Q4 2024 Federal Agricultural Mortgage Corp Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to the farmer Mac fourth quarter 2024 earnings results Conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you requiring me to this.
Please press star zero for the operator.
Speaker Change: This call is being recorded on Friday February 21st 2025.
Nazareth: I would now like to turn the conference over to job, but Nazareth. Please go ahead.
Speaker Change: Good morning, and thank you for joining us for our fourth quarter and full year 'twenty 'twenty four earnings conference call I'm jump in 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.
Speaker Change: Looking statements about the company's business strategies and prospects, which are based on management's current expectations and assumptions thesis.
Speaker Change: 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.
Speaker Change: Please refer to farmer Mac's 2024 annual report on Form 10-K filed with the SEC today for a full discussion of the Companys risk factors on today's call. We will also be discussing certain non-GAAP financial measures disclosures and reconciliations of these non-GAAP measures can be found in the 'twenty 'twenty four Form 10-K and earnings.
Speaker Change: Release posted on farmer Mac's website farmer, Mac dot com under the financial information portion of the investors section.
Ramesh Parnell: Joining us from management. This morning is our president and CEO, Brad Norton home, who will discuss 2020 for business and financial highlights and strategic objectives, and Chief Financial Officer of Parnell, Ramesh, who will provide greater detail on our financial performance select members of our management team will also be joining us for the question and answer period.
Speaker Change: At this time I'll turn the call over to President and CEO Brad Brad.
Ramesh Parnell: Thanks, Joe.
Speaker Change: Good morning, everyone and thank you for joining us.
Speaker Change: We delivered another year of strong financial results building upon our record performance over the last few years.
Speaker Change: Our 2024 performance was highlighted by record net effective spread and core earnings driven by consistent loan growth effective asset liability management and funding execution.
Speaker Change: And coupled with well managed operating expense control.
Speaker Change: We also successfully closed to 300 million dollar Barb securitization transactions.
Speaker Change: Our commitment to being a regular issuer in the market.
Speaker Change: This is the first time, we have completed two issuances in one year.
Speaker Change: All these factors have allowed us to execute in a matter that is consistent with our long term strategic growth objectives and it showcases the resiliency of our business model against market volatility in a changing credit environment.
Speaker Change: This morning, we also announced our 14th consecutive annual dividend increase.
Beginning in the first quarter 2025, we will be increasing our quarterly common stock dividend by 10 cents per share to $1.50, which represents a 7% increase from the quarterly common stock dividends paid in 2024.
Speaker Change: This increase is the tangible indication to our shareholders of our ongoing commitment to provide a dividend payout.
Speaker Change: Balances previous and expected future earnings growth.
Speaker Change: Maintaining an adequate level of capital to exceed regulatory and market requirements.
To support our expectations for future business volume growth.
Speaker Change: Our total revenues in 2024.
Speaker Change: The $362 million compared to $349 million in 2023, primarily due to higher net effective spread.
Speaker Change: This reflects the compositional shift of new business volume towards higher spread businesses that we have seen over the last few years.
Speaker Change: And the continuing effectiveness of our proactive management of our balance sheet and funding levels.
Speaker Change: Core earnings year to date improved to $172 million modestly exceeding our prior year record.
Speaker Change: Reflected in 2024 results is the recognition of the renewable energy investment tax credits of $2 $6 million is a benefit to income taxes from tube dairy renewable natural gas projects.
Speaker Change: We are actively looking at these types of renewable energy credit opportunities in 2025, as we continue to be a significant participant in the renewable energy project finance market, which gives us unique insights into the value of these credits.
Speaker Change: Turning to volume.
Speaker Change: Fourth quarter 2024, we introduced a new segment reporting construct that provides for clear insight into the various contributing components of our portfolio's net effective spread and a.
Speaker Change: Our overall bottom line profitability.
Speaker Change: Our partner will cover this in more detail.
Speaker Change: But we're now showing you a more granular information on each segment's direct allocation to operating expense.
Speaker Change: We've also rebranded our rural utilities segment.
Speaker Change: Power and utilities and introduced a new broadband infrastructure segment.
Chris Blake: Chris Blake communicate the core areas of focus.
Chris Blake: The power and utilities segment includes loans to rural electric generation and transmission cooperatives and distribution cooperatives as.
Chris Blake: Wells eight vantage securities secured by those types of loans.
Chris Blake: The broadband infrastructure segment includes the loans to rural fiber cable broadband tower wireless local exchange carriers and datacenter projects.
Chris Blake: Previously held in the former rural utility segments.
Chris Blake: Real solid communication and data connectivity has proven to be a vital economic importance in the last decade, especially in rural America as more households in agricultural enterprises require more data and connectivity to thrive.
Chris Blake: We have strategically expanded our footprint in this market over the last several years.
Chris Blake: Turning us well with expected growth in digital technologies that is expected to require significant more computing and storage capabilities as well as investment in additional fiber network capacity.
Chris Blake: This new segment reporting construct aligns better with how we actually manage our business and provides better transparency into the economics of our portfolio and the overall value creation of our operations.
Chris Blake: In 2024, we purchased $7 billion in gross volume with farm and ranch and renewable energy bond purchases.
Chris Blake: Secondly, outpacing the prior year.
Chris Blake: After repayments and several large maturities and farm and ranch and power utilities advantaged volume, we grew $1 1 billion ending.
Chris Blake: Ending the year at $29 $5 billion.
Chris Blake: Our infrastructure finance line of business grew over $1 billion in 2024, largely driven by loan purchase volume within the renewable energy segment.
Chris Blake: As of year end, we had nearly $1 $5 billion of total renewable energy volume.
Chris Blake: Reflecting the continued strong demand for renewable energy power generation storage and the dedication and commitment from our organization to grow this segment and alignment with our long term initiatives.
Chris Blake: We introduced this segment in 2020.
Chris Blake: And have successfully doubled our volume in this segment every year since then.
Chris Blake: We believe that the growth in renewable energy generation and deployment of energy storage technologies has the potential to continue to deepen farmer mac's relationships with existing customers through new business opportunities.
Chris Blake: Our 2025 pipeline within the renewable energy segment remains strong.
Chris Blake: It's a robust efforts and investments to grow this portfolio remain one of our top priorities over the foreseeable future.
Chris Blake: The broadband infrastructure segment grew over $300 million or.
Chris Blake: Our 60% year over year.
Chris Blake: We expect to continue to see an increase in financing opportunities for other telecommunication providers in rural areas with fiber line expansion wireless broadband deployment industry consolidation and efficiency through <unk>.
Chris Blake: Mergers and acquisitions and.
Chris Blake: And data processing center build outs are increasingly important to real economic opportunity and the constant connectivity.
Chris Blake: Wired by the food and agricultural businesses.
Chris Blake: Within the agricultural finance line of business corporate finance saw net growth of about $200 million during 2024, reflecting our continued efforts to support larger more complex agribusiness focuses focused.
Chris Blake: Businesses that spanned the food supply chain.
Chris Blake: While volume tends to be lumpy on a quarter by quarter basis opportunities. In this segment are generally more accretive than farm <unk> ranch loans is evident in our new segment construct.
Chris Blake: We closed over $1 $5 billion of New farm <unk> ranch loan purchases in 2024 compared to a total of $780 million.
Chris Blake: 2023.
Chris Blake: That loan growth included $179 million of two pools of loans purchased from Cigna agricultural lender.
Chris Blake: Underscoring our secondary market track record, providing agricultural under solutions for their capital planning and our expansive product set to support customers of all sizes throughout market cycles.
Chris Blake: We expect to see this positive momentum continue in 2025.
Chris Blake: Tightening bank liquidity.
Chris Blake: And an adjustment to higher rate environment takes hold.
Chris Blake: While the USDA expects an increase in cash farm income in 2025 due to potential.
Chris Blake: Increases in government support payments with American Relief Act.
Chris Blake: Ongoing uncertainty and forecasted volatility in commodity prices is expected to drive more alarm lock volume.
Chris Blake: Producers navigate current market dynamics.
Chris Blake: Farm and ranch segment is core to our mission and we remain committed to bring our customers products and solutions that fit their profiles as they continue to navigate industry change and economic cycle.
Chris Blake: Offsetting farm <unk> ranch purchase growth in 2024 with over $2 billion and scheduled maturities with several large farm and ranch egg vantage counterparties driven.
Chris Blake: Driven by slower market loan growth for them and tightened market credit spreads resulted in less liquidity and diversification needs for these counterparties.
We successfully closed two arms securities transactions in 2020 for the second of which closed in November and was structured similarly to our earlier deal in April 2024.
Chris Blake: Since our initial farm securitization in 2021.
Chris Blake: Our execution has significantly improved leading to better financial results due to better spreads and reduce transaction and administrative costs.
Chris Blake: Looking ahead to 2025, we're planning to continue our target deal sizes of approximately $300 million.
Chris Blake: Consistent with the size of our prior deals.
Chris Blake: As we are continuing to explore the opportunity to introduce new securitization products and asset classes, including renewable energy for our customers, while continuing to build liquidity in the farm securitization program.
Chris Blake: As we look ahead, we are confident that our underlying business model strong capital position and uninterrupted access to the debt capital markets will continue to uniquely position us to partner with our customers to help them grow and manage any capital and liquidity risk they may might say.
Chris Blake: In the future, including risks related to ongoing market uncertainty and potential regulatory policy change.
Chris Blake: Our ability to navigate industry changes.
Chris Blake: Economic cycles, while growing earnings positions us well.
Chris Blake: Well to continue to create more opportunities for enhanced shareholder value through mission fulfillment.
Speaker Change: And 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.
Chris Blake: <unk>.
Speaker Change: Thank you Brad and good morning, everyone.
Speaker Change: 2020 full results once again highlight our consistent financial and operational execution.
Speaker Change: With proactive management of our balance sheet and funding sources.
Speaker Change: Suffice it seems of business revenue and our funding and hedging capabilities stemming from our disciplined approach to asset liability management allow us to continue to fulfill our mission and generate consistent shareholder returns across market cycles.
Speaker Change: Staying in alignment with our long term strategic initiatives.
Speaker Change: Net volume growth in fourth quarter, 2024, with $1 $1 billion and this was primarily driven by strong loan purchase volume in the farm and ranch.
Speaker Change: Energy and broadband broadband infrastructure segments.
Speaker Change: Offsetting loan purchase volume growth in the fourth quarter with $255 million.
Speaker Change: Our farm and ranch advantage that matured without refinancing.
Speaker Change: As we saw throughout the year changes in the quarterly advantaged securities volume, primarily driven by the larger transaction sizes.
Speaker Change: The product scheduled maturity amounts for particular quarter, the liquidity and loan growth opportunity needs of farmer Mac's advantage counterparties.
Speaker Change: And the pricing and availability of wholesale funding.
Speaker Change: The relative value of our wholesale financing product versus other funding alternatives.
Speaker Change: These factors, we expect advantage business volume in both lines of business to continue to be volatile.
Speaker Change: As we navigate the evolving needs of all stakeholders and all of the yield curve steepens and interest rates stabilize.
Speaker Change: The momentum that we saw in the farm and ranch renewable energy and broadband infrastructure business segments included strong loan purchase volume, which is generally more accretive and highest spread relative to the advantaged product.
Speaker Change: The shift in business composition to highest spread business has been one of the drivers of the increase in net effective spread quarter over quarter, we believe that our pipeline and the overall compositional shift positions us well heading into 2025.
Speaker Change: Turning to 2020 full results.
Speaker Change: Core earnings were $171 6 million or 15 cyclical with diluted share in 2020 full at $43 6 million or $3 97 per diluted share and fourth quarter 2024.
Full year core earnings results reflect modest growth over our record breaking 2023 financial performance and this is largely due to our proactive debt funding strategies disciplined asset liability management approach that is designed to minimize earnings volatility over the medium to long term.
Speaker Change: Coupled with opportunistic debt issuances that have allowed us to Accretively fund new asset opportunities.
Speaker Change: Awesome.
Speaker Change: Net effective spread improved $12 $6 million year over year and this is largely due to a shift in volume to more higher yielding assets.
Speaker Change: In percentage terms net effective spread compressed year over year by three basis points.
Speaker Change: 815 basis points due to loans moving into non accrual status, which has resulted in a decrease in interest income.
Speaker Change: And that has been coupled also with a more volatile funding environment.
Speaker Change: This dynamic was partially offset by our diversified revenue streams and opportunistic funding and hedging of our balance sheet with the use of callable debt securities.
Speaker Change: Core earnings in fourth quarter 2020, full declined sequentially by one 4 million and this was primarily due to an increase in operating expenses in credit expenses.
Speaker Change: Doctors will pass.
Speaker Change: Offset by an increase in net effective spread.
Speaker Change: Kris and preferred stock dividends and the previously mentioned renewable energy investment tax credits.
Speaker Change: Net effective spread in dollar terms improved quarter over quarter to $87 $5 million from $85 4 million.
Speaker Change: This improvement was driven by several factors and this concludes our proactive equity capital allocation strategy, where we are lodging and leering duration to minimize balance sheet and earnings volatility.
Speaker Change: The opportunistic redemption and re issuance of fixed rate callable debt at lower market interest rates.
Speaker Change: Improvement in floating rate funding levels relative to sofa and expanded viewed from volume growth in the renewable energy and broadband infrastructure portfolios.
Speaker Change: As we've mentioned on prior calls our treasury and funding desk Opportunistically take advantage of favorable market conditions and this coupled with our disciplined asset liability management positions us very well and changing credit environments to deliver consistent spreads across all business cycles in percentage terms net effect.
Speaker Change: The spread was unchanged sequentially at 116 basis points.
Speaker Change: Operating expenses increased 18% sequentially largely due to an increase in licensing fees infrastructure technology costs and higher transactional legal fees associated with our broadband infrastructure and renewable energy portfolios as Brad mentioned, we introduced new segment level reporting.
Speaker Change: In fourth quarter 2020 for that.
Speaker Change: <unk> reporting frameworks includes the breakout of our broadband infrastructure portfolio, which previously was sided within the rural utilities portfolio and provides the direct operating expenses within each of our new segments.
Speaker Change: These enhanced segment disclosures reflect our commitment to providing transparency into our portfolios.
Speaker Change: Both volume and profitability perspective.
Speaker Change: Operational efficiency was 30% for fourth quarter 2024, and it was 28% for full year 2024.
Speaker Change: Both are in line with our long term strategic plan target.
Speaker Change: This is a reflection of our disciplined approach to expense management, and we'll continue to monitor and manage expense growth as we've done proactively against incoming revenue streams.
Speaker Change: As we discussed on our last call.
Speaker Change: Very proud of the on time and in budget completion of our multiyear technology investment, which modernized our treasury infrastructure positioning us well to mitigate risk increase efficiency and enhanced deal flow as.
Speaker Change: We look ahead, we remain committed to bringing cutting edge technology and new capabilities to our customers.
Speaker Change: Continuing to invest in ways to build innovative systems that accelerate growth.
Speaker Change: Mostly monitoring and managing our efficiency ratio.
We expect that ratio to remain at or below a long run average of 30% to our disciplined approach to keeping our efficiency ratios in line with our growth expectations.
Speaker Change: Turning to credit.
Speaker Change: Our performance with respect to credit it was largely driven by large loans with BARDA with specific headwinds as the nature of all credit events and charge offs have historically tended to be idiosyncratic for example in 2024.
Speaker Change: Could an aggregate economic loss of $2 5 million and this was related to a single $14 5 million dollar agricultural storage and processing Barwood exposure.
Speaker Change: A portion of this was sold in second quarter 2024, and the remainder is currently under contract to be sold.
Speaker Change: Our total allowance for losses was $25 3 million as of December 31st 2024, and this reflects a $3 4 million dollar increase from September 30th 2024.
