Q3 2022 Federal Agricultural Mortgage Corp Earnings Call
Select members of our management team will also be joining us for the question and answer period at this time I'll turn the call over to President and CEO , Brad normal Brad.
Thanks, Joe Good afternoon, everyone and thank you for joining us.
I am very pleased to announce that we have achieved another record quarter with all time high net effective spread and earnings.
And continued strong credit quality.
Our results not only highlight the strength of our core business, our disciplined approach to interest rate risk management and the resilience of the U S agricultural economy.
But also the benefits from the investments in and the strategic management of our business really in support of our long term success.
The diversity of our revenue streams, combined with our credit and asset liability management disciplines.
Have enabled us to deliver a very very strong quarter.
We've provided a gross $2 7 billion in liquidity and lending capacity to lenders serving rural America. During this last quarter, resulting in outstanding business volume of $25 3 billion at quarter end.
The agricultural finance line of business grew $675 million during the third quarter, which is predominantly comprised of growth in the farm <unk> ranch segment across multiple products, including AG <unk> securities loan purchases and long term standby purchase commitments.
The overall growth in the wholesale financing space, primarily reflects many of our institutional counterparties leveraging our continued access to low cost of funds as they seek to add longer term AG vantage securities to manage their asset liability maturity profile.
The recent increases in interest rates.
And the comparative competitiveness farmer, Mac egg vantage pricing relative to other market and federal reserve derived options.
Year to date, we've added a net $580 million.
New farm <unk> Ranch aid vantage securities compared to a net decline of $20 million in the same period last year.
Looking ahead, we believe advantage volume will continue to increase as farmer Mac's relative value is viewed favorably by longstanding counterparties.
This is the quarter for the harvest of many agricultural crops in Rural America.
Yet farm <unk> ranch loan purchase volume growth. This quarter has performed ahead of our expectations.
Simply put borrowers are adjusting to the higher rate environment and theyre being opportunistic.
Given the strength in the agricultural markets, we are optimistic about potential increases in loan purchase opportunities given the strong cash position of farmers and ranchers as they complete their harvest.
In a reversal from prior years, we also saw new volume.
Our farm <unk> ranch long term standby purchase commitment product with one of our farm credit system customers.
We see this as a testament to farmer Mac's product flexibility in providing credit solutions to farm credit system partners and relative value throughout market cycles.
Our corporate AG Finance segment saw a net growth of $67 5 million during the third quarter, primarily due to our continued efforts to support loans to larger and more complex agribusinesses focused on businesses span the food supply chain as.
As we say outside the farm gate.
We expect this relatively new area of business activity to enable farmer Mac to continue to strengthen and deliver on our mission.
Turning to rural infrastructure. This line of business added $510 million.
<unk> year to date, and renewable telecommunications and core rural utilities sectors.
As a result of continued strong relationships with rural electric cooperative lenders.
And the wholesale finance space, we successfully refinanced $400 million of outstanding advantage volume with rural utility Counterparties.
And we currently do not have any large rural infrastructure advantage maturities expected in the next three years.
Loan purchase volume in the rural utility sector was consistent with telecommunications loans, a strong contributor in 2022.
Farmer, Mac has acquired a $162 million and telecommunications loans year to date.
A total balance of $243 million as of September 30.
While loans to telecommunications companies that provide wireless cable fiber transport and broadband services to rural America as a newer area for farmer Mac, we strive to increase investments and reduce the cost of capital for telecommunications providers.
As it is an area of growing importance to rural communities.
Our renewable energy portfolio ended the quarter at nearly $200 million.
As of September 30, reflecting $48 million and net growth in the third quarter, the largest quarterly increase to date.
The pipeline remains strong in the near term as we continue to focus on upsizing existing deals and bringing on new renewable energy opportunities.
As I've said on prior calls.
Renewable energy is both an important economic development opportunity for Rural America.
In a business opportunity for us at farmer Mac.
