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Edited Transcript of AGM earnings conference call or presentation 8-Nov-18 4:00pm GMT

Q3 2018 Federal Agricultural Mortgage Corp Earnings Call

WASHINGTON Dec 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Federal Agricultural Mortgage Corp earnings conference call or presentation Thursday, November 8, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradford T. Nordholm

Federal Agricultural Mortgage Corporation - President & CEO

* John Curtis Covington

Federal Agricultural Mortgage Corporation - Executive VP & Chief Credit Officer

* R. Dale Lynch

Federal Agricultural Mortgage Corporation - Executive VP, CFO & Treasurer

* Stephen P. Mullery

Federal Agricultural Mortgage Corporation - Executive VP, General Counsel & Corporate Secretary

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Conference Call Participants

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* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD & 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 Third Quarter 2018 Investor Conference Call. (Operator Instructions) Please note, this event is being recorded. I would like to turn the conference over to Brad Nordholm, President and Chief Executive Officer. Please go ahead.

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [2]

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Good morning. I'm Brad Nordholm, Farmer Mac's newly appointed President and CEO, and I'm very pleased to welcome you to our third quarter 2018 investor conference call. We posted a slide deck to the website, and we'll be referring to that deck throughout today's call. The press release includes information about where you can find these slides if you haven't already done so.

Before I begin speaking about our business results, I'd like to ask Steve Mullery, our 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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Stephen P. Mullery, Federal Agricultural Mortgage Corporation - Executive VP, General Counsel & Corporate Secretary [3]

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Thank you, Brad. 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, and we may not be obligated to update these statements after this call. We caution you that forward-looking statements are subject to 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 2017 annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q.

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 of 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 performance and to develop financial plans. In management's view, they are useful alternative measures for understanding Farmer Mac's business. 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 these measures are 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 most recent Form 10-Q and earnings release posted on Farmer Mac's website, 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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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [4]

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Thank you, Steve, and thank you all for joining us. It's a pleasure to be on the call with you today. As you know, this is my first investor call as Farmer Mac's President and CEO. I'm excited to be here, and I am eager to lead Farmer Mac to greater results.

Over the last few weeks, I've been busy with members of Farmer Mac's management team and the Board of Directors, and I've got to tell you, I'm impressed by the caliber, energy and commitment of the people that are part of this mission-driven organization. I've long admired Farmer Mac's unwavering dedication to finding innovative solutions, and I'm proud to have joined the team at such a critical moment for the company and for American agricultural economy.

Beginning this week, I've begun traveling to meet key customers of their organization and to understand their issues and how we can better serve them. Coming from a background in agriculture, energy, capital markets and cooperatives, I'm both confident and energized to be leading Farmer Mac, a company that is fundamentally very healthy, growing and positioned to be a central and strategic leader in rural finance.

Over the last 2 years, Farmer Mac, its board and its senior management has formalized its strategic plan and challenged ourselves with a set of specific objectives. These include some ambitious market share goals for the next 5 to 10 years that will require significant innovation across many fronts within Farmer Mac. I want to emphasize that these objectives are a natural but more ambitious extension of our current business and the disciplined approach to credit and ALM management that we have.

Turning now to third quarter 2018 results. As you saw in our press release this morning, Farmer Mac grew its core earnings per share 34% over the same period last year. Credit quality improved slightly from second quarter 2018 and remains favorable. We also saw healthy net growth in certain products within several of our lines of business. Specifically, we saw good net growth in our USDA and Farm & Ranch loan purchases, as well as our institutional credit business with financial counterparties. Dale Lynch will describe this and our other financial results in detail shortly. But first, I'd like to turn to Curt Covington, our Chief Credit Officer, to give you an update on current agricultural environment and our credit quality. Curt?

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John Curtis Covington, Federal Agricultural Mortgage Corporation - Executive VP & Chief Credit Officer [5]

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Brad, thank you. As the fall harvest works its way towards completion, lenders will begin the ritual of renewing operating loans for thousands of farmers across the U.S. Undoubtedly, there will be much to discuss this winter across farm family dining room tables and agribusiness boardrooms alike.

Growth in farm income continues to be limited by lackluster commodity prices. Several agricultural sectors have been beset with heaping supplies, declining demand and an economic recipe for market price disruption. Trade is top of mind for many in the agricultural industry. Retaliatory tariffs remain in place for many of the U.S. top trading partners, such as China, Mexico and Canada, and that reduces the competitiveness of U.S. farm products with other agricultural allies. A strong U.S. dollar kept commodity prices upside, and a survey of agricultural lenders indicate only half of farm borrowers are likely to be profitable in 2018. But despite all the negative press, the difficult conversations and sleepless nights, agricultural producers and their lenders in aggregate have continued to find a way. Loan delinquency rates remain well below historical levels at Farmer Mac as well as across most of the retail agricultural capital providers such as banks and the Farm Credit System associations. Farm balance sheets show continued resilience, with good equity positions combined with better-than-average working capital levels. Farmers built significant reserves while commodity prices were higher and maintained good discipline in leverage levels and in spending. This has allowed them today to be better -- to better weather the current economic environment. U.S. farmland has not only retained its value, but in many parts of the country, land values have actually increased in 2018.

Some of the uncertainty around trade has been reduced by a tentative agreement on NAFTA's replacement, known as the United States, Mexico, Canada Agreement.

Finally, credit and capital continue to make their way to rural America, evidenced by an increase in loan outstandings at retail and secondary lending institutions and high loan renewal rates reported by agricultural lenders. While the long-run strength and opportunities in food and farm sector far outweigh the weaknesses and threats, there are sure to be bumps in the road. In this age of heightened volatility, a prudent and pragmatic approach to lending becomes paramount to long-term success. Like with any economic cycle, peaks and valleys tend to dictate the headlines, and it is tempting for lenders to make corrections this way and that and risk running off course. The Farmer Mac family abides by a more tempered approach, one that aims to provide consistency and reliability to the rural lending landscape. Our underwriting standards are time tested, forged during the last great cyclical trough in the 1980s, and our portfolio is diverse by commodity, geography and borrower name, reducing loan performance correlation and creating a lasting portfolio. Ultimately, it's the combination of reliability and portfolio strength that will allow Farmer Mac to continue to increase access to capital in rural America in any phase of the agricultural cycle.

And with that, I'll turn it back to Brad.

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [6]

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Thanks, Curt. Now I'd like to turn to Dale Lynch, our Chief Financial Officer, to cover the results of our financial performance in more detail.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - Executive VP, CFO & Treasurer [7]

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Thanks, Brad. Our third quarter 2018 results reflect Farmer Mac's commitment to delivering upon our mission, while at the same time producing good returns for our stockholders. Farmer Mac is executing well in the opportunities within its markets, and we believe our outlook is strong.

Turning to the third quarter results. As you can see on Slide 5, outstanding business volume increased $15.7 million to $19.5 billion as of September 30, 2018, after maturities and principal paydowns on existing business. As Brad summarized earlier, the increase in outstanding business line was driven by net growth of $53.1 million in the USDA Guarantees line of business, $47.3 million in net new institutional credit business from financial fund counterparties and net growth of $41.7 million in Farm & Ranch loan purchases. Farmer Mac refinanced all of its AgVantage securities maturing during the third quarter 2018, which included an early refinance of a $50 million AgVantage security that matured in third quarter 2018, but which was refinanced during the second quarter.

Within the Institutional Credit line of business, while outstanding business volume experienced a net decrease of $26.6 million this quarter due to the early refinance of the AgVantage bond I mentioned, Farmer Mac was able to successfully refinance all of its third quarter 2018 scheduled maturities. Specifically, Farmer Mac refinanced $650 million of maturing on-balance sheet AgVantage securities and a $300 million revolving floating rate off-balance sheet AgVantage facility with National Rural Utilities Cooperative Finance Corp., also known as CFC, to replace a similar facility that expired this quarter. The $650 million of refinanced purchases included AgVantage securities in the amount of $275 million from MetLife, $250 million from CFC and $125 million from Rabo. Farmer Mac also purchased a new AgVantage security in the amount of $25 million from Rabo this quarter.

Although Farmer Mac experienced net growth in some of its lines of business during this quarter, several factors combined to reduce overall net growth. Specifically, within the institutional credit line of business, 3 factors contributed to reducing net growth. First, the early refinance of the $50 million AgVantage security in the second quarter that matured this quarter. Second, the quarterly amortization of $14 million on another AgVantage security. And third, a $9.8 million prepayment on a Farm Equity AgVantage security. This security prepaid upon the sale of the underlying asset, as the counterparty's limited life fund that held the asset is nearing its maturity date and selling assets to return capital to its investors. Importantly, this client is a continuing customer of Farmer Mac and we do business with its other funds.

