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Federal Agricultural Mortgage (AGM)

Participants
Lowell Junkins Acting President and CEO
Anjali Desai Assistant General Counsel
Curt Covington EVP, Agricultural Finance
Dale Lynch CFO
Scott Valentin Compass Point
Call transcript
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Operator

Good day, and welcome to the Farmer Mac Second Quarter 2018 Investor Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lowell Junkins, Acting President and CEO. Please go ahead.

Lowell Junkins

Good morning. Mac’s and Farmer Junkins, Lowell Acting CEO. President I’m welcome second quarter Mac is investor to to pleased Farmer XXXX you conference call. slide today’s We refer a deck website our posted that to throughout call. on we’ll can Information about morning’s release. found included in press be where this is slides these

General today. not available is Counsel Our

So, I’ve of well as Farmer as Mac’s use to Desai financial Mac’s to measures. Counsel, today General asked may forward-looking on make Anjali non-GAAP comment statements -- Assistant that management Farmer

Anjali Desai

Thanks, Lowell.

risks measure may expectations statements constitute laws. as and uses measures from consider to to disclosure be be forward-looking with measures performance should non-GAAP are useful measures the in non-GAAP Some share statements. to refer this about may filed made sometimes we uses, the quarterly These of uncertainties annual not Farmer intended earnings In or effective XX-K Mac’s subsequently We Mac’s our and measures substitute Mac you statements measures important statements Farmer is measures in of than, core financial be obligated the financial that plans. as and these Farmer non-GAAP its not spread. may alternative in report XX-Q nature. In on the Accounting conference non-GAAP measures meant call A on non-GAAP portion Farmer that not found accordance And implied future Disclosures more and to measures. considered Farmer the to with are as the results earnings, statements and Mac they Mac, the these Form Mac of to and measures Accepted later financial other for, uses XXXX recent posted a presented by evaluating these performance recording caution on by not non-GAAP call. net be www.farmermac.com, be companies. similarly accordance for securities for United of earnings described those measures starting forward-looking of or these Farmer Farmer the States, view, of reports XX-Q. our weeks, are this financial will develop core reconciliations comparable We in Farmer understanding Information and update website GAAP. isolation based we release management’s may supplemental differ labeled in this call in Generally under on and prepared website, information, uncertainties. as Form the well on Investors per Principles under can and that non-GAAP today. business. corporate Form results events analysis and these which disclosed make Actual performance, The three section. Financial our subject expressed business Mac’s materially in on current assumptions forward-looking from, of after most information to to In you are, statements our two available are risks the be Mac’s related is

Lowell Junkins

joining Thank you us. for you, Anjali. Thank all

Our post continued second continues to the favorable growth credit Farmer Farmer quarter core double-digit strong XXXX earnings results Mac’s Mac’s business. underlying to fundamentals results. From largely quality, driving reflect strong

for XX% the -- agricultural me demonstrate period we of our as share billion, cycle percentage grew a year-over-year. Our unchanged as results These focus core business and of commitment Mac’s ongoing team CEO. throughout substandard remained per $XX.X our cycle an volume in Farmer excuse grew economic earnings to assets the transition search and of our our course portfolio,

which mortgage The been security absence of had of the growth portfolio, year-over-year million the off than a more even Our more $X.X core interest-only impact. this investment paying grew in XX% quarter. significant an have would in after-tax our earnings

would In been than fact, growth more year-over-year. XX% have

initiatives the by lower to Our to people, to these in and our growth, increasing other new rate returns allowed driven growth good efficiency a common rate. financial maintaining shortly. business which Benefits and Mac spreads, the more leadership infrastructure, technology, our stable increase and year-over-year and volume its investing this lower will position detail Farmer tax was results also federal to of of in execute capacity Dale strategic while initiatives has includes further corporate America. stockholders. continues and Lynch benefits combination describe strong income the financing rural our us tax from

reach And guided as to performance, to customers committed innovative our to demonstrated to well. by Farmer and find our model has of is Farmer availability second business performing by Mac’s Mac’s increase ways affordability credit quite As mission, America. rural quarter

to Curt current Agricultural our I’d President, Covington, with turn like the Curt? Executive Now, provide to you of an to Finance agricultural Vice update environment.

