ryan: You know the the <unk>.
William Haraway Ryan: Eurasia, the extension I would say, maybe tick down and yes down by.
William Haraway Ryan: Half a basis point to one at this point.
William Haraway Ryan: We do expect to see them.
William Haraway Ryan: Erosion and it's really hard to predict Bill you know what the fed is going to do but if you look at just where things are trending today relative to where the market predicted six months ago. When you take a look at the forward curve you know I think markets were predicting seven rate cuts this year.
William Haraway Ryan: And based on you know what we've heard more recently with the feds, they're gonna stay higher for longer so what does that mean, possibly to be tougher in the back half of this year.
William Haraway Ryan: Things that we continue to emphasize is that when we actually manage our LMR asset liability management, we tried to mitigate volatility fast and so we did that and the extended duration.
William Haraway Ryan: You know, we had a benefit of almost $1 billion of cash that we raised back in 2020, we've been layering in maybe a third overtime and extending our duration on our investment portfolio will we see a little bit of negative carry as the fed stays higher for longer it's the opportunity cost of not reinvesting back relative to a year ago.
William Haraway Ryan: Yes, we will but as I mentioned, that's probably likely to be you know and anywhere in the tune of about one basis point on under on an N E. S percentage basis, well really start to see a pickup in that strategy over a year as we start to see the yolk of steepen and we start to see more rate cuts come into play but again.
William Haraway Ryan: This is something that we do not to maximize short term profits, but we do it to minimize our volatility which has played out very well.
Speaker Change: Okay. Thanks for the detailed response on that and second question again kind of little bit more bigger picture, but could you provide an update on the farm Bill you know what is being proposed in there that could benefit farmer Mac I believe a couple of things mentioned in the past had been like increasing the acreage that you can.
Speaker Change: Finance.
Speaker Change: Being able to work around co ops.
Speaker Change: In utilities business, but maybe you can give us a little bit of color on that.
Speaker Change: I'd be very pleased to youre going to start seeing more headlines I think about the farm Bill of course. It was it's scheduled to be revisited and re passed every five years and that exploration that maturity was in 2023, So it's already operating under it.
Speaker Change: An extension.
Speaker Change: Just in the last week and a half G T Thompson.
Speaker Change: Krishnan from Pennsylvania, who chairs the house Agricultural Committee.
Speaker Change: He has announced his intention to release the Jose Committee's draft of farm Bill before Memorial Day weekend.
Speaker Change: And with.
Speaker Change: With that we're seeing.
Speaker Change: A lot of conversations we're in active discussions conversations with the staff in and really appreciate the fact that the farm Bill is by all indications beginning to move forward. Now. This is important for farmers and ranchers in agribusiness is across the United States as well as those who benefit from other programs.
Speaker Change: Our delivered under the farm Bill.
Speaker Change: We werent sure what would happen on the Senate side, certainly there's been a huge amount of work done.
Speaker Change: Senator <unk> has announced.
Speaker Change: The Q2 is going to move forward to Senate committees.
Speaker Change: Ladies.
Version and we've been closely monitoring the details of both.
Speaker Change: It's premature for us to project exactly what this means for farmer Mac obviously.
Speaker Change: When bills are negotiated are where their reconciliation taking place a lot can happen and so we just can't project exactly what happened, but the things that we're interested in you mentioned enhanced ability to.
Speaker Change: Originate a renewable energy project finance loans, not changing the eligibility of the power purchase to originate some broadening that.
Speaker Change: To be able to do more types of USDA loans that are consistent with our mission.
Speaker Change: Possibly getting some relief from the 2000 acre limitation, which.
Speaker Change: Actually by a regulator was recommended to be dropped in with some substitute for a capital requirement.
Speaker Change: Which we believe would be favorable to farmer Mac. These are things that we have consistently talked about now.
Speaker Change: For a number of years and where our key stakeholders and even our detractors are well aware of what we want and more importantly, exactly why we think it would be beneficial to.
Speaker Change: Rural America too.
Speaker Change: Culture to rural infrastructure.
Speaker Change: And while it's absolutely consistent with our overall mission so stay tuned, but we hope a lot happens in the next couple of months on the farm Bill.
Speaker Change: Okay. Thanks, Brett.
Speaker Change: Hmm.
Speaker Change: Thank you Les.
Brendan Michael McCarthy: Ladies and gentlemen, just a reminder, should you have a question. Please press star followed by the number one on your Touchtone phone you have our next question coming from the line of Brendan Mccarthy from Sidoti. Please go ahead.
Brendan Michael McCarthy: Hey, good morning, everybody. Thanks for taking my questions.
Brendan Michael McCarthy: I just wanted to start off taken will get volume you know I think you mentioned a potential.
Brendan Michael McCarthy: Potential softening in and farm net income maybe driving increased borrowing in the farm and ranch sought on the farm and ranch side.
Brendan Michael McCarthy: Can you talk about how you how you look at that from an underwriting perspective.
Brendan Michael McCarthy: Any changes in underwriting there.
Brendan Michael McCarthy: Yeah, I'm going to turn over to Zack Carpenter, who is with us today.