During our last earnings call, we discussed the successful execution of our second $300 million securitization transaction.
<unk> and quite frankly, a difficult market.
We remain committed to being a regular issuer in the securitization market place with a set of securitization products that align with our borrower and investor interest.
Developing this capital flow to agricultural producers exemplifies farmer Macs core mission to lower cost for the borrower and improved credit availability in Rural America, while also creating a well received new investment opportunity for a leading institutional investors.
While agricultural commodity prices have thus far outpaced the significant increase in input costs.
The impact on global commodity markets from the Ukraine conflict creates further uncertainty for farmers and ranchers in terms of global production prices and input costs for the remainder of 2022 and into 2023.
We believe our portfolio is sufficiently balanced to withstand the market volatility that could arise should the U S economy and move into a recessionary period.
Soon as many fear as the agriculture food and infrastructure industries tend not to be directly correlated with the general economy.
We believe these sectors are generally well positioned to withstand an economic downturn due to ample consumer demand and government support.
Looking ahead, we will strive to continue to be a source of stability to our customers by remaining adaptive and flexible to our customer needs in this changing environment.
The branding initiative, we embarked on earlier this year, which is wrapping up in the next months has helped us gain a deeper insight from each of our stakeholders and help determine how we describe farmer Mac and more compelling ways.
This we hope will continue to build on our strong reputation as.
As the nation's trusted provider of low cost credit to rural America.
And now I'd like to turn the call over to our partner Ramesh.
<unk> financial officer to discuss the financial results in more detail.
A part of.
Thank you Brad.
Good afternoon, everyone.
Our record third quarter results highlight a balanced well measured approach excellent credit quality and resiliency throughout market cycles.
Net new business volume growth was $847 2 million.
In third quarter, and it was driven by the healthy growth across all four of our segments.
As we've discussed over the last few months, we have seen a slowdown in prepayments in the overall portfolio.
<unk> had less of an incentive to prepay in this higher rate environment.
As we look ahead, we believe our strong capital position.
Really bodes us well as the <unk>.
<unk> continues and as we look to further our growth objectives.
Turning to core earnings.
Core earnings for third quarter, 2022, what a record $33 4 million.
Our $3.07 per diluted common share compared to $30 7 million.
Our two $1 83.
Diluted common share in second quarter 2022.
$27 6 million.
Our $2 55.
The diluted common share for the same period last year.
The sequential increase was due to a $3 7 million after tax increase in net effective spread.
And a $500000 after tax decrease in operating expenses.
Year over year increase in core earnings was primarily due to a $7 7 million after tax increase in net effective spread and this was partially offset by a $1 8 million after tax increase in operating expenses.
Our net effective spread for third quarter 2022 was a record $65 6 million.
Compared to $60 9 million.
Second quarter, 2022, and $55 9 million in the same period last year.
Both the sequential and year over year improvement in net effective spread was driven by compositional shift in our program assets and generally widespread across the board we.
We have seen upward pressure pricing on corporate finance loan and advantaged volume as a result of the higher rate.
There's another revolving factor that I would like to describe and this has contributed to net effective spread as well.
Over the past few years, we opportunistically raised low cost debt and capital and the excess capital essentially offsets our urgency.
It's more expensive dumb and callable debt in a rising rate environment.
This will continue to create a downward pressure on our non-GAAP funding costs as the short end of the curve continues to increase with fed actions.
Our liability side of the balance sheet remains extremely strong as we continued to benefit from this low cost debt.
The extension of debt has also strengthened our overall liquidity profile.
Continued to maintain disciplined asset liability management carefully analyzing our duration and convexity matches to minimize our interest rate risk as rates rise.
Forward looking funding strategy and prudent approach to hedging has also allowed us to maintain and enhance profitability. Despite an inversion in the yield curve.
Operating expenses have increased 15% year to date.
To the same period last year.
And this is primarily due to increased head count.
Including 10 employees in connection with the strategic acquisition of loan servicing rights in the third quarter of 2021.
