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Edited Transcript of AGM earnings conference call or presentation 9-Aug-17 3:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Federal Agricultural Mortgage Corp Earnings Call

WASHINGTON Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Federal Agricultural Mortgage Corp earnings conference call or presentation Wednesday, August 9, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christy Prendergast

* R. Dale Lynch

Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer

* Timothy L. Buzby

Federal Agricultural Mortgage Corporation - CEO and President

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Conference Call Participants

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* Brian Christopher Hollenden

Sidoti & Company, LLC - Research Analyst

* Eric J. Hagen

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Farmer Mac Second Quarter 2017 Investor Conference Call. (Operator Instructions.] Please note this event is being recorded.

I would now like to turn the conference over to Tim Buzby, CEO. Sir, please go ahead.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [2]

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Thank you. Good morning. I'm Tim Buzby, Farmer Mac's President and CEO. Farmer Mac is pleased to welcome you to our Second Quarter 2017 Investor Conference Call. We have posted a slide deck to our website that we will refer to throughout today's call. Information for where these slides can be found is included in this morning's press release.

Our General Counsel is not available today, so I will ask Christy Prendergast, Farmer Mac's Deputy General Counsel, to comment on forward-looking statements that management may make today as well as Farmer Mac's use of non-GAAP financial measures.

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Christy Prendergast, [3]

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Thanks, Tim. Some of the statements made on this conference call may constitute forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance. We do not undertake any obligation to update these statements after the date of this call.

We caution you that forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied by the forward-looking statements. In evaluating Farmer Mac, you should consider these risks and uncertainties as well as those described in our 2016 Annual Report on Form 10-K, our subsequent quarterly reports on Form 10-Q and our other filings with the SEC.

In the analysis of its financial information, Farmer Mac sometimes uses measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States, which we refer to as non-GAAP measures. The 3 non-GAAP measures that Farmer Mac uses are core earnings, core earnings per share and net effective spread. Farmer Mac uses these non-GAAP measures to measure corporate economic performance and to develop financial plans. In management's view, they are useful alternative measures for understanding Farmer Mac's economic performance, transaction economics and business trends. These non-GAAP measures may not be comparable to similarly labeled non-GAAP measures disclosed by other companies.

Farmer Mac's disclosure of non-GAAP measures is intended to be supplemental in nature and is not meant to be considered in isolation from, as a substitute for or as more important than the related financial information prepared in accordance with GAAP. Disclosures and reconciliations of Farmer Mac's non-GAAP measures can be found in the Form 10-Q and the earnings release posted on Farmer Mac's website, www.farmermac.com, under the Financial Information portion of the Investors section.

A recording of this call will be available on our website for 2 weeks starting later today.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [4]

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Thank you, Christy. Farmer Mac extended its strong start to 2017 in the second quarter as the trends that have developed over the course of 2016 and into this year continued. Second quarter 2017 was particularly good in terms of new business volume and net growth as Farmer Mac broadened its customer base across a number of products and lines of business. We're beginning to see more institutions recognize the value Farmer Mac can provide. For example, in addition to refinancing several AgVantage securities this quarter, our longstanding Institutional Credit customer, Rabo Agrifinance, sold a loan to Farmer Mac for the first time. This success exemplifies our team's dedication to understanding our customers' needs and providing alternative solutions.

The overall business climate for Farmer Mac remains positive, even as certain sectors of the agricultural economy remain under pressure from lower grain and oilseed prices and net farm income decreases for many producers. We believe that the resulting tighter credit environment has actually helped increase demand for Farmer Mac's products and solutions.

Farmer Mac's mission is to increase the access to credit and reduce the cost of credit for rural borrowers. Our market position as a GSE and our lower cost of credit provides an advantage in the market and has contributed to this relative increase in demand for our agricultural real estate and Rural Utility financing. This has allowed Farmer Mac to help even more farmers, ranchers, and Rural Utility cooperatives as they seek to increase sources of operating capital.

Against this market backdrop, Farmer Mac's strong delivery upon its mission can be seen in our financial results this quarter as business volumes, spreads and core earnings grew significantly. We grew our outstanding business volume by $0.4 billion, spreads improved in dollars and as a percentage and our core earnings grew by 22% year-over-year. Farmer Mac ended second quarter 2017 with outstanding business volume of $18.3 billion. We added $1.9 billion of new business during the quarter, resulting in net growth of $414 million after maturities and prepayments. This increase was primarily driven by increased demand for our Farm & Ranch and USDA Loan purchase products as well as our Institutional Credit line of business.