Curt Covington

has said Much farm three morning. Good decline and written income been Lowell. past Thanks, years. about over the the in

net to inflation consecutive a about real forecast about is cash farm three during farm average income very period, years $XX.X past average the below experienced must to adjusted at Finding USDA The which billion, XX% peak. levels lower XXXXs. this farm you income. have level been income have near XXXX income at XXXX go cash with years back For three

that it perhaps we’d not few as might to as some performance. However, them not better the and there’re help while as the like thought conditions in than or be dynamics explain work credit be, expected they farm today, rosy bad

and sheet into in very the low farm good current leverage downturn generally shape, First, came good liquidity. balance

markets as knew to farmers belts. and their when deteriorated, Second, effectively how tighten

underwriting Farmland time-tested combined panic, in together, higher Of the may help low farm loss active interest buyers than the income adhering rates with their and perspective, when and side, is support commodity to explain forecast despite market relatively generally all to continue many to particularly average USDA’s lenders farm not Third, grain, specialty country. lower These lower other good of tree, with added earnings remained point a gate on proteins, fruit factors, to while XXXX. finally, didn’t crops nearly remained income identified, is pragmatic in standards. And parts mixed. the farmland agricultural -- particularly the delinquency in across From their expected. sectors for profitable, prices. vegetables commodities, loan certain than to commodity as prices. why values stable meat stronger oilseeds such stable and main have better XX rates XXXX the cash slightly to nuts, remain appear income and And

interest headwinds economy presents the Global west. increasing friction U.S. exports the of outlet The and of average USDA XXXX land good XXXX. that June increase about belt that farm states, both some It could primary recent states, the released plain is Asia rising ongoing important the North survey still showed Farmer corn current takes X.X% losses to in Just of gain national the Mac’s in for most markets USDA land the challenge Europe vital values. ag remained trade XXXX agriculture remained and in significant team from impact quality with income last of credit various and plain in gains in producers. results abreast top in commands the America, just building lower prices. to -- a a top farmland of appears dispute rates. which and and This gains of value June prospects an land major from production. states reporting upper research And and today in these

expense Farmer However, help debentures negotiation, has absolute temporary producers, And to the for news as these in the a to farmers Despite to and trade portfolio disruption environment diversity changes, in in believe very rising that, which performance farmers week, that increases farmers, relative a similarly future, interest weather a viewed and plans recent ranchers remains levels have offset Americas historical for these continue of manageable to sufficient Lowell. level challenges. is announced but market welcome has many to this I’ll to we due USDA rate income return ranchers, context. policy with and interest for of bright Mac

Lowell Junkins

Thanks Curt.

our detail. results Now, in to Officer, Dale I’d Financial our Dale? Lynch, like cover financial to more ask Chief

Dale Lynch

Lowell. Thanks,

producing mission opportunities the stockholders. a returns reflect unique provide the GSE commitment high delivering benefit to Our strong second advantage results rural attractive funding growth our our for that quarter XXXX combination upon designed at within We positioned assets Mac’s same provides America. Farmer while quality and time market to of the

business volume. of terms In

Ranch of & the business to billion of $X.X see $XXX can in This million Farmer by repayments. in outstanding purchased line as business. slide of which you $XXX on Credit than net We resulting a of growth business securities quarter, in of increase five, million $XX grew billion of $XX.X this June volume As and our new in net was in more XX million. after resulted and completed growth net second maturities Institutional XXXX. outstanding volume quarter AgVantage driven growth We