Increased stock compensation and increased spending on software licenses and information technology as well as the addition of consultants.
To support growth and strategic initiatives.
Operating expenses decreased by 3% sequentially due to the deferral of certain large projects to 2023 voluntary employee turnover and believes in hiring.
This improvement reflects our proactive management of expenses as we continue to expand our investments in both headcount and technology over the next one to two years.
We are currently in the process of evaluating a fairly large scale investment to modernize both our treasury infrastructure and upfront and non platform system to mitigate risk increase efficiency and enhanced deal flow.
In summary, operating efficiency was 29% through September and better than our strategic plan targets of 30%.
We're especially pleased with our efficiency ratio given the inflationary headwinds, which are impacting the market as a whole as we've always said we will continue to closely monitor our efficiency ratio and we're committed to holding the run rate efficiency ratio at 30% or lower.
As we make decisions to invest in infrastructure and funding platform.
And scale for further growth, we may see some temporary increases.
About the 30% level.
Turning to credit.
Our credit profile continues to be strong despite the economic headwinds.
90 day delinquencies were $44 million.
A 17 basis points of our entire portfolio.
Ed to $21 million.
In second quarter, 2022, and $55 million in the same period last year.
Our credit underwriting and policy has remained consistent and sequential.
The increase is consistent with the seasonal pattern of farmer Mac's 90 day delinquencies that were observed at the end of the third quarter due to the July close to BBB.
As of September 30 of 2022, the total allowance for losses was $15 2 million.
Which reflects a half a million provision during the third quarter.
The $400000 provision to the rural infrastructure portfolio was primarily driven by net new loan volume.
$100000 provision in the agricultural finance portfolio was related to the deterioration of the single agricultural storage and processing alone.
Now turning to capital.
Hello, Max $1 $3 billion of core capital as of September 30 of 2022 exceeded our statutory requirement by $514 million or 66%.
<unk> capital increased from year end, primarily due to an increase in retained earnings.
Tier one capital ratio improved to 14, 9% as of September 30 of 2022.
From 14, 8% as of year end 2021, and this was largely due to strong earnings results and capital relief that we obtained through our second securitization transaction and this was partially offset by growth in program assets.
Maintaining consistent credit standards and strong levels of capital.
Pretty fundamental part of our long term strategy to support continued growth.
Liver low costs and ensure the steady execution of our business model.
Yes.
After the successful execution of a second bomb Tvs securitization transaction in August .
Encouraged by the demand for agricultural backed securitized product opportunity because these align very well with our mission and foster continued success.
The <unk> 2022 Dash, one transaction was structured around two tranches of <unk>.
Can you guarantee tranche and Spartan is guaranteed crunch, both of which were very well received by the market.
Slide a volatile environment for structured products.
The success of this transaction further demonstrates farmer mac's capability to diversified long term funding sources, and we intend to use a conduit to perhaps generate additional lift.
Most importantly, this capability is highly central to how much.
We expect to return to the market soon with another similar securitization as we are committed to making this a more programmatic effort in the future to continue to build liquidity.
Got it.
In summary, our ends.
<unk> delivered exceptional quarterly results, while fulfilling several key strategic objectives, achieving record core earnings.
And showing continued strong credit performance.
And resulting in a minimum 15% return on equity and an efficiency ratio at or below 30%, coupled with a dividend payout ratio of 35%.
And with that Brad I'll turn it back to you.
Thanks <unk>.
We are extremely proud of our third quarter results and believe our performance provides yet. Another example of that dynamic and enduring nature.
Farmer Mac's business model, which continues to be well positioned for earnings growth going forward.
We have a solid long term strategic plan that we're executing on consistently and a proven track record of strong financial results as evidenced by record core earnings this quarter.
We continued to deliver on our mission throughout agricultural economic cycles is it.
Reflected by our financial results over the last few years.
Our capital base is strong and growing providing plenty of capacity for future growth and creating more opportunities for us to enