• Total Revenue: $89 million, an increase of $2.4 million over the same quarter last year.

• Core Earnings: $39.8 million or $3.63 per share, a decrease of $3.6 million sequentially and $2.4 million year-over-year.

• Return on Equity: 16%, or 18% excluding credit expense.

• Operating Efficiency: 27%, better than the long-term target of 30%.

• Loan Purchase Volume: $1.5 billion in new business, with $700 million in new farm and ranch loan purchase volume in the first half of the year.

• Outstanding Business Volume: $28.8 billion as of June 30, 2024.

• Allowance for Losses: $18.6 million, reflecting a $2.2 million increase from March 31, 2024.

• Core Capital: $1.5 billion, exceeding statutory requirements by $626 million or 71%.

• Tier 1 Capital Ratio: 15.3% as of June 30, 2024.

• Liquidity: 283 days of liquidity as of June 30, 2024.

• Warning! GuruFocus has detected 2 Warning Sign with AGM.

Release Date: August 05, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Federal Agricultural Mortgage Corp (NYSE:AGM) closed $1.5 billion of new business in the second quarter, with 70% consisting of higher spread longer-term loan purchases.

• The company reported a total revenue increase of $2.4 million year-over-year, reaching $89 million in the second quarter of 2024.

• Loan purchase volume growth was strong in the renewable energy and farm and ranch segments, with renewable energy loans more than doubling since the previous year.

• The company maintained a strong capital position, exceeding statutory requirements by $626 million or 71%.

• Federal Agricultural Mortgage Corp (NYSE:AGM) achieved a return on equity of 16%, or 18% excluding credit expenses, demonstrating strong profitability.

Negative Points

• Core earnings decreased by $3.6 million sequentially and $2.4 million year-over-year, primarily due to a $6.2 million provision for losses.

• A single permanent planting loan resulted in a $3.9 million charge-off, impacting core earnings.

• The outstanding business volume decreased by $88.9 million from March 31, 2024, due to scheduled maturities and repayments.

• AgVantage Securities volume was volatile, with $785 million maturing without refinancing, reflecting counterparties' liquidity evaluations.

• Operating expenses increased by 2% year-over-year, driven by increased headcount and stock compensation expenses.

Q & A Highlights

Q: Aparna, you mentioned expecting flat to higher earnings as rates go down. Are you also expecting flat to higher spreads, or is this a combination of spreads and volume growth? A: Aparna Ramesh, CFO: Yes, it's both. We stress test our balance sheet monthly for interest rate exposure. As we enter a Fed easing cycle, we anticipate a marginal improvement in our net effective spread. Historically, our spread levels are similar to current levels, and any deceleration in spread is due to funding in advance of volume. We expect a pickup in both earnings and spread as the Fed eases.

Q: Regarding the mortgage loan sold during the quarter, what work was done with the borrower to ensure they are current, and what is the comfort level with that loan going forward? A: Bradford Nordholm, CEO: The borrower faced industry headwinds and adverse events in manufacturing facilities. We reduced our exposure to a more palatable level. Post-sale, the borrower restructured its facilities with lender support and rectified adverse situations. We are comfortable with our current exposure and optimistic about the borrower's direction.

Q: Can you provide more details about the $3.9 million charge-off loan and why it is considered idiosyncratic? A: Bradford Nordholm, CEO: The loan was affected by excessive water in California, leading to root rot in crops. The borrower was a poor operator with land in poor growing regions. The bankruptcy process was under a tight timeframe, affecting sale prices. We don't expect recovery on this loan, and it doesn't represent systemic risks in our portfolio.

Q: What is the status of the farm bill, and how might it affect your business? A: Bradford Nordholm, CEO: Our current business doesn't depend on changes to the farm bill. Potential changes could be upsides, but they're not included in our 2024 or 2025 plans. The farm bill's passage is unlikely before the election, and we expect it to be addressed in 2025. We remain engaged with stakeholders and prepared for any legislative opportunities.

Q: What drove the sequential decline in farm and ranch outstanding volume from the first quarter? A: Bradford Nordholm, CEO: The decline was due to the maturity of large AgVantage bonds. Loan growth at counterparties slowed, reducing their liquidity needs. We expect volatility in refinancing maturing bonds but believe in the product's value. As growth picks up, we anticipate potential growth opportunities.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.