Speaker Change: The increase was primarily attributable to new volume and the infrastructure finance line of business and the single renewable energy loan that was downgraded to substandard during the quarter.
Speaker Change: Based on our analysis the issues involved with this substandard loan borrowers specific and are not indicative of any broader systemic risk in our portfolio.
Speaker Change: Overall substandard asset volume increased this quarter to four.
Speaker Change: $440 7 million from $402 million as of September 30th 2024, primarily due to credit downgrades.
Speaker Change: Substandard assets represented approximately one 5% of our total outstanding business volume as of year end 2024.
Speaker Change: <unk> to one 4% of our total portfolio as of September 30th 2024, and 0.8% as of year end 2023.
Speaker Change: 90 day delinquencies were 37 basis points across our entire portfolio as of December 31, 2020 full.
Speaker Change: Bed to 51 basis points at the end of September the.
Speaker Change: The decrease in fourth quarter is a seasonal pattern of farmer Mac's 90 day delinquencies with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarter of each year.
Speaker Change: This seasonal factor is due to the annual and semiannual payment dates on the majority of farm <unk> Ranch loans.
Speaker Change: Although we had credit expenses in 2024 that were above historical levels, we have outperformed our peers and how we have navigated a slowing down in the agricultural cycle, which reflects our strong underwriting and credit discipline.
Speaker Change: We believe that our total portfolio of loans as well diversified a credit book profile remained strong overall and that we are well buffered given our strong levels of capital let.
Speaker Change: Let me turn to capital now farmer Mac's, one $5 billion of core capital as of December 31st 2020, full exceeded our statutory requirement by $583 million or 64%.
Speaker Change: Tier one capital ratio was 14, 2% as of December 31, 2024, compared to 14, 2% as of September 30th 2024, and 15, 4% as of December 31st 2023.
Speaker Change: The year over year decrease in core capital was primarily due to the redemption of the series C preferred stock in third quarter 2024.
Speaker Change: Along with an expansion into more accretive lines of business such as renewable energy these lines of business to consume additional capital.
Speaker Change: This was offset by the efficiency that we gain from executing successfully on two securitization transactions in 2024.
Speaker Change: Our strong capital position has allowed us to continue to grow and diversify our revenue streams remained resilient and volatile credit environment and allow us to offer a source of low cost liquidity for our customers and borrowers.
Speaker Change: In difficult times.
Speaker Change: As you read in this morning's press release, we are very pleased to announce a 10 cent per share increase in our first quarter 2025 common stock dividend to $1 50.
Representing a 7% increase from the quarterly dividend speed in 2024, we.
Speaker Change: We believe that our strong earnings and consistent capital position support this dividend increase and our overall strategy to achieve a targeted payout that balances a reasonable growth with both previous and future earnings and our expectations for future business volume growth.
Speaker Change: We are also very pleased with the execution of our fifth from series transaction in November which is for the first time, our second transaction in a year.
Speaker Change: We received more than three times the demand for this latest offering.
Speaker Change: Which is really a testament to farmer mac's reputation with institutional investors as well as the overall market appetite for the underlying agricultural asset class not.
Speaker Change: Only with demand strong, but we were once again able to successfully expand our investor base in both tranches.
Speaker Change: The consistent farm series issuances every year for the last four years have not only built a strong foundation for future market liquidity, but also led to continually improved execution economics.
Speaker Change: Efficiencies in servicing for the agricultural mortgage backed securities market.
Speaker Change: The securitization program remains an important strategic initiative for farmer Mac as it allows us to diversify our funding and has an optimized balance sheet efficient deployment of capital.
Speaker Change: <unk> also enables our crude strategy by targeting new asset opportunities that we might include in our conduit.
Speaker Change: We are very pleased with the tremendous support we've seen from our customers and investors for this program and we remain committed to being a regular issuer in the market.
Speaker Change: Our liquidity and capital positions remain well in excess of all regulatory requirements.
Speaker Change: Our projections show minimal change in our profitability with limited exposure to movements in interest rates with the market rates go up or down as of year end 2020 for farmer Mac had 264 days of liquidity and we held approximately $1 billion in cash and other short term instruments in our investment portfolio.
Speaker Change: We expect to be well positioned in the medium term as we move into the anticipated fed easing cycle and we are confident in our resiliency against potential short and medium term market disruption.
Speaker Change: Once again, our team delivered strong consistent quarterly results.
Speaker Change: Any key metrics that we highlight on each calls while staying within our credit framework, which emphasizes loan to value and cash flow metrics.
Speaker Change: Notably.
Speaker Change: We delivered a 16% return on equity this quarter and an efficiency ratio of 30% both in line with our strategic target.
Speaker Change: Of 30% and within the range for return on equity.
Speaker Change: We believe that our balance sheet is well positioned for market uncertainty and we are more optimistic than ever to deliver on our long term strategic plan objectives and with that Brad Let me turn it back to you.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you very much Arnaud.
Speaker Change: As I hope you have heard we are very pleased with our 2024, our results and believe that we're well positioned to deliver on our multi year strategy as we head into 2025 with good momentum strong liquidity and capital levels.
A diversified business mix highly effective risk management practices and most importantly, a talented team of dedicated professionals.
Speaker Change: Before I turn to your questions I do want to comment on the change in administration here in Washington D C.
