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Text: In evaluating Farmer Mac, you should consider these risks and uncertainties, as well as those described in our 2019 annual report on Form 10-K filed with the SEC in February as updated to discuss risks related to COVID-19 pandemic and our quarterly report on Form 10-Q filed with the SEC yesterday.
In analyzing 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, also known as non-GAAP measures.
I'd like to start by recognizing that this is really an extremely challenging time for all of us.
And our thoughts are especially with those most affected by COVID-19, particularly those on the front line of this crisis.
At Farmer Mac, our immediate priorities are to support American agriculture and rural communities and to provide a safe, secure work environment for employees.
I believe that if we focus on these priorities such as the financing of producers and processors of food on the front line, we can and will be a positive force in helping the nation get through this terrible pandemic.
I'm happy to report that Farmer Mac has been successfully operating uninterrupted with 100% of our employees working remotely, and we've been doing that since March 12.
Like all businesses, our leadership team has challenged ourselves to communicate and collaborate in new ways, and we've been successful, I think.
Our business continuity plan has been functioning as designed in support of all functions of the organization.
And recent investments in technology have allowed us to stay in communication within our organization and with our customers and our suppliers.
Our Board has also remained very active in its oversight role.
They've done that through weekly teleconference meetings.
And we have been working effectively and cooperatively with our regulators and our debt capital market investors to help ensure the continued safety, liquidity and soundness of Farmer Mac.
Let me now turn to results.
Our strong underlying fundamentals and resilient business model has really enabled us to successfully continue operations and execute on our mission.
We provided $1.3 billion of new credit to rural America that ultimately is to people in the first quarter of 2020.
The challenges presented beginning in March 2020 required Farmer Mac to respond dynamically.
We pivoted our customer outreach approach and fine-tuned some of our products in order to continue fulfilling our mission.
In a few minutes, Zack Carpenter is going to go into more details on how we've done that.
Our access to capital markets has remained strong despite the ongoing market volatility.
We have continued to issue debt on a daily basis and to maintain our disciplined asset liability management policies and practices that have long been in place.
We have remained well capitalized with a strong liquidity position that has been at or above $1 billion for most of the last couple of months.
This strong liquidity position enables us to meet any unexpected cash flow need with minimal operational disruption.
As we have previously noted, we indefinitely suspended our $10 million share repurchase program in early March to preserve capital and liquidity and as additional precautionary measure.
Turning to credit, despite the normal seasonal uptick in delinquencies in the first quarter, our credit quality has remained healthy.
We have maintained the same consistent underwriting guidelines for credit approvals and are closely monitoring the impact of COVID-19 on new applications.
While we are not subject to any regulatory requirements that would require forbearance of loan payments, we are working closely with those borrowers that have been impacted by COVID-19 and we've been providing flexibility on payment terms to them as needed.
More specifically, we have approved 71 payment deferment requests related to COVID-19 through May 1 with a total principal balance of $78.9 million.
That's less than 0.5% of outstanding credit.
We do expect to see an increase in these deferment requests over the next quarter, and we're continuing to work closely with our servicers to provide appropriate relief to impacted borrowers.
We remain focused on serving the needs of our rural customers and are challenging ourselves to find more efficient and effective ways to provide our customers with the flexibility and assistance their borrowers need as they adapt to this new norm.
And with that introduction, I'd like to now turn to Zack, our Chief Business Officer, to give you an update on customer and market developments.
In the wake of this unprecedented global pandemic, we know that companies around the world are enacting new measures to ensure that they continue to offer their services, but even more importantly, to protect the wellbeing of their customers and employees.
While we have transitioned to alternative operation, our team continues to work diligently to remain flexible and adaptable to meet our customers' financing needs and help mitigate any challenges their borrowers may face.
To that end, we have taken specific steps to support our customers during this time.
These initiatives include: loan closing flexibility and extended rate lock optionality for approved loans to provide customers the ability to navigate challenges due to office closures and social distancing requirements; continuing to offer competitive prices for all available Farmer Mac products and risk management solutions, given our ability to maintain [Phonetic] continued and uninterrupted access to the capital markets during this volatile environment; as well as providing rural borrowers impacted by the pandemic [Technical Issues] for principal and interest payments, as well as supporting customer deferral requests for loans backing guaranteed securities and long-term standby purchase commitment products.
We will continue to assess and incorporate initiatives that allow Farmer Mac to serve our customers, rural borrowers and rural America as a stable source of capital during this unprecedented environment.
Now, turning to business volume, 2020 is off to a good start for Farmer Mac, as all four lines of business contributed to net outstanding business volume growth of $421.4 million this quarter.