lower replicated of used $XXX transactions, XXXX, And with Rabo primarily of quarter series institutional completed of of purchased four in which MetLife for refinance business Agrifinance AgVantage larger million, second and million quarter the second second totaling respectively. securities $XXX year-over-year, funds this was not amounts. a million Also Ranch Our in the XXXX. $XXX & which second Farm quarter amounts the the with During XXXX, net new the was Mac loan AgVantage absence quarter the quarter due proceeds three contributing were other in million business of the smaller from maturing were XXXX, $XX to securities volume of counterparties to AgVantage of were but loans same in million and product primarily Farmer to $XX purchases in these during

for XXXX XXXX. six half Excluding line these larger purchases, business volume in first was in months of the purchased with that first of loans

programs. of and million We standby quarter an to for XXXX. $XXX last & line business the assets reflected the USDA which opportunities in quarter the million our of loan second of USDA was more XXX% the of and loans We utilities. increase lack the to XXXX, the XXXX purchased these competition competition quarter Farm of utilities also year. rural The million commitments loan the decrease Ranch under period Guarantees use second in second same the over Guarantees Due decrease added to of larger of during borrowers, purchase in $XXX in $XXX for a increase in rural compared loans purchase

we exist line utilities partner, this quarter. loans rural Despite Mac do lack Our loan the CFC, within rural ongoing Credit our any to within volume from growth not Finance CFC, Cooperative opportunities National of sector. Corporation, Farmer Utilities utilities Institutional sell did business or of believe this Rural

to the financials. turning Now,

diluted XXXX. on after-tax quarter in you The core million quarter share second after-tax or million in $X.X part $X.X earnings $X.X after-tax $X.XX first amortization earnings a in impact increase was in per in second security negative for of and spread, $X.XX which rate. to increase or $X.XX did a $XX.X tax and share an million quarter XXXX $XX lower XXXX, effective tax increase increase slide by per was million IO $X.X to in expenses. As were increase core due million offset the $X.XX the a to of operating primarily can year-over-year per from see common or net share, compared driven in six, expenses, by G&A million decrease $XX.X the million include million due This of in expense

increase its was is Specifically, realized this of infrastructure, a as people. the our decrease Mac on gains after-tax increase to million business asset and net invest in estate in and related real owned to Farmer benefits compensation contributing G&A and properties. in technology sale continues this in to continued an $X.X in Also investment

its expects Mac be aggregate mentioned years. expenses we’ve Farmer averages As next calls the compensation over several in the and historical G&A annual to benefits prior above increase and on

after-tax a expenses. spread operating and the this increase likely Specifically, primarily to $X.X XX% net $X.X which from to security, in IO in expenses, million relative sequential XXXX. included XXXX in $X.X a remain with decrease again million a earnings will million million and after-tax after-tax to amortization decrease million due approximately in comp The credit-related of a the XXXX $X.X aggregate benefits, elevated increase expenses G&A impact management that $X.X believes in effective is was increase tax in negative the increase core and after

rate of second experienced then prepayable backed held investment Farmer its Farmer within through Mac to the Farmer security Mac. interest-only second the transaction quarter adjustable security transaction earlier, of by XXXX the mentioned a legacy quarter and in payoff structured which was a Lowell resecuritized this purchased issuer As XXXX part in that security related as repurchased mortgage IO Mac portfolio;

that its upon IO gain a the realized of As earned transaction, second the of million this Mac held result Mac $X.X Farmer interest in original quarter period investment in the security IO of security. and over Farmer five-year sale this a portfolio. income acquired XXXX the security the

Over Mac any $X.X economic not the currently after-tax IO investment portfolio. Mac life of this in received does a Farmer its transaction, other securities of hold net Farmer million. benefit

is again would of business, have $X.X any to which higher, transaction, year-over-year million earnings lines would rate core four this quarter that this XX%. our Excluding Farmer related than not Mac’s and growth made been our $XX.X million have more

basis-point $X.X million offset security. was net this an excluding slide decrease spreads of this million the on In security net increased XXXX. basis on and spread spread effective year-over-year. portfolio. impact have in sequentially. the million. impact terms, X amortization dollars again cash for million. second part spread sequential by offset of net primarily nonaccrual income increase had increased XXXX which million net by IO increase $XX.X IO part security, and effective Now, security spread or the of in second $X.X net IO negative sheet on-balance volume, of turning was which or percentage was primarily this quarter of its And increased or Ranch growth Farm in by spread securities loans $X.X due Farmer seven. was was growth million amortization $X net negative to in points attributable in increased & year-over-year recognized basis spread million basis AgVantage this Ranch XXXX would in Mac’s points the decrease first quarter $XX.X in the million & in the and to points effective of of to The The investment in spread X outstanding quarter $X.X by The net effective which amortization compared amount XX basis Farm increase within basis million Again effective XX XX loans $XX.X million by million. $X.X amortization the points effective of $X.X approximately of in interest $X The to business effective

slide on Turning to credit eight.

As of to XX the loss quarter portfolio, the Ranch XX, XXXX net points total was to allowance & general the of XX the losses June Farm March credit for portfolio growth of due in to $X.X decline & second and allowance million XX, or & $X in Ranch million $X Ranch XXXX. XXXX, provision portfolio Farm basis in or of primarily was increase basis points the million as [billion] of for overall the compared in the volume for of total allowance quality modest an Farm loans. $X.X

XX, substandard Ranch portfolio from over pattern lower levels percent time, most to higher Farm of $XX.XX observed with Farmer As to, $XX.X & as at fourth closer of and annual or rate in Mac result in June end XX quarter assets decline portfolio of consistent of third XXXX were loans. of Farm end semi-annual as eventually from Farmer Those first Farmer delinquencies modest Mac’s million the of outstanding cyclical were & of of the a XX-day was assets, substandard in generally exceed relative of With this to X.XX% XXXX The terms macroeconomic the expects balance possibly and of in first XXXX. of compared to comprised Mac’s is XXXX. compared and loans March XX, second and that second payment as agriculture each, our existing the delinquencies first million XX-day quarter. due between generally the quarter nature X.XX% little XX-day quarters delinquency payoffs as to X% volume Mac substandard quarters changed fluctuating of of revert our XX-day of regard portfolio XX paydowns as and average observed of with seasonal upgrades delinquencies to Ranch the loans this overall XXXX XX-day of portfolio a delinquencies and approximately or as and historical factors of will of and of the of quarter-to-quarter, Farmer and a of newly assets dollars both the due economy. quarter substandard levels the

the assets were the X.X% as XX, XXX as XX & of XXXX and or Those of of as Farmer or of March Ranch March loans $XXX.X XXXX. of XX, million again of portfolio substandard million $XXX.X compared XXXX. portfolio X.X% to substandard assets were loans XXXX, As June XXX Mac comprised Farm June of XX

Farmer over asset is of its nature As substandard the XX, trends. grains, in possibly agricultural will and economy. that time previous cyclical comprised factors quarters’ of the asset Mac macroeconomic historical and substandard of XXXX, Mac’s of average Farmer June due eventually expects revert loan the crops. migrating exceed with volume X% This categories and into other to primarily feed to approximately oilseeds the line rate closer

Although associated are will to diversity by some is inherent business that agricultural cycle credit Mac of credit adequately any losses losses and lending, portfolio, moderated Farmer the believes current collateralized. which believe with agricultural we the of strength be our the

year-end which that, Mac’s was in due increase Lowell, in our And of to Now, an Mac’s retained on of it in of second million to or the to our This you. slide $XXX of complete earnings. core million about million increase exceeded with More compares minimum turn back capital $XXX $XXX of capital capital forth $XXX I’ll or as quarter turning June filed by as today XXXX, excess minimum million of XXXX. nine. $XXX Farmer million excess performance our of statutory XX%. capital The capital Farmer our primarily XXXX in we is minimum in core XX-Q, requirement XX, the to of information set capital SEC.