Another factor reducing the overall net growth this quarter was a $37.4 million net decrease in Farmer Mac's Rural Utilities line of business due to loan repayments. The last factor that contributed to reduce overall net growth was a $15 million net decrease in Farm & Ranch loans under standby purchase commitments as repayments exceeded new business volume due to the seasonally heavier repayment schedule in the third quarter.

During the third quarter 2018 and throughout this year, Farmer Mac's gross purchases of Farm & Ranch loans and USDA Securities have declined compared to the prior year, which Farmer Mac believes is due to several factors. In the Farm & Ranch line of business, 2018 has seen far fewer opportunities to purchase large loans that are over $15 million compared to 2017. Farmer Mac believes this could be due to a fewer number of eligible borrowers that are able to secure financing in that size as well as potentially increased pricing competition for the highest rated borrowers of these larger loans. The decrease in purchases in the USDA Guarantees line of business reflects increased competition, fewer refinances due to higher interest rates, and potentially lower loan volume being processed through USDA. However, Farmer Mac does not believe that this indicates a decrease in borrower demand for USDA loans.

While gross loan purchase volumes are down in both Farm & Ranch and USDA Guarantees lines of business, year-over-year net outstanding business volume growth has remained in the high single digit to double-digit percentage range throughout 2018. Contributing to these net growth rates is the significant slowdown during 2018 of prepayments on these loans as higher rates and lower farm income appear to have reduced borrowers' incentive to prepay. Farmer Mac's net Farm & Ranch loan purchase growth rate compares favorably to the year-over-year growth rate of the total agricultural mortgage loan market of approximately 5% through June 2018.

Now turning to the financials. As you can see on Slide 6, core earnings for the third quarter of 2018 were $22.4 million or $2.08 per diluted common share compared to $16.8 million or $1.55 per share in the third quarter of 2017, and $19.4 million or $1.80 per share in the second quarter of 2018. The $5.6 million or 33% year-over-year increase in core earnings was primarily due to a $2.4 million after-tax increase in net effective spread and a $4.2 million decrease in income tax expense due to the lower federal tax rate. The year-over-year increase in core earnings was offset in part by a $1 million after-tax increase in operating expenses. The increase in operating expenses was primarily due to continued technology and business infrastructure investments, an increase in headcount and new leases for office space entered into during late 2017. As we've mentioned on prior calls, Farmer Mac expects the annual increases aggregate compensation of benefits in G&A expenses to be above historical averages over the next several years. Specifically, management believes that the aggregate comp and benefits and G&A expenses will increase approximately 15% in 2018 relative to 2017, with percent increases moderating in 2019.

The $3 million sequential increase in core earnings was primarily due to 3 factors. First, there was a $2.3 million after-tax increase in net effective spread, partially due to the $1.6 million after-tax impact of the amortization of the IO security that occurred in the second quarter of 2018. Secondly, there was a $0.8 million after-tax decrease in operating expenses. This was due to a decrease in G&A expenses, including hiring expenses and servicing advances, and a decrease in comp and benefits expenses, which are generally higher during the second quarter due to payments of employee incentive compensation.

And finally, there was a $0.4 million after-tax decrease in credit-related expenses due to a $2,000 after-tax release from the provision for the total allowance for losses this quarter compared to a provision of $0.5 million after-tax in the second quarter of 2018. The sequential increase in core earnings was partially offset by a $0.5 million decrease in tax benefits primarily related to share-based compensation recognized from exercises of equity-based awards.

Now turning to spreads, on Slide 7. Farmer Mac's net effective spread for the third quarter of 2018 was $39.1 million or 93 basis points compared to $36 million or 91 basis points in the third quarter of 2017 and $36.2 million or 86 basis points in the second quarter of 2018. The $3.1 million year-over-year increase in net effective spread in dollars was primarily due to the growth in the outstanding business line, which increased net effective spread by approximately $2.3 million and a $0.8 million increase in the amount cash basis interest income received from nonaccrual Farm & Ranch loans. The 2-basis-point year-over-year increase in net effective spread in percentage terms was primarily due to the increase in the amount of cash-based interest income.

The $2.9 million or 7-basis-point sequential increase in net effective spread in dollars and percentage terms was primarily due to a couple of factors. First, the absence this quarter of the amortization of the IO security that occurred in the second quarter of 2018, which reduced net effective spread by $2 million and had a 5-basis-point negative impact in the second quarter. And secondly, an increase in the amount of cash basis interest income received from nonaccrual Farm & Ranch loans, which increased net effective spread by $0.4 million or 1 basis point.

Turning to credit, on Slide 8. As of September 30, 2018, the total allowance for losses was $9 million or 13 basis points of the $7.1 billion Farm & Ranch portfolio, which is a slight improvement compared to June 30. There was a $3,000 release from the Federal allowance for losses in the third quarter primarily due to modest improvement in the overall portfolio credit quality and the reduced net growth rate in Farm & Ranch loans this quarter.

As of September 30, 2018, Farmer Mac's 90-day delinquencies were $37.5 million or 0.53% of the Farm & Ranch portfolio compared to $43.1 million or 0.61% of the Farm & Ranch portfolio as of June 30, 2018. The decrease in 90-day delinquencies from the second quarter is primarily due to lower-than-expected seasonal delinquencies associated with loans that have January 1 and July 1 payment dates, which account for most of the loans in our Farm & Ranch portfolio, as well as the $9.8 million in 2 crop loans to a single borrower that became current during the third quarter of 2018.

Turning now to substandard assets. Due to a relative balance between newly substandard assets and upgrades, payoffs and paydowns of existing substandard assets, the overall portfolio of substandard volume was little changed. As of September 30, 2018, Farmer Mac substandard assets were $216 million or 3.1% of the Farm & Ranch portfolio compared to $226.5 million or 3.2% of the portfolio as of June 30, 2018.

As of September 30, 2018, volume migrating into the substandard asset category was primarily comprised of oilseeds, feed grains and livestock. Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of its portfolio, which Farmer Mac continues to believe is adequately collateralized.

Turning to capital, on Slide 9. Farmer Mac's $714 million of core capital as of September 30, 2018, exceeded the statutory minimum requirement of $540 million by $174 million or 32%. This compares to core capital of $657 million, or $137 million of capital above the minimum as of year-end 2017.

The increase in the excess -- in excess of minimum capital was primarily due to an increase in retained earnings this quarter. For more complete information about Farmer Mac's third quarter is set forth in our 10-Q, which we filed with the SEC today. And with that, I'll turn it back to you, Brad.

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [8]

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Thank you, Dale. For 30 years now, Farmer Mac has been a champion for and an integral part of the nation's rural economy through its commitment to finding innovative ways to reach customers to increase the availability and affordability of credit. Our business model is relevant to the times, and I hope you agree that we are performing well. I look forward to helping lead Farmer Mac through the next phase of its development.

Farmer Mac's performance is strong as we continue to deliver on our mission through the agricultural cycles. We continue to post good core earnings growth and double-digit returns on equity even as we invest in our people and technology. Our capital base is strong and it's growing, providing plenty of capital for future growth and also building book value for our stockholders.

With our announcement last week of our fourth quarter 2018 dividend of $0.58 per share, we remain on track for a 2018 payout ratio of approximately 30% of core earnings. Maintaining a growing dividend remains a top priority for Farmer Mac, and this dividend policy has helped enhance shareholder value over the past 3 years while still allowing management ample resources to support our strategic growth objectives.

As I begin my tenure as CEO, I do so with great confidence in our team, our mission and the credit and ALM discipline that is the foundation of our success.

And with that, I'd be happy to answer any questions you may have for me and the team here at Farmer Mac today.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Scott Valentin of Compass Point.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [2]

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Brad, you mentioned -- and welcome, Brad, to your first quarterly call. On the strategic plan, I think you mentioned over 5 or 10 years, Farmer Mac sees itself as taking market share, or growing market share within the ag lending market. I'm just wondering if you can flesh it out a little more. Like maybe what size do you see the market being? Where does Farmer Mac stand now? Just I know quarter-to-quarter, there's volatility in origination volumes. I'm just wondering, longer-term trend, how we should think about the growth of the portfolio.

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [3]

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Thanks for the question, Scott. Indeed, a lot of time has gone into strategic planning. We basically feel that with our capital resources, that we have the ability to grow market share. And why don't I turn to Dale to just shed a little bit more light on kind of how we're thinking about where we are today and where we might go in the near future.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - Executive VP, CFO & Treasurer [4]

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Scott, if you look historically, our growth rate sort of on the loan -- on the Farm & Ranch portion of our business, the loan purchase in particular, has kind of been in the, on a net basis, roughly 2x to 3x the market. The market has slowed down a bit this year, so we're growing -- but similarly, we're growing a somewhat relative proportion of the market, about 2x the market. But big portions of Farmer Mac's business have been more stagnant. Utilities, for example, some of our credit protection businesses, and I think we've talked about this previously around the opportunity for Farmer Mac to address a broader set of the market, to be open to working more broadly with farm credit institutions across the board. I think there's a tremendous opportunity where Farmer Mac and the rest of the farm credit brethren can cooperate and work together on a win-win basis, and that's going to be one of our key objectives going forward. Penetrating more product types with existing customers, tremendous opportunity to do that. I think what you're seeing in terms of sort of financialization within agriculture finance is here. It's real. It's not going away. And Farmer Mac can be a leading player, sort of at the vanguard of that modernization, if you will. So we can't get specific around what our goals are in terms of percentages and whatnot, but I think the goals that Brad outlined are pretty ambitious. I think you're going to see Farmer Mac's energy commitment become evident in the coming several years as he gets into his role here. So we're all excited about it but I can't get real specific with you, though.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [5]

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Okay, fair enough. Appreciate the color. And then on the spread, I know it rebounded last quarter, you had the premium amortization that drove the spread down. But net spread, at the upper end of the range, I think it's been running, call it 91 basis points, give or take a basis point. Should we expect it to come back down to that low 90 range?

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - Executive VP, CFO & Treasurer [6]

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We've been pretty stable in it, around 90 to 92, with the only variance really being driven by day counts or anomalies on sort of a premium amortization or whatnot. So I think, strategically, that feels like a good blend for our business at the moment. I don't see things changing dramatically. We have not adjusted our asset pricing in any material fashion one way or the other.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [7]

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Okay. And then on credit, I get a lot of questions from investors. You see the -- I think you guys alluded to it earlier, but the headlines about -- I think Curt mentioned it, the headlines about the stresses in the farm economy right now in terms of just commodity prices down, fuel prices up and [straights] up. The credit improved this quarter. Typically, I think you guys point out, seasonally, 3Q and 1Q are weak quarters. Just wondering what you're seeing in terms of performance there. Are you seeing opportunities? Are banks pulling back a little bit, and maybe that gives you an opportunity to do more in the farm sector?

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [8]

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Scott, the -- and I'll turn to Chris -- to Curt to give you some more detail here. But you really look at these numbers, and they're incredibly low. The variations that you see almost could be characterized as noise around a really nominal amount. So I don't think that there's huge significance in the variation between the last 2 quarters. But Curt, I know you're talking to reporters about this constantly today on the wire. Could you help out on kind of a more detailed description of the outlook here?

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John Curtis Covington, Federal Agricultural Mortgage Corporation - Executive VP & Chief Credit Officer [9]

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Yes. I'd be happy to, Brad. And it's a really good question. We get asked this question frequently. I've probably been asked that question 10 times today. Where is -- where are we in the credit cycle? So we are in a -- what would be considered a cycle that's in a trough. We -- but I want to -- maybe I want to add some bright spots to this for you. We tend to focus on what's happening in the corn and bean sector and in the dairy sector, and those 3 sectors right now, simply because of cyclicality in the business and also because of -- a little bit because of trade and tariff and oversupply are in distress. But I would tell you that probably 60% of our portfolio is performing very, very well outside of the Midwest. So when I say that if you look at our portfolio in general, just -- we don't just focus on the Midwest, we have a lot of business outside of the Midwest. And those sectors of agricultural are performing very, very well. In the meantime, when you look at what's going on in the Midwest, most of these operating lenders have really got their hands around the conditions in the marketplace. We've kind of been seeing this coming for at least 3 years. And I think most of these operating lenders have flushed out the problems, helped their farmers get their balance sheets rightsized, and they've done a lot of that through us. And in the end, do we see more problems on the horizon? Look, probably. But in the end, talking to most bankers, they think this renewal season is going to go okay because of the hard work they've done in the last 3 years.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [10]

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That's helpful. And then just with regard to capital. I know you guys mentioned you have excess capital over regulatory requirements. If the growth rate kind of stays where it is, and this quarter, again, it looked like net growth not as strong as it has been in the past. Is there room to do additional capital management activities such as a share repurchase or maybe retire some debt?

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - Executive VP, CFO & Treasurer [11]

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So Scott, we look at that all the time. We do have a small residual amount remaining on the share buyback program that we launched several years ago. We are still trading sort of reasonably above book value. I think we're around 140%, 142%, which is kind of in line with banks right now or other financials. But it is something that we look at, a combination of those ideas as well as maybe dividend kind of payout levels and those sorts of things. That's always under consideration, particularly when your evaluation is -- we're still trading at a 30% or 40% discount to other financials on a multiple basis, right? A P/E multiple basis. So it's something we look at, but we're not announcing anything here today. But stay tuned. More thoughts on that in the future.

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

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Okay. And then just one final question for me, I guess. It goes back to credit. There was an article I saw talking about farmers switching from soy to corn. I guess, given the -- what's happening with tariffs and demand from China, I'm just wondering if that increases credit risk at all from your point of view as farmers maybe move to a different crop they're not more familiar with or less familiar with?

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John Curtis Covington, Federal Agricultural Mortgage Corporation - Executive VP & Chief Credit Officer [13]

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So this is Curt again. Yes, it's a great, great question that was -- has been discussed, again, quite a bit over the last probably 60 days. Now is the time these farmers sit across the dining room table and say, "Okay, what are we planting this year, you guys? We got hurt in the soybean space this year. Should we go to corn?" Well there's like 1.6 million acres just in the upper Midwest that those decisions are having to get made. So I don't see additional credit stress as it relates to this. To be quite honest with you, when you look at our portfolio, our corn and bean portfolio still performs very, very well, and whether they switch from corn to bean or bean to corn, or choose another commodity, most of these farmers and their lenders have got a handle around this. But I do suspect over the next probably 90 days, decisions are going to be made probably to move off beans a little bit and over to corn. But I don't see that as a credit risk whatsoever.

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Operator [14]

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(Operator Instructions) The next question is from [Mike Fried] of [Mecatur] Research.

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Unidentified Analyst, [15]

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I wanted to inquire about the funds that you're lending to on the institutional credit side, particularly Texas Pacific Group and Farmland Partners. Farmland has been selling land now to be able to pay out a dividend to shareholders. And I understand that Texas Pacific Group has had back-to-back years of crop failures on land in Florida that you folks have lended to. Maybe you could expand on your -- some detail on the exposure to those 2 entities and what your expectations are going forward with them.

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R. Dale Lynch, Federal Agricultural Mortgage Corporation - Executive VP, CFO & Treasurer [16]

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So I would defer a bit on specific conversations around individual counterparties as it relates to their underlying assets. We don't have any direct credit exposure to TPG as far as I know. I think it might be collateral for our wholesale lending to a fund that we lend to; a private fund not a public fund, so not public information. But nonetheless, when we do business with small financial fund counterparties, the product that we've designed compensates us and accounts for the risk profile associated with that. In other words, we have a significant amount of over-collateralized amount. We have 20% to 25% of OSP in those deals. We have financial covenants, and we price those deals at wider margins to reflect the risk. As far as that business, we've not had a single -- in 4 years now of this business, we've not had a single default, delinquency or any credit impairment on any of that business. We don't actively lend new money to Farmland Partners, to the second part of your question. We haven't done that for going on 2 years now or so. So their business is more in runoff. As debt matures, they pay it back. And they've serviced all their debt on time without any issues. They're in good standing. They're a customer in good standing with us as it relates to covenants and financial strength, so that's all good. I mean that's really kind of all I would say on those 2 topics.

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Unidentified Analyst, [17]

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Okay. Did you expect to -- in terms of your goals, I missed the outline on that. But do you -- is one of your goals to expand in this sector to some of these farmland funds, the institutional farmland funds such as those I just referenced?

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [18]

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Well without reference to the specific names, [Mike], we are always looking for ways of expanding the business. And with my arrival, we're really starting to take a much harder look at how we design product and service, including supporting technologies, to ease the process of origination from our existing customers. We want to make sure that we're serving them very well. And then for new entrants coming into the market, which some of those funds that you're referencing may be, we're going to be applying the same credit standards to those that we always have been. So when we suggest that we're looking for ways of increasing market share and we're looking for ways of expanding our customer base, anything that we do is going to be with the exact same credit standards that have served us so well recently.

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Operator [19]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Brad Nordholm for any closing remarks.

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Bradford T. Nordholm, Federal Agricultural Mortgage Corporation - President & CEO [20]

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Well, thank you, operator. And thank you all very much for listening and participating in our call this morning. I think, speaking for all of us here at Farmer Mac, we look forward to our next call to report our fourth quarter 2018 results, and that will be in February 2019. And in the meantime, we wish you all a very happy Thanksgiving and holiday season coming up. Thank you all.

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Operator [21]

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