Speaker Change: As a publicly traded financial services firm and a government sponsored enterprise.
Speaker Change: We are crystal clear.
Speaker Change: Our enduring mission to increase the accessibility of financing to provide vital liquidity.
Speaker Change: For American Agriculture and rural infrastructure.
Speaker Change: Our central parts of the U S economy.
Speaker Change: We closely monitor regulatory and statutory developments.
Speaker Change: And messaging and as of right now, we do not anticipate material changes to our business.
Speaker Change: Results of the change in administration.
Speaker Change: We will continue to strive to develop and deliver on our mission throughout the agriculture economic cycles.
Speaker Change: As reflected by our financial results over the last several years.
Speaker Change: Our loan pipeline and capital base, our strong and growing and.
Speaker Change: And our revenue is well diversified providing capacity for further growth and creating more opportunities for us to enhance shareholder value.
Speaker Change: Put another way we are optimistic about our future.
Speaker Change: We'll maintain our singular focus.
Speaker Change: Filling our mission efficiently innovative Lee and profitably.
Speaker Change: As we navigate the back drop of a broader market uncertainty.
Speaker Change: Beautiful to interest rates regulation and policy change.
Speaker Change: This is how we believe we can continue to differentiate ourselves and.
Speaker Change: And deliver value to our customers and the end borrowers have rural America.
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, ladies and gentlemen, who will now begin the question and answer session should you have a question. Please press star followed by the wondering you touched on phone.
Speaker Change: I'll hear prompt that your hand have been raised should you wish to decline from the polling process. Please press star followed by the U C.
Speaker Change: If you are using a speaker phone please lift the handset before pressing any Gs one moment. Please for your first question.
Speaker Change: Your first question comes from Bill Ryan with Seaport Research Partners. Your line is now open.
Thank you good morning, Brad in a partner.
Speaker Change: A couple of questions one starting off at a high level and then one more numbers specific but.
Speaker Change: Last quarter, you sort of you mentioned that there might be a transformational securitization product coming out in.
Speaker Change: I think we kind of odd.
Speaker Change: Figured out it might be at some format that mortgage conduit.
Speaker Change: Could you maybe provide us an update on where that stands right now how you see the Tam.
Speaker Change: What the interest level is in.
Speaker Change: In the product as well and what kind of fee structure it might have.
Speaker Change: Yeah, Yeah, good morning, Bill and very nice too nice to hear from you.
Speaker Change: We're always looking at opportunities to develop new uses for the securitization machine that we've really built at farmer Mac.
Speaker Change: I think during the last call we were suggesting that we were working on the possibility of.
Speaker Change: Securitizing loans.
Speaker Change: A lot like our farm <unk> ranch loans, but might be originated by others.
Speaker Change: And that exploration work that feasibility work continues with market participants being the primary focus of that work.
Speaker Change: We also are doing some exploration.
Speaker Change: The feasibility of securitizing some of our renewable energy loans.
Speaker Change: At the end of the day in all cases, we're going to look at.
Speaker Change: The.
Speaker Change: Impact on notional profitability as well as return on allocated equity capital and making any final decisions and so stay tuned it's something that you'll continue to hear.
Speaker Change: About during 2025.
Speaker Change: But there are no pending announcements.
Speaker Change: Yes.
Speaker Change: And why don't I turn to a partner too to address your second question.
Bill Ryan: Hi, Good morning Bill.
Bill Ryan: I think you said you had a numbers related question as well.
Speaker Change: Oh, yes, just a number quite nervous question in terms of the G&A expense, it's obviously a little bit elevated this quarter.
Speaker Change: And you talked about the deployment of the Treasury and cash management system.
Speaker Change: You had some transactional legal fees.
Speaker Change: Could you talk about maybe unpack it a little bit like what were the specific components are and is this a new level that we should think about.
Speaker Change: Going forward.
Speaker Change: Yeah I think.
Speaker Change: Right and that we did have an elevated level of.
Speaker Change: Operating expenses in Q4, when you compare that to the prior quarters also resulted in a slightly elevated level of efficiency ratio all the things within our target of 30%.
Speaker Change: I think it's important to just look at our operating expenses given some seasonality that we see particularly in the first and fourth quarters.
Speaker Change: Looking at it annually, it's probably a better metric, but then he specifically and as you know we did have an elevation in our G&A expenses in particular, and one big factor associated with that path.
Speaker Change: You have to do with our exact and into some of these newer lines of business.
Speaker Change: You know, especially our telecom as well as a renewable energy of me as we continue to grow in the segment.
Speaker Change: You know we at least at the target level, we did experience some additional legal fees.
Speaker Change: I'd say that that is expected to be in endemic level, but you could expect a little bit of volatility back with wanted to drive it.
Speaker Change: I would say the the vastly larger driver, which I think will moderate over time.
Speaker Change: Has to do with the culmination of our.
Speaker Change: Program.
Speaker Change: We announced in Q4, we successfully completed our <unk> initiatives accompany that with some what I would call onetime or lumpy expenses that were associated with the completion of that program that we have to be contracted for us. So.
Speaker Change: Just wanted to a singular drivers of a slightly elevated what I would call general and administrative expenses, but what I would note. Though is older compensation expenses went up just a tad bit in against that is associated with some level of seasonality.
Speaker Change: Actually held our head count as well as our operating expenses.
Speaker Change: I think the compensation at extremely.
Speaker Change: Manageable levels, including our head count.
Speaker Change: Paul.
Speaker Change: Okay. Thank you I'll get back in the queue.
Speaker Change: Okay.
Speaker Change: Your next question comes from Bose, George with K B W. Your line is now open.
George Bose: Hi, everyone. Good morning, actually I wanted to ask first just about the outlook for it for the for spreads.
And assuming it looks like rates have hopefully found a range here and the fed might be on hold and if that is what happens with rates can you just talk about what you'd expect for spreads this year.
George Bose: Yeah, Yeah, good morning Bose.
George Bose: Very nice to you too.
George Bose: Well I'll offer a few high level comments and then.
George Bose: Ask a both a partner from a funding standpoint.
Zack Carpenter from a business segment standpoint too.
George Bose: Some additional color, but my observation is that.
As we're going into 2025.
We're seeing a little bit of.
George Bose: Almost like a competition between.
George Bose: Our rate of growth.
George Bose: On a notional basis of some of the wider spread businesses segments, such as renewable energy and what we're seeing is some accelerated growth in our farm and ranch product, which has lower capital consuming but also a bit lower.
Spread.
George Bose: I think in past years, we have <unk>.
George Bose: Provided some caution about net effective spread.
George Bose: It's being sustained at a high.
George Bose: Teams are 115% to 120%.
We.
George Bose: Suggested that it could drop down into the $112 13, you kind of see is that it's held up remarkably well and that's been.
George Bose: Because in that competition those higher margin segments.
George Bose: Experienced a lot of growth this last year.
Speaker Change: Zach maybe you can comment on just kind of how you're seeing the development.
George Bose: Of that between our farm and ranch and <unk>.
Speaker Change: These other segments going into 'twenty five.
Speaker Change: Yes, absolutely happy to first and foremost and farm and ranch. The one thing I will note is.
Speaker Change: Two things farmers are getting used to the higher rate environment.
Speaker Change: Maybe there was an expectation heading into 'twenty for that the rates would come down clearly given the economic environment. That's not the case, coupled with a tight agricultural economy farmers are needing additional liquidity and they've gotten a little bit used at a higher rate environment.
Speaker Change: And needing to support working capital and potential growth and so we're seeing that increased demand and farmer ranch, even though I would say overall rates remained higher than 'twenty, one and 'twenty two.
Speaker Change: And we think that's going to keep pace and in 2025.
Speaker Change: I would say in our newer lines of business, we had significant growth in the fourth quarter across corporate <unk> broadband infrastructure and renewable energy.
Speaker Change: Those spreads in the businesses maintained and in many instances increased in the fourth quarter and given that growth and given the pipeline that we see.
Speaker Change: These newer lines of business, we anticipate those spreads to maintain.
Speaker Change: Those levels, plus or minus a couple of basis points here or there, but we don't see any deterioration in the accretive ness of those newer lines of business heading into 2025. The one thing I would comment on produce to AG vantage.
Speaker Change: Credit spreads for investment grade Counterparties continue to be extremely tight.
Speaker Change: Which is part of the reason we've seen some declines in volumes in 2024, we've seen some widening out recently, but nothing significant so.
Speaker Change: We see some more market volatility, we'd anticipate the credit spreads.
Speaker Change: Relatively tight and could be volatile volumes heading into 2025.
Speaker Change: Yes, a part of anything to add.
Speaker Change: And then or how we're managing our balance sheet that has implications for the NDS and response to pose this question.
Speaker Change: Yes, absolutely.
Speaker Change: Let me just talk with your question a little bit retrospectively, but also prospectively. So you know you you've noted.
Speaker Change: Just how we manage the balance sheet and on net effective spread it on the funding standpoint, I'll just highlight a couple of things that we think will.
Speaker Change: In terms of just how we strategically optimize our balance sheet.
Speaker Change: Over the past year, we've certainly seen a very interesting yield curve environment, something a little bit more typical in Q3 that allowed us to redeem some of our callable issuances and that really helped us actually smoothen out our net effective spread.
Speaker Change: That was offset by some volatile floating rate funding that we experienced in the first quarter of this year, but again I highlight these two dynamics because it gives you a sense of just how well hedged.
Speaker Change: Our funding strategy and as we head into 2025.
Speaker Change: I think the market was suddenly expecting a more rapid easing cycle than what has been communicated by the fed as we head into 2025, perhaps.
Speaker Change: One rate cut.
Speaker Change: The second half.
Speaker Change: Should we think about our funding strategy, we narrowed that day they closely with how our businesses are in that business segment outlook. The opposite that you just heard that Zach.
Speaker Change: You know, we expect to be able to deploy a number of the tools that would be habitat disposal.
Speaker Change: Whether it's a fixed rate callable instruments, let's just say, we see an easing a faster even than anticipated that should actually give us a little bit of an asymmetric benefit relative to the thing.
Speaker Change: <unk> or trend a little bit higher and that has to do with the fact that we took advantage and crept up a little bit of net effective spread wildly remained high by bringing in more fixed rate call. It.
Speaker Change: So I'd be head into a what I would call a medium term easing cycle.
Speaker Change: You should really start to see our net effective spread everything else remaining equal benefit from that hedging strategy that arises from our fifth Street callable strategy.
Speaker Change: The only other point that I would make and I think you've alluded to this initially is.
Speaker Change: What happens if the.
Speaker Change: They see pretty high.