This reflects loan purchase net volume growth in Farm & Ranch, USDA and Rural Utilities of a combined $303.3 million, which was partially offset by a sequential decrease in net growth in long-term standby purchase commitments and guaranteed securities of $137.8 million.
We also saw increases in institutional credits, which grew $255.9 million, largely driven by our ability to provide short-term liquidity for two of our largest counterparties during the most volatile capital markets environment during the month of March.
This growth is a testament to Farmer Mac's ability to be competitive in price, while also being effective in execution to meet the needs of these customers.
In our Rural Utilities lines of business, loan purchase net volume grew $118.4 million in the first quarter of 2020 compared to $490.3 million in the same period last year.
It is important to note that loan purchase net volume growth in the first quarter of 2019 included one large unique transaction, the purchase of a $546.2 million portfolio of participations in seasoned Rural Utilities loans from CoBank.
Excluding the impact from the unique CoBank transaction, Farmer Mac's loan purchase net volume decreased in the first quarter of 2019.
The strength of growth during the first quarter of 2020 reflects steady loan purchase demand from CoBank and their other primary counterparty in the rural utilities line of business, National Rural Utilities Cooperatives Finance Corporation.
Loan purchase net volume growth in our foundational Farm & Ranch and USDA lines of business was $184.9 million for the first quarter of 2020 versus a net volume decline of $64.7 million for the same quarter in 2019.
The strong first quarter of 2020 primarily reflects the results of Farmer Mac's customer acquisition and retention initiatives, competitive interest rates across our product set, and efficient and effective loan approval and onboarding execution by our underwriting and closing teams.
Farm & Ranch loan purchases had net volume growth of $142.1 million during the quarter, overcoming one of our largest prepayment quarters of over $260 million, primarily related to the January 1 payment date, as well as increased scheduled principal amortization levels, given our larger portfolio.
Looking ahead, our pipeline remains robust as we continue to build upon a more dynamic and responsive business model that has transformed the way we deliver upon our mission and improved customer satisfaction, volume retention and penetration in existing and new markets.
As I've mentioned on prior calls, enhancing our infrastructure is crucial in order for us to continue to provide consistent and reliable capital to both existing and new markets.
I'm excited to announce that we successfully launched our new customer portal platform yesterday.
This portal provides an enhanced interface with elevated security features for our Farm & Ranch and USDA customers and will serve as the foundational platform to launch future innovative products and initiatives as we continue to drive incremental capital of the core sectors we serve.
Later this fall, we will launch through this customer portal a new streamlined origination platform for Ag Express score card loan product.
This origination platform will provide increased efficiency, enhanced technology and faster loan approval and funding for Ag Express score card loans.
Our continued investment in our infrastructure does not stop with these two enhancements.
We have several initiatives slated for 2021 and beyond and that continuing to elevate our infrastructure.
We look forward to providing more details on future calls.
Lastly, I would like to take a moment to recognize the Farmer Mac team for all their hard work and dedication to help meet the credit and liquidity needs of our customers and rural communities nationwide.
Even during these times of uncertainty, it is imperative that we continue to execute upon our strategic priorities and remain dynamic and flexible in supporting our customers in rural America.
And I just like to note that to be able to execute and deliver this kind of loan growth as well as to launch a major new technology initiative while working under our business continuity plan, basically working from home, I think is a real testament to both the commitment as well as effectiveness to the Farmer Mac team.
I'd now like to turn to Jackson to give you an update on the current agriculture environment.
You've heard a lot, read a lot of headlines in the press.
Now, Jackson will fill in some of the detail and provide the Farmer Mac perspective.
The COVID-19 pandemic has disrupted nearly all aspects of the global economy.
Energy consumption has fallen precipitously in the last few months as drivers abandoned the roads and travelers shelved their passports.
This demand decline caused dramatically lower oil and fuel prices.
Increased market volatility and uncertainty also resulted in a significantly stronger US dollar in March, as well as elevated credit spreads for most borrowers, both corporate and retail.
The agricultural sector has not been immune to the wide reaching effects of COVID-19.
Schools, hotels and restaurants are all significant buyers of wholesale dairy products, animal protein products and fresh produce.
Without this important demand pool for our food supply system, many farmers have abandoned milk and fresh produce due to the excess supply and perishable nature of these commodities.
Animal protein processors have been challenged by the indirect economics of hospitality business closures, but also more directly confronted by COVID-19 outbreaks at individual plants.
Approximately 40 animal protein processing plants have temporarily closed for parts of March and April and over 40% of hog and 30% of cattle processing was offline in early May.
This drop in gasoline demand translated to reduced ethanol usage as well, prompting ethanol producers to take nearly half of all capacity offline.
Ethanol typically consumes between 30% and 40% of annual US corn production.
So lower corn demand is pressuring grain prices.
Finally, a stronger US dollar and lower global economic growth creates headwinds for agricultural exports.
Agricultural exports through March were down from 2019 levels, driven by a 15% drop in corn and soybean sales.
Farmers and ranchers are pivoting production as a result of rapidly evolving information.
Food processors and agribusinesses are enhancing already strong food and worker safety protocols to stay open or reopen during this challenging time.
In April, USDA announced $16 billion in direct emergency aid, targeting cattle, dairy, hog, specialty crop and grain producers, and an additional $3 billion in food purchases for donation and distribution.
Additionally, the CARES Act signed in March authorized a $14 billion replenishment of the Commodity Credit Corporation for possible direct farm and ranch aid later this year.
The CARES Act also created several small business administration programs that could cover payroll, mortgage interest and other general expenses.
According to data released by the SBA, the first round of Paycheck Protection Program payments delivered nearly $3 billion to small businesses involved in agriculture, forestry, fishing and hunting.
Finally, lower fuel, feed, fertilizer and interest expenses provide a needed offset to those lower commodity prices.
While Farmer Mac's credit portfolio contains exposure to affected industries, initial indicators of credit performance show only minor signs of degradation.
The Farm & Ranch portfolio has no direct credit exposure to hog or cattle processing facilities, and only $40 million or 0.5% in hog production and only $21 million or 0.3% in dairy processing as of March 31.
We do have exposure to several indirectly affected commodities like corn and soybeans at $2.4 billion or 30% of the Farm & Ranch portfolio, ranch cattle and calves at $672 million or 9% of the portfolio and dairy at $538 million or 7% of the portfolio as of March 31.
However these exposures are extremely well diversified by both borrower and geography.
For example, the corn and soybean portfolio is spread across more than 5,000 loans in 601 counties in 41 states.
Loans past due by 90 days or more increased in the first quarter of 2020 to 1.02% of the outstanding Farm & Ranch portfolio or 0.37% across all four lines of business.
This increase was driven by a handful of larger exposures, but the percentage of loan count is also increasing.
There were no delinquencies in any of the other portfolios, including rural infrastructure, institutional credit or USDA guarantees.
Individual loan risk ratings held steady in the first quarter of 2020, with substandard loans totaling $317 million across all loans and guarantees.
This volume is spread across 56 commodities in 212 counties in 36 states.
These metrics are near historical averages as a percentage of Farm & Ranch, as well as total loans and guarantees.
But there still exists considerable uncertainty around the full impacts of COVID-19 on agriculture and rural communities.
The disruption could significantly alter the trajectory of the related economic cycles.
Fortunately, there exist strong support mechanisms to help augment any financial disruption and give rural communities time to heal.
Farmer Mac had a very good start to the year, with our results for the quarter divided into two distinct macroeconomic periods.
January and February were characterized by rising markets and a stable and positive economic outlook.
March, however, proved to be unprecedented for everyone.
As the COVID-19 virus spread globally and shelter-in-place orders became common, we saw significant volatility and market dysfunction in the latter half of March, and this coincided with national and global lockdowns.
We continue to have, though, strong access to capital markets and were able to issue across various price point and tenors remaining well within GSE spread issuances.
While there was initial strain and widening at the longer end of the curve in the latter half of March, we worked with our existing investor and dealer base and issued bonds in a flexible way that was tailor-made to meet end investor needs.
During the period through which COVID-19 has been declared a national emergency, we issued long SOFR bonds.
In fact, one of them was the longest GSE SOFR issuance and $285 million in structures, 10 years of greater, with total medium-term note issuances of approximately $2.5 billion to date.
Our strong liquidity position, as Brad mentioned, and market access also enabled Farmer Mac to call higher-cost issuances, provide funding to business lines for new assets and add over $160 million in high-quality liquid assets to our investment portfolio.
Let me now provide an overview of our financial results.
Core earnings were $20.1 million for first quarter 2020 compared to $22.2 million in first quarter 2019.
Net effective spread was $44.2 million in first quarter 2020 compared to $38.8 million in the same period last year.
Net effective spread in percentage terms remained stable at 89 basis points for both periods.
The $2.1 million year-over-year decrease, though, in core earnings was primarily due to a $3.3 million after-tax increase in the total provision for losses and a $2.7 million after-tax increase in operating expenses.
These were partially offset by the higher net effective spread.
The increase in the total provision for losses reflects the adoption and implementation of the new standard Current Expected Credit Losses, or CECL, and the immediate impact of updated economic factor forecast, particularly higher credit spreads and expected higher unemployment as a result of the COVID-19 pandemic and the resulting economic volatility that I mentioned that had an impact on CECL model results.
Of the $3.8 million loss provision during the first quarter, approximately $3.5 million was attributable to factors related to COVID-19.