Our Farm & Ranch loan purchases were more than $312 million in second quarter 2017, which was a 30% increase from the year-ago quarter. This was due to an increase in borrower demand for agricultural real estate financing and an increase in the average size of loans purchased including several loans from larger financial institutions.

We attribute the growth of our customer base partly to our increased efforts to build Farmer Mac's brand across agricultural and rural communities nationwide. These efforts include speaking engagements at industry conferences, hosting lender appreciation forums and educational webinars as well as promoting various perspectives on the current state of agriculture through our quarterly publication of The Feed.

In terms of our Institutional Credit line of business, we purchased nearly $1.3 billion of AgVantage securities in the second quarter, which resulted in net growth of $126 million. This increase was mostly driven by new business from Rabo Agrifinance and counterparties within our newer AgVantage products such as AgVantage for Funds and Farm Equity AgVantage. We also achieved a 100% refinance rate on the $1.2 billion of AgVantage securities that matured this quarter with two large counterparties. This includes the refinance of a $1 billion AgVantage security with MetLife that we mentioned during our last conference call. This was great news for Farmer Mac, as we managed to bring this volume on balance sheet and earn a wider spread as opposed to just a guaranty fee.

Our USDA Guarantees line of business also saw significant growth in second quarter 2017. We purchased $169 million of USDA securities, which resulted in net quarterly growth of $87 million, our largest ever. This reinforces the trend of increased lender usage of USDA Guaranteed Loan programs due to available federal funding for these programs.

Farmer Mac's net effective spread for second quarter 2017 grew significantly in dollars and as a percentage due to growth in our business volumes and improved LIBOR-based funding costs this quarter. Dale Lynch, our CFO, will describe those changes in more detail in a few minutes.

The credit quality of our portfolio deteriorated modestly in terms of substandard assets, which increased slightly as a percentage of our Farm & Ranch portfolio. Our 90-day delinquency rate actually improved this quarter as a number of delinquent loans became current in the second quarter, which is consistent with the seasonal pattern we've discussed in the past and which we will discuss in more detail shortly.

With that as background, I'll turn to Dale Lynch, our Chief Financial Officer, to cover our financial results in more detail. Dale?

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [5]

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Thanks, Tim. Our second quarter 2017 results reflect Farmer Mac's commitment to continue growing, developing new customers, innovating our product set and delivering upon our mission throughout market cycles. As Tim mentioned, we grew to a record outstanding business volume of $18.3 billion as of June 30, 2017. This growth was driven primarily from net growth in Farm & Ranch loans, AgVantage securities, and USDA securities. Our spreads improved in both dollar and percentage terms, both sequentially and year-over-year.

Spreads on new assets generally remained stable, although Farmer Mac has recently tightened some pricing for the highest-quality Farm & Ranch loans because we believe there's an attractive growth opportunity in this sector of the market. Funding costs on LIBOR-based assets improved this quarter due to changes in our funding strategy and a LIBOR funding market that remained favorable throughout most of the quarter.

As Tim mentioned earlier, we are seeing continued signs of stress in certain sectors of the ag economy, and some evidence of this has emerged within our Farm & Ranch portfolio, as substandard assets have increased moderately over the last several quarters, going back to second quarter 2016.

Turning to the financials, as you can see on Slide 6, core earnings for second quarter 2017 were $16 million, or $1.48 per diluted common share compared to $13 million or $1.23 per share in second quarter 2016 and $15.6 million or $1.45 per share in the first quarter of 2017. The $3 million year-over-year increase in core earnings was primarily attributable to higher total revenues, which included a $3 million after-tax increase in net effective spread and a $0.1 million after-tax increase in guaranty and commitment fee income. Farmer Mac also realized net gains of $0.5 million after tax in second quarter 2017 on the sale of real estate owned properties compared to no sales of REOs in second quarter 2016.

Partially offsetting the year-over-year increase was a $0.7 million after-tax increase in compensation and employee benefit expenses, which is due primarily to an increase in staffing, related employee health insurance costs and benefits and higher payouts of variable incentive compensation resulting from actual performance exceeding certain targets.

The $0.4 million sequential increase in core earnings was attributable to a $1.8 million after-tax increase in net effective spread and an increase in net realized gains of $0.5 million after tax on the previously mentioned sales of REO properties. The increase was primarily offset in part by a $0.8 million after-tax decrease in other income, primarily driven by a decrease in fees received upon the inception of swaps and a $0.5 million decrease in tax benefits recognized from stock-based compensation.

Other offsetting factors included a decrease of $0.2 million after tax in guaranty and commitment fees, which was driven by the refinancing in second quarter of the $1 billion AgVantage security from an off-balance-sheet asset upon which Farmer Mac earned a guaranty fee to an on-balance-sheet asset upon which Farmer Mac earns interest income, and secondly, a $0.2 million after-tax increase in compensation and employee benefits due to the higher payouts of variable incentive comp during second quarter.

Turning to GAAP net income, second quarter 2017 net income attributable to common stockholders was $17.5 million or $1.62 per share compared to $12 million or $1.13 per share for the year-ago quarter. The $5.5 million year-over-year increase was driven by an increase in net interest income of $3.5 million after tax. Also contributing to the increase were the effects of fair value changes on financial derivatives and hedged assets, which was a $1.4 million after-tax gain in second quarter 2017 compared to a $1.3 million after-tax loss in second quarter of 2016. The increase was offset in part by a $0.8 million after-tax increase in noninterest expense, which was primarily driven by higher compensation and employee benefits.

Turning to spreads on Slide 7, Farmer Mac's net effective spread for second quarter 2017 was $35.6 million or 92 basis points compared to $31 million or 84 basis points in the year-ago quarter and $32.9 million or 91 basis points in the first quarter of 2017. The $4.6 million year-over-year increase in net effective spread in dollars was primarily due to the effects of the previously mentioned changes in Farmer Mac's funding strategy and a favorable LIBOR-based funding market, which added approximately 5 basis points. The increase in percentage terms was offset in part by a decrease in the amount of cash basis interest income recognized on nonaccrual Farm & Ranch loans, which reduced NES, net effective spread, by approximately 2 basis points. The $2.7 million sequential increase in net effective spread in dollars was primarily due to growth in on-balance-sheet AgVantage securities, Farm & Ranch loans and other business lines which increased net effective spread by approximately $2 million, and changes in Farmer Mac funding strategies and LIBOR-based funding that remained favorable throughout most of the second quarter, which added approximately $0.7 million.

The 1-basis-point sequential increase in net effective spread in percentage terms was primarily due to the lower based -- LIBOR-based funding costs that I just mentioned, which added approximately 2 basis points. The increase was offset in part by the effect of the refinancing of the $1 billion AgVantage security into three new on-balance-sheet AgVantage securities at an average spread that was less than the overall average net effective spread in percentage terms for Farmer Mac.

Net effective spread for our 4 lines of business for second quarter 2017 and first quarter 2017 were as follows: $11.3 million or 180 basis points for Farm & Ranch compared to $10.7 million or 180 basis points in first quarter 2017; $4.7 million or 90 basis points for USDA Guarantees compared to $4.7 million or 91 basis points; $2.7 million or 109 basis points for Rural Utilities compared to $2.6 million or 106 basis points; and finally, $14.4 million or 81 basis points for Institutional Credit compared to $12.6 million or 82 basis points.

Turning to credit now on Slide 8, as of June 30, 2017, the total allowance for losses was $8.1 million or 13 basis points of the $6.4 billion Farm & Ranch portfolio compared to $7.6 million or 12 basis points of the Farm & Ranch portfolio as of March 31, 2017. The provisions to the allowance for loan losses recorded during second quarter 2017 were attributable to an increase in the general allowance due to overall net volume growth and on-balance-sheet Farm & Ranch loans. This provision was offset in part by a modest decline in loss rates used to estimate the probable losses.

The provision to the reserve for losses recorded during second quarter 2017 was primarily due to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired crop and permanent planting loans underlying purchase commitments and off-balance-sheet Farmer Mac guaranteed securities. There were no charge-offs reported during second quarter 2017.

As we mentioned on our first quarter earnings call this year, in April 2017 Farmer Mac sold properties related to 2 impaired crop loans to 1 borrower that were foreclosed and transitioned to REO during the first quarter of this year. Farmer Mac had previously recorded a specific allowance of $0.2 million on these impaired loans as of year end 2016. Farmer Mac then sold the two properties for $5.4 million and recognized a $0.8 million gain on the sale of the REO.