Speaker Change: You know I would say, Bob you know, assuming a flat to up.
Speaker Change: Perhaps a 100 basis point shock on our existing portfolio.
Speaker Change: You can expect the effect on our net effective spread coupled with just how we think about our loan portfolio to resolve essentially in a flat net effective spread protection.
Speaker Change: Okay, Yes.
Speaker Change: Yeah, that's great that's very good detail I appreciate that.
Speaker Change: And then actually in terms of on the credit side.
Speaker Change: As you're moving into higher product spread over time.
Is there a way to think about the impact of that on credit over time, the credit loss content relative to your historic content on the farm and ranch core side has obviously been minimal.
Speaker Change: Is there kind of a way to think about what's.
Speaker Change: You've noted that a lot of this stuff is idiosyncratic, but is there a way to think about where the run rate could be versus your core farm and ranch, where the run rate is so close to zero.
Speaker Change: Yes.
Speaker Change: With the.
Speaker Change: With the credits that we're focused on right now that require a bit more attention sub standard.
Speaker Change: It continues to be pretty idiosyncratic I think on prior calls.
Speaker Change: Last year, we were talking about some of the stresses with permanent crops and specifically almonds in California well.
Speaker Change: We have a situation where actually almond prices have rebounded quite nicely that will kind of through the system.
Speaker Change: Over the next year. It doesn't immediately result in a pick up because of contracts and other factors.
Speaker Change: And another one in a part of mentioned this we have renewable energy project.
Speaker Change: That requires some additional attention that had to do with.
Speaker Change: Some failure of equipment during construction.
It's a situation, where we expect it between insurance and contractors.
Speaker Change: It will get back on track just fine.
Speaker Change: But in an abundance of caution we have.
Speaker Change: Downgrade at that end and Hum.
Speaker Change: Special provisions, so thats the situation, where we could see some reversal. So it continues to be very difficult to.
Speaker Change: Two project.
Speaker Change: Systemic or sector.
Speaker Change: Our problem credit problem.
Speaker Change: For us it tends to be kind of one asset at a time and while the numbers say.
Speaker Change: That we have.
Speaker Change: We're in a more challenging part of the credit cycle.
Speaker Change: Both the 90 day delinquencies as well as sub standards are up.
Speaker Change: At the same time the situations that we see continue to be.
Speaker Change: Kind of related to various special situations, so I'm reluctant to provide.
Speaker Change: Any guidance on how that very favorable historic.
Speaker Change: Experience.
Speaker Change: <unk> will be trending up in the future.
Speaker Change: Yes.
Speaker Change: There is not current evidence.
Speaker Change: To say, yes, we're going to have a problem here or there.
Speaker Change: It tends to be one at a time.
Speaker Change: Okay.
Speaker Change: Sorry go ahead.
Speaker Change: If I might just add one comment to what Rob said, which will likely help you as you think about this and you know it.
Speaker Change: It does.
Speaker Change: Point to the fact that we tend to have a more conservative outlook in terms of credit and this has to do with the way our expected loss models look that's when we start to see volume shifting towards more accretive lines of business that also draws.
Speaker Change: More.
Speaker Change: <unk> loss estimates or projections.
Speaker Change: And so that tends to smooth out over time. So that's just something to keep in mind as you were thinking about.
Speaker Change: Modeling some of this but it's sort of all get booked at one and then you know then we don't have to worry about it you get the volume.
Speaker Change: Yeah, Yeah, yeah, Okay, great. Thanks, and then actually one.
Speaker Change: Political question, obviously, a lot of noise and things happening in D C, but specifically in terms of when you.
Speaker Change: Renewable energy.
Speaker Change: Business.
Speaker Change: The inflation reduction Act.
Speaker Change: You provided a lot of funds for that.
Speaker Change: Is there any indication that they.
Speaker Change: There could be changes in sort of how the level of support for projects. There just any color in terms of what could be changing in D. C relative to do that.
Speaker Change: Yes, sure a couple of thoughts on that first of all.
Speaker Change: Yeah.
Speaker Change: Add some.
Speaker Change: Reports for example of grants being frozen by USDA for renewable energy projects in the.
Speaker Change: The projects that we're financing are really not grant dependent.
Speaker Change: For investment tax credit dependent and so it's important to start off by making that distinction.
Where exactly.
Speaker Change: Administration and Congress, because it'll take a change in tax law go into tax benefits.
Speaker Change: Associated with these projects remains to be seen but a couple of points.
Speaker Change: The projects that we have financed those credits are locked in and and their credits Theyre not grants.
Speaker Change: Second that when you look at.
Speaker Change: Congressional support.
Speaker Change: For the tax credit elements of.
Speaker Change: The inflation reduction act, particularly as it relates to some of the projects.
Speaker Change: For construction of new energy infrastructure.
Speaker Change: And.
Speaker Change: And certain types of renewable energy.
Speaker Change: A lot of that money has been spent and traditional Republican districts and it's quite popular. So I think we're taking a wait and see attitude. We are very much comforted by the fact that what we have on our books is locked in.
Speaker Change: And if things change, we can adjust our origination accordingly.
Speaker Change: The final point I would make is that.
Speaker Change: These remain huge addressable markets for us.
Speaker Change: So when you look at the increase in our renewable energy.
Speaker Change: <unk> segment.
On a percentage basis, it's pretty impressive.
Speaker Change: <unk> basis.