Operating expenses increased by 26% in first quarter 2020 compared to first quarter 2019.
This primarily was due to increased compensation and benefit expenses, including higher cash bonus payments to employees under our short-term annual bonus plan, as well as onetime payments to an executive who resigned during the quarter.
It's important to note that these additional compensation expenses are seasonal and they do not reflect a recurring trend for the rest of the year.
General and administrative expenses also increased compared to the prior year due to Farmer Mac's ongoing investment in various growth and strategic initiatives that were highlighted by both Zack and Brad.
These ongoing investments in infrastructure will enable Farmer Mac to more efficiently meet its customer needs and will ultimately enable greater revenue retention over time.
As of March 31, 2020, total allowance for losses were $19.1 million, an increase of $6.5 million from December 31, 2019.
The total allowance for losses represents 9 basis points of Farmer Mac's $21.5 billion portfolio, and we continue to compare very favorably to industry peers.
As I previously mentioned, the adoption and implementation of CECL on January 1, 2020, as well as the corresponding increase in reserves under these macroeconomic conditions were the primary drivers of this increase.
Before moving on to capital, I did want to note one item regarding the adoption of CECL, which is the impact that it's had on our Rural Utilities line of business.
Under the previous accounting standard, which estimated incurred losses based on historical loss rates, Farmer Mac's Rural Utilities line of business did not require an allowance as Farmer Mac had never experienced a loss in its Rural Utilities line of business.
However, under the CECL accounting standard, the highly specialized nature of power generation and transmission utilities results in significant losses, given default estimates that drive our model assumptions, even though the actual probability of default remains very low.
It is therefore important to note that as of March 31, 2020, Farmer Mac's $2.4 billion in outstanding Rural Utilities loan purchases and long-term standby purchase commitments have no historic or current delinquencies.
Turning to capital, we continue to remain very well capitalized, which puts us in a position of strength as we entered this challenging time and will serve us well as we move forward.
Farmer Mac's $815.1 million of core capital as of March 31, 2020 exceeded our statutory requirement by $165.8 million or 25%.
This compares to $815.4 million of core capital as of December 31, 2019, which exceeded our statutory requirement by $196.7 million or 32%.
The slight decrease in excess capital from the prior quarter is primarily due to net growth in Farmer Mac's outstanding business volume and the coinciding decrease in retained earnings related to various factors.
However, from an overall liquidity standpoint, we are comfortable with our current cash position, which is hovering around $1 billion and which was at $1.2 billion on March 31, 2020.
This level resulted in 202 days of liquidity and it's far exceeded our regulatory requirements by approximately 112 days.
April, likewise, continued to be strong with a daily average cash position also around $1 billion, accompanied by strong levels of liquidity, which have continued through today.
As Brad noted, the higher-than-mandated levels of cash and liquidity allow us to weather any unexpected cash flows, adequately fund deferments to meet our customer needs, while retaining the flexibility to maintain low but still ample levels as market conditions change.
So in conclusion, Farmer Mac's underlying financial fundamentals, reflecting a well-capitalized balance sheet, stable core earnings, disciplined asset liability management and strong capital markets access, positions us to continue to successfully deliver upon a critical mission and navigate these uncertain times effectively.
More complete information about Farmer Mac's first quarter 2020 performance is in the 10-Q we filed yesterday with the SEC.
Farmer Mac was created in response to crises back in the 1980s and is intended to be a resource for financial institutions serving rural America.
This is especially true during times of economic pressure and uncertainty.
We are proud to play a vital role as a source of credit and liquidity for America's farmers, ranchers and rural utilities that comprise one of the most resilient sectors of this economy.
Our ongoing commitment to invest in technology and business infrastructure has played a critical role in our ability to reach our customers, and we will continue to work diligently to ensure that remains the case as we look ahead.
We're encouraged by the fact that we've been operating the Company remotely over the last two months.
In closing, I'd like to express how proud I am of our team's efforts during this very difficult time to identify new and creative ways to connect with those who we serve.
This includes the hardworking farm and ranch families who continue to be the most efficient, innovative producers of food in the world even in the face of challenges of trade, weather, labor and transport.
It includes the people who process, transport and distribute our food, who are facing new safety challenges and who are adjusting to new distribution channels.
It includes the people who produce and distribute electricity and provide rural infrastructure, who are having to adjust to fluctuating demand and safety and other issues.
It certainly includes the network of financial institutions who are Farmer Mac's partners in serving all of these people.
Our team, our employees at Farmer Mac have shown remarkable resilience, in large part because of the character and their belief in the purpose and the mission of Farmer Mac.
And now, operator, I'd like to see if we have any questions from anyone on the line today.

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provided $1.3 billion in liquidity and lending capacity in q1 2020.

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