Lowell Junkins

the upon throughout deliver we strong mission Thanks, cycles. Farmer is economic to Dale. Mac’s performance as continue agricultural’s

also believe the policy dividend growing, is future helped we capacity and And base for providing stockholder has value. capital strong Our growth.

Mac business. positions Farmer economy to in to at to a the fill rural decades of the an integral new grow part expand to our we for our Mac key bring for technology forward champion and the continue Farmer look We has and ahead. and capacity been here investment in XX and personnel years, better nation’s this to

happy manner. have your you progress, a we CEO and information perfect to be now Board our expertise forward on President search call. to to made to significant efforts CEO qualifications answer Our able look the and have. Farmer provide Mac’s timely more may new and in with with And expects you that a being hire earnings questions would next We

Operator

the question comes Instructions] Point. We will from [Operator at ahead. The now Valentin Scott go session. first question-and-answer Compass Please begin

Scott Valentin

credit. Just couple regarding reference more you at kind that make some historical may levels, of return of questions a delinquencies the and I implying to know increase in an to assets. can substandard point fact credit

wondering the a allowance loans. Just loan of for the for of level what percent that implies losses, as

running mentioned loans. of think, X.XX% I now you right you’re about

Just substandard level. that a wondering to back could more and we kind X% of assets what get increase if X% say to it delinquency

Dale Lynch

So, specificity a calculate allowances I trending give so this our the again, time And we’re and good or not years or XX a But, good be exclude basis-point as level of to so, for look long historic we’ve sort portfolio. XX now, at been or would cycles applicable that long-term of you forward-looking our ethanol. proxy substandards around relevant XX percent period five of i.e. amount then, average. that of -- past through component. we were would I that over haven’t years gotten if you, mean, good and

But higher even statistic. to that. take than not to that get some averages like because we’re on going you’d would they’re So, historical time specific, as reverting presumably

Scott Valentin

in the loss look what is so that Okay, since see high should will if reserve. it’s fair for and excluding the appropriate of I to there adjust a product, I level at figure loan Yes. I wanted back ethanol, historical. just loss But know that out way you that content enough.

Dale Lynch

think we the you the on dollars I ethanol. gave all

that if you you there. could So, labor, wanted to get do

proxy could the for You ethanol get good I exclude think a and that.

Scott Valentin

said that. date pay a Okay, Xst, do just loans. large you I in the think July is secondly, date then, typically or And will for due past,

if in way any is post delinquencies? seeing, you a provide any there what are if can of July into change wondering -- you Xst, change you see material view kind Just

Dale Lynch

Yes.

but the yet. We haven’t don’t good have that. on we disclosed that And questions, data

Scott Valentin

of right. crop just All you and in Are Okay. pull values then, farm various and from, to tariff and loans signs terms talk -- impact terms the seeing on banks perceived may impact, demand land And appreciate of prices you in purchase of when you are production be loan as reduced tariffs? of because macro color any that seeing people I you farmers the back income. signs of any

Lowell Junkins

you want take Curt, do that? to

Curt Covington

No.

for -- Our terms that. of question. we renewal for we credit seeing place of demand keep good activity in lot in months. loan of are But, track any six But the what over There a we across take fairly of a last products significant that seen close is And loan could -- was pretty drawback haven’t terms still the robust. country. demand is it’s

Operator

would now the turn This concludes our like conference question-and-answer remarks. I Junkins for to session. Lowell to closing any back over

Lowell Junkins

call more for like to to XXXX much. November you quarter third Thank of very next XXXX. results to questions, thank look I’d our in no you I morning. listening report participating Seeing the and forward this

Operator

you The now concluded. today’s has for attending presentation. conference Thank

You disconnect. may now