Speaker Change: Coming quite impressive.
Speaker Change: But relative to the addressable market, it's still but a drop.
And so we're.
Speaker Change: We're going to continue to be very disciplined in what we originate we're going to continue to leverage the relationships that our key professionals have with other industry players to focus on quality projects.
Speaker Change: And if there are changes in tax law, we will adjust accordingly.
Speaker Change: We're not in a position where we can't.
Speaker Change: Those adjustments.
Speaker Change: In a nanosecond if.
Speaker Change: If we see something unexpected or negatives coming out of <unk>.
Speaker Change: Legislation for example.
Okay, great. Thank you.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please press star One. Your next question comes from Gary Gordon. Your line is now open.
Speaker Change: Okay. Thank you so had several questions most are asked.
One last one on the loan loss reserve.
Speaker Change: So you described the other credit issues last year as idiosyncratic.
Speaker Change: And those were dealt with with a specific reserves and charge offs overall, though the the reserve was up by about $7 million.
Speaker Change: So the question is where do we go from here or there.
Speaker Change: This introduced a period of.
Speaker Change: Steady or increases or not.
Speaker Change:
Speaker Change: Yes, maybe I.
Speaker Change: Put the question is.
Speaker Change: Since you've discovered some idiots syncretic issues does it.
Speaker Change: Expectation that that's part of your business going forward.
Speaker Change: Or was this sort of a catch up in the reserve to reflect that.
Speaker Change: So things can happen.
Speaker Change: Trying to think about the extent of the reserve buildup last year and what that means going forward.
Speaker Change: Yeah.
Mark Crazy: Turn to Mark Crazy to give you some additional color on this.
Mark Crazy: But let me just first start by saying that for a $30 million balance sheet is $7 million additional reserve.
Mark Crazy: Is is nothing compared to other financial institutions and.
Mark Crazy: It kind of sticks out because it's.
Mark Crazy: It's maybe a bit more for us, but relative to other institutions and relative to our credit.
Mark Crazy: Our capital pardon me relative to our capital.
Mark Crazy: It's it's extremely.
Mark Crazy: Minimal.
Mark Crazy: And I'd also note that it's very difficult to provide more specific because these situations do continue to be pretty idiosyncratic, but but let me just turn to mark.
Mark Crazy: Mark maybe you can come off mute.
Mark Crazy: Let me turn to you to provide a little bit more color to help address Jerry's question.
Mark Crazy: Yeah, Good morning, Gary.
Mark Crazy: First off I would say.
Mark Crazy: The increasing allowance did not reflect any catch up.
Mark Crazy: I'll talk about the allowance in terms of the entire year of 2024, so the allowance increased by about $11 million or two.
Mark Crazy: $2 million was a farm <unk> Ranch line, we talked about in the second quarter third quarter, we increased the allowance by about a million on another farm <unk> Ranch loan and then earlier in the opening remarks, and Brad mentioned, a renewable energy loan that we took a million for provision in the fourth quarter. So those three together represent six 5 million of the $11 million increase for the.
Mark Crazy: Year.
Mark Crazy: And the remainder represented various other downgrades, primarily the results of the agricultural cycle and then volume growth, we had significant volume growth in our in our new corporate segments, which which kind of require a bit more capital than farm and ranch. So again I'll just I'll just sort of emphasize it.
Mark Crazy: Isn't it catch up in in 2024 really continuing to be sort of idiosyncratic you know loans that.
Mark Crazy: During the year.
Mark Crazy: Okay. So if we got let's say zero idiosyncratic issues. This year, presumably the reserve wouldn't have to change materially.
Mark Crazy: I think thats right.
Mark Crazy: Yeah.
Mark Crazy: Keep in mind, Gary that.
Loan growth is one of the.
Mark Crazy: The other thing, though that I mentioned in response to your question of whether they catch up.
Mark Crazy: You know there was a time in my career, a long time ago.
Mark Crazy: Management had significant discretion on how those refunded.
Refunded.
Mark Crazy: That is not the case today.
Mark Crazy: These allowances are highly challenged and scrutinized.
Speaker Change: By both our auditors pricewaterhouse.
Speaker Change: And our regulators and so we.
We follow very strict formula.
Speaker Change: Our outlined with the classifications of the loans.
Speaker Change: And the models that we used for allocating.
Speaker Change: Allowances, when we do new business.
And there's very little discretion in there so.
Speaker Change: What you see is what you get and if something reverses we suggested that we could see a reversal in this renewable energy alone for example, if something reverses it'll go down then if something comes on it will go up but we can always point to very specific situations that are the cause of that.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Brad: There are no further questions at this time I will now turn the call over to Brad <unk> for closing remarks.
Brad: Thank you operator, and thank you all for participating and I really do appreciate it.
Speaker Change: Learn something hearing the questions and whats on your mind.
Speaker Change: And if there are follow up questions. Please reach out to to Joppa are we want to be very transparent in theory.
Speaker Change: It was to you.
Speaker Change: We will host our next regularly scheduled call in May at that time I'll be reporting our first quarter 2020 results.
And.
Speaker Change: As I said earlier in my comments, we are very optimistic about 2025.
And for that reason and look forward to having that call with you.
Speaker Change: In the meantime, all the best for a little bit warmer weather for most of you and thanks again for your participation.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and I say you. Please disconnect your lines.
Speaker Change: Okay.
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