Zachary N. Carpenter: Talk about both underwriting and the impact that changes in that part of it may have in volume and maybe how that breaks down by sector. So Zach good morning, Brandon.
Zachary N. Carpenter: First off well.
Zachary N. Carpenter: Well net farm income is expected to decline from 2023 and the highs of 2022, it's still above the historical average here. So in context, right, we've seen a decline but still.
Zachary N. Carpenter: Still doing well at the farm gate now we are seeing some pressure on liquidity.
Zachary N. Carpenter: Across certain sectors of the farm gate, so that is driving the need to potentially lever a little bit more on the farmland, where there's plenty of equity as we continue to see a farmland appreciate albeit at a slower rate. So.
Zachary N. Carpenter: Overall, we still feel very comfortable with the borrower and the types of transactions. We're seeing so when we look from an underwriting perspective, clearly there is a component of leverage and cash flow. So we are seeing some tightness in cash flow, but as long as we feel comfortable that theres good liquidity.
Zachary N. Carpenter: At the borrower level and.
Zachary N. Carpenter: Allowing them to tap some equity in the farmland also supports our liquidity we are comfortable so we haven't seen any significant deterioration.
Zachary N. Carpenter: That being said, we have seen some stress in certain sectors across the farmland space, but overall, our underwriting standards remain very strong credit quality remains very strong.
Zachary N. Carpenter: And you know what do you see additional opportunities to support the farmer to kind of weather some of the declines in commodity prices and maybe a little bit more sticky on the input side.
Speaker Change: Got it. Thank you that's helpful.
Speaker Change: And I believe you mentioned there was a 57 million pool of farm <unk> Ranch loans that you purchased that added to the business volume in the first quarter can you talk about that transaction I guess was that any kind of stress scenario from the on the lender side.
Speaker Change: Yeah happy to now it was a great opportunity for us to support one of our key originators that did close in the <unk>.
Speaker Change: Back half of the quarter, so well see some benefits of that heading into the second quarter.
Speaker Change: This is this is really kind of a theme that we've been talking about right. When rates were low we saw a lot of originators lenders kind of hold loans on balance sheet to take advantage of.
Speaker Change: Growth in deposits and capital now as things revert with higher interest rates and potential.
Speaker Change: Potential issues with capital and changes in capital from a regulatory perspective, theyre kind of re looking at their balance sheet to say, hey, what makes sense for us to keep our balance sheet.
Speaker Change: As well as potentially offload for liquidity purposes. So this wasn't a stressed scenario. This is pure capital and liquidity management for this organization.
Speaker Change: And a lot of these institutions are trying to grapple with a servicing and overhead and capital requirements, especially for you know I'd say smaller farmland loans read a lot of these loans still take the same.
Speaker Change: Require the same servicing and management as larger loans. So that's a lot of overhead that has a lot of structure to put in place to manage that.
Speaker Change: And so when you get a portfolio of size in that nature, you kind of stresses that dynamic internally from our expense and capital perspective. So this is purely white farmer Mac was created to help support these lenders in this with this.
Speaker Change: Specific area and frankly, I think could provide more opportunities for us in this dynamic to support more financial institutions as they continue to look at liquidity and capital.
Speaker Change: Got it that makes sense.
Speaker Change: Last question for me just from a very broad perspective, what could really drive outperformance or underperformance relative to your expectations for the rest of the rest of the year, obviously assume the industry environment plays a big part of that but just kind of curious as to your thoughts.
Speaker Change: With the increasing diversification in our business.
Speaker Change: And a relatively conservative approach to.
Budgeting and forecasting at farmer Mac, it's hard to forecast what that event might be it would really be some kind of black Swan event.
Speaker Change: So could it happen on the credit side, I would never say never but.
Speaker Change: Our credit metrics have been very consistent and I think speak for themselves.
Speaker Change: Be on the volume side, when kind of quarter on quarter I Hope we show a <unk>.
<unk> digit growth for the quarter.
Aside from an occasional opportunity to do a large portfolio purchase such as in 2019, when we purchased a portfolio of well infrastructure loans or some of the opportunities that may be Zach is looking at in the back half of this year aside from that it's pretty predictable so.
Speaker Change: I don't really foresee.
Speaker Change: Anything that would be a major change on the upside or downside and the kind of growth and performance that you've seen from us very consistently now for a number of years.
Speaker Change: Great. Thanks, everybody.
Speaker Change: Thank you there seems to be no further questions at this time I'd now like to turn the call back over to Mr. Noah Hong for final closing comments.
Good well. Thank you all very much we truly appreciate it when you participated in these calls.
Noah Hong: It gives us an opportunity to.
Noah Hong: Thank you and the disciplined way about how we are assessing our recent past performance and our prospects and also to hear from you whats on your mind and maybe the gaps in what we've explained to you in and how we can better.
Noah Hong: Better response, so thank you very much we truly appreciate your participation.
Noah Hong: I mentioned that if you're interested check in on the Investor day presentations, both a webcast as well as live.
Noah Hong: That will be coming up a week from this next Thursday.
Noah Hong: And if there are other questions as follow up please follow up with you all pumps and with that we wish everyone. A very good day. Thank you.
Speaker Change: Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.
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