As of June 30, 2017, Farmer Mac's 90-day delinquencies were $41.9 million or 0.65% of the Farm & Ranch portfolio compared to $50.8 million or 0.81% of the Farm & Ranch portfolio as of March 31, 2017, and $21 million or 0.34% of the Farm & Ranch portfolio as of year end 2016. 90-day delinquencies were comprised of 42 delinquent loans as of June 30, 2017, compared with 57 delinquent loans as of March 31, 2017, and 38 delinquent loans as of year end 2016.

More than half of the net increase in Farmer Mac's 90-day delinquencies as a percentage of its Farm & Ranch portfolio from year end resulted from the delinquency of a single borrower on 2 permanent planting loans to which Farmer Mac had a $15.4 million exposure as of June 30, 2017. That delinquency was due to factors specific to that borrower and not related to the macroeconomic conditions in the ag economy. Farmer Mac believes that it remains adequately collateralized on these loans.

The improvement in 90-day delinquencies from first quarter 2017 is consistent with the seasonal pattern of Farmer Mac's 90-day delinquencies fluctuating from quarter to quarter, both in dollars and as a percentage of the outstanding Farm & Ranch portfolio, with higher levels generally observed at the end of first and third quarters and lower levels generally observed at the end of second and fourth quarters of each year as a result of the January 1 and July 1 payment dates of most Farm & Ranch loans. Farmer Mac expects that over time its 90-day delinquency rate will eventually revert closer to and possibly exceed Farmer Mac's historical average due to macroeconomic factors and the cyclical nature of the ag economy.

Farmer Mac's average 90-day delinquency for the past 15 years for the Farm & Ranch line of business is approximately 1%, and the highest 90-day delinquency rate observed over that period of time occurred in 2009 and was approximately 2%. However, this coincided with Farmer Mac's higher delinquencies on its then held S&L portfolio, which we no longer hold.

In Farmer Mac's other lines of business, there are currently no delinquent AgVantage securities or Rural Utility loans held or underlying standby purchase commitments, and the USDA securities are backed by the full faith and credit of the United States. As a result, across all of Farmer Mac's 4 lines of business, the overall level of 90-day delinquencies, comprised entirely of Farm & Ranch loans, was just 0.23% of total volume as of June 30, 2017, compared to 0.28% as of March 31, 2017, and 0.13% in the year-ago quarter.

As of June 30, 2017, Farmer Mac's substandard assets were $192.1 million or 3% of the Farm & Ranch portfolio compared to $165.2 million or 2.7% of the Farm & Ranch portfolio as of December 31, 2016. Those substandard assets were comprised of 287 loans as of June 30, 2017, and as of December 31, 2016. The $26.9 million increase from year end was primarily driven by credit downgrades and purchase commitments. Farmer Mac expects that over time its substandard asset rate will eventually revert closer to and possibly exceed Farmer Mac's historical average due to macroeconomic factors in the agricultural economy.

Farmer Mac's average substandard assets as a percent of its Farm & Ranch portfolio over the last 15 years is approximately 4%, and the highest substandard asset rate over that period of time occurred in 2010 and was approximately 8%. This also coincided with Farmer Mac's then held ethanol portfolio, which we no longer hold.

As the substandard asset percentage rises, it is likely that Farmer Mac's provision to allowance to losses and the reserve for losses will also increase. Although some credit losses are inherent in the business of agricultural lending, Farmer Mac believes that any losses associated with the current credit cycle will be moderated by the strength and diversity of our portfolio, which Farmer Mac believes is adequately collateralized.

Now turning to business lines, as you can see on Slide 9 we added $1.9 billion of new business in the second quarter of 2017. Looking at the specifics for the quarter, we added the following new business volume: purchased $1.3 billion of AgVantage securities; purchased $312.2 million of newly originated Farm & Ranch loans; purchased $115.8 million of USDA securities; added $55.9 million of Farm & Ranch loans under purchase commitments; issued $53.5 million of Farm Act guaranteed USDA securities; and finally, purchased $25 million of Rural Utility loans. After maturities and repayments, our net outstanding business volume increased $414 million during the quarter.

Turning to capital on Slide 10, Farmer Mac's $639 million of core capital as of June 30, 2017, exceeded our statutory minimum requirement of $505 million by $134 million or 27%. This compares to core capital of $610 million or $143 million of capital above the minimum requirement as of year end 2016. The decrease in core capital from year end 2016 was due to an increase in minimum capital required to support the growth of on-balance-sheet assets, which included the $1 billion MetLife AgVantage security that was refinanced to an on-balance-sheet asset from an off-balance-sheet asset originally. This decline was offset in part by an increase in our retained earnings.

In terms of liquidity, Farmer Mac had 208 days of liquidity as of the end of second quarter 2017 compared to the minimum regulatory requirement of 90 days. More complete information about Farmer Mac's performance for second quarter 2017 is set forth in our 10-Q, which we filed today with the SEC.

With that, I'll turn it back to you, Tim.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [6]

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Thanks, Dale. Farmer Mac continues to deliver upon its mission throughout agricultural economic cycles, especially in today's more difficult environment, and this has never been more true than throughout the last year and a half. Our capital base is strong and growing, providing plenty of capacity for future growth, and we believe our dividend policy has helped enhance stockholder value. Farmer Mac continues to bring in new personnel to fill key positions and create new positions and is expanding its investment in technology and the capacity to better grow our business. Farmer Mac continues to broaden its customer base with more institutions recognizing the value Farmer Mac can provide, and this is showing up in our results as more customers choose different products and solutions across our lines of business.

We continue to sign up new lenders for our loan purchase and credit protection products. We see strong interest for our AgVantage family of products, including new business opportunities to provide wholesale funding to financial funds that originate and invest in agricultural mortgages. And we continue to grow Farm Equity AgVantage and look forward to working with new customers in this area.

Over the last year, Farmer Mac has significantly increased its profile and name recognition as a nationwide expert in agriculture. We believe this will help as we seek to bring in new capital to agriculture and rural communities.

At this time we'd be happy to answer any questions you may have.

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Questions and Answers

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Operator [1]

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[Operator Instructions.] And our first question comes from Eric Hagen with KBW. Please go ahead.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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I joined a little late, so I apologize if you said this in your opening remarks, but the gain on sale from REO during the quarter, how many properties was that from? How long was the property in REO for? And how did the sale price compare to your expectations? Thanks.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [3]

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There was 1 property -- it was in Georgia; I believe it was a sweet potato farm -- 2 loans to one obligor. We put a spec reserve on it in fourth quarter, I believe, of 2016, and it transitioned to REO in the first quarter 2017 and we sold it in April of 2017 for about a $0.8 million gain, pretax; after tax, about $0.5 million. I think we felt pretty good about getting out on that asset. Again, the collateral was very good on it and we had a pretty active bidding process for it. I forget how many in total, but we probably had, how many, 5 active bidders in the auction. So I think we felt pretty confident, even as that was transitioning to REO, that we'd get out with at least our capital intact. We didn't necessarily expect a $0.8 million gain, but I think we felt good about getting out and getting our money back.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Well, that's good. The bid list sounds like it was robust, so that's positive to hear. And then how do you pro -- if you could just guide us to how you provision for some of the pickups in substandard assets. For example, have you provisioned yet for the pickup that occurred at the end of last quarter? And just the kind of trend that you think about as you provision generally. Thank you.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [5]

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Yes, as loans fall down the scale into substandard assets, the models that we use to estimate our allowance for losses pick those up in a timely manner. So you see a couple of things happening. As more loans become substandard, you'll see increases to the allowance for losses as more loans become delinquent. Then they further become further substandard, and the allowances occur at that point. So they're trailing indices is the way to look at it.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [6]

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But I would just highlight to Tim's point, though, it's important that the dollar increase that you saw in the allowance this quarter wasn't due to that. The degradation we saw in the credit quality was actually quite modest. The entirety of the net growth in the dollars of the allowance this quarter, the total allowance, was driven by volume growth entirely. I think the net dollar increase in the allowance was $0.5 million. The volume impact of that was roughly $800,000, so there's actually net offsets other where -- other areas of the portfolio. But it was growth related this quarter. But to Tim's point, yes, academically those numbers are in the provision, the degradation and substandard assets.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7]

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They're already in the provision?

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [8]

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Correct. But they were offset by other factors, is my point.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [9]

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Right. No, I hear you. Thank you. One more from me, if you don't mind. If you can talk about prepayment rates right now, how you expect those to trend, and just any certain areas of the country or among different farms or type of farms that have a concentration of different prepayment rates. Thanks.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [10]

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We haven't seen an increase in prepayment rates. The reality with the agricultural economy sort of -- struggling is probably a strong word -- but things aren't that good. You don't see a lot of people paying down their loans on an early basis. Where we see loans being paid off is usually due to the sale of farms or other factors, but we don't expect an increasing level of prepayments.

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Operator [11]

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Our next question comes from Scott Valentin with Compass Point. Please go ahead.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [12]

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Just, you guys mentioned Rabobank, I think, did their first, or sold their first loan to you guys. And they're a large ag lender. Just wondering if you see a lot more opportunity to get growth from that relationship.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [13]

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We certainly do. They've been a longstanding relationship with us for many years. They have some new leadership in place and are looking at their business model strategically. And we're certainly a partner of theirs and looking to help them as they move forward. So we do expect that relationship to continue and expand.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [14]

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And there's other large counterparties as well, Tim, right?

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [15]

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Certainly. They're just one of the few that we started doing business with in a different way this quarter. There are other lenders that we have not done business with historically that we continue to talk to and hope to be able to provide value to them as well.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [16]

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Okay. So is the next question, just on the net growth, just over $4 million. How should we think about that going forward? You talked about Rabobank, maybe new relationships. Should we see acceleration in that net growth going forward?

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [17]

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Well, I think we see opportunities. It's a matter of whether or not we're able to bring those opportunities to fruition. We've experienced strong and steady growth over the past couple of years. We expect that to continue, and we're continually looking for ways to provide better service and products that customers seek value in. So I would expect that we, obviously, are hoping to grow the company and expect that we'll be successful.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [18]

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And just -- I apologize if I missed this. On the net effective spread, it was up 1 basis point linked quarter. Just thinking about future spreads in terms of, 1, any mix shift you see in the composition of the business, would that drive any kind of net effective spread expansion? And 2, if we do get a rate increase in December, I believe that would be positive, too, for the net effective spread.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [19]

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Yes, I think the last part first on the rate increase. I'm not sure that's enough to be impactful. You really need, if you're talking, if you're alluding to generalized widening of spreads in credit, commercial credit, you really need to see a material and sustained increase in the 10-year Treasury rate. And that just hasn't proven to be the case. So I'm not sure that I see that as a driver of an increase in spread tactically in the near term.

As far as your first point, the sequential increase in spread was driven by improvements in our LIBOR-based funding costs, and we've kind of tried to be smart about how we're doing those fundings between 1- and 3-month assets, balancing the term-outs and looking at certain structures that we can issue that will achieve lower costs. And generally, it was a good market in the second quarter as well. So I think we picked up $2.5 million of interest savings between Q1 and Q2 year-to-date on our refinanced LIBOR-based assets.

Going forward, when you look at the funding market today, it is -- the levels we're at right now are the levels that I would call normal. I mean, these are the levels that you kind of, we seem to revert to over the last 10 years or so. So ongoing further improvements are possible, but I wouldn't -- they don't feel as like they're likely to be as material as the improvements we've seen in the last, I'd say, 3 to 4 quarters at our funding rates. But the levels that we're at now are good levels, and they feel like they're stabilized somewhat.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [20]

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And one final question. I think Tim, or I think you mentioned that for your highest-rated credits, you guys tightened pricing a little bit, got -- I guess for lack of a better word -- more aggressive on pricing to get some more business and get some volume. You thought it was an attractive risk reward. In terms of, outside from pricing in terms of other underwriting -- maybe debt service coverage ratios or LTV -- is there any thought that maybe changing some of the criteria there would also help on the origination front? Or is it just mostly focused on pricing?

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [21]

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Well, we're certainly not going to degrade our underwriting standards in order to bring in additional loans. I mean, the pricing aspect is really just a matter of competition and serving the customers' needs. A good example -- we brought the MetLife bond on balance sheet and refinanced that, and that's going back to the comment about spreads. That brings down our overall spreads in terms of basis points because it's a high-quality customer and a large bond. But at the same time, it increases a lot of dollars of spread. So economically, it's a great asset coming on the books, but if you looked at it in terms of basis points, its impact, it brought our overall level of basis points down. So when we look at an individual loan, if we're doing a large loan to an agribusiness type of entity, they have other sources of financing as well that they're looking at. We're just one source of their financing. They have a lot of other borrowings. So we need to position ourselves in the marketplace in order to be beneficial, and sometimes that means tightening our spreads.

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Operator [22]

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Our next question comes from Brian Hollenden with Sidoti. Please go ahead.

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Brian Christopher Hollenden, Sidoti & Company, LLC - Research Analyst [23]

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Should we still think about annual net volume growth in terms of $1 billion, give or take, or does that seem low in the current environment?

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [24]

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Well, it really depends quarter to quarter. We've kind of -- that's what we've seen in the past over the years. It's been roughly $1 billion, maybe a little bit more over the years. So I think, again, as we see opportunities coming in and we see a little bit of pressure in the ag economy, that provides -- that causes a situation where other financial institutions look at their business models and think about ways that they can mitigate risks. And oftentimes that leads to business with Farmer Mac.

So I'm not going to say that $1 billion is low, but I think that's kind of where we sort of take a look at where we're going to be in the future and what we can sustain and capitalize ourselves. We certainly have room for greater growth than that. But there aren't a lot of ag lenders out there, quite frankly, who are estimating sequential growth much more than that. It would be in terms of percentage of Farmer Mac's book of business. But obviously, we hope to exceed that and grow our business and continue to self fund.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - CFO, EVP and Treasurer [25]

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We've grown $800 million in 6 months. So arguably, I think that the $1 billion looks like it's -- are we going to grow more than $200 million in the balance of the year? The Farm & Ranch loan volume is running at 50% ahead of last year, which was a record year, and we had a record USDA loan-buying quarter this quarter. To Tim's broader point, when the credit market is tighter, we're seeing a secular trend toward Farmer Mac's business expanding. So we alluded to the fact that we're hiring people and investing in infrastructure. I think we're doing that because we see a longer-term opportunity for Farmer Mac that's probably not fleeting.

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Brian Christopher Hollenden, Sidoti & Company, LLC - Research Analyst [26]

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And then can you talk about your efforts to increase your customer base overall? What are you doing differently now that's driving new customers?

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [27]

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I would say it's sort of positioning ourselves in the industry. We talked in here earlier about hosting webinars and we have our quarterly publication, The Feed, that we send out to all of our customers and other prospects in the industry. We continue to do our road shows that we do in marketing. We've expanded that a little bit. We're hosting additional lender conferences. We hosted 3 this year. Last year it was 2; the year before, it was 1. So it's really working on name recognition and positioning ourselves in the industry and making sure we're out in front of potential customers. Conferences that we attend are also a -- can be very high profile for us. Speaking engagements and other things, those are all successful. So I think it's a general investment in our name and our brand, I think, is how I would characterize it overall.

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Operator [28]

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Our next question is a follow-up from Eric Hagen with KBW. Please go ahead.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [29]

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I wanted to ask my broken record question on AgVantage. It looks like there's a little over $2 billion that's coming due next year. Do you think you can replace that with the wider spread that you did the April deal with MetLife at instead of just earning the G-fee? Thanks.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [30]

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We don't have any subsequent large maturities that are that dynamic that are off balance sheet and just earning a G-fee. The balance of our -- we've gotten through all the large maturities with MetLife, and this last one was the only one that was off balance sheet. So the other AgVantage maturities that we have upcoming in the 12- to 24-month forward period are just traditional on-balance-sheet spread business for us. It just comes down to what time period that asset was put on the books and what the competitive dynamics were then relative to what spreads are today.

I think we've generally this year been able to refinance most of our bonds, even away from this MetLife bond, at spreads that were at least as wide, if not wider, than the original spreads. But I would expect not significant changes from what the spreads were to what their refinance spreads would likely be, presuming that the LIBOR funding market doesn't have a dramatic change, the swap curve doesn't change dramatically from where it is today relative to a yield curve.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [31]

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Roughly how many bonds does that $2 billion and change go in that's coming due next year include?

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [32]

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I don't know. I'd say the average AgVantage size we have remaining per issuances might be $150 million.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [33]

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Okay. That's a lot of loans, probably. All right, great. Thank you, guys.

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Operator [34]

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This concludes our question-and-answer session for today. I'd like to turn the conference back over to Tim Buzby for any closing remarks.

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Timothy L. Buzby, Federal Agricultural Mortgage Corporation - CEO and President [35]

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Thank you for listening and participating this morning. We look forward to our next call to report our third quarter 2017 results in November. Thank you.

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Operator [36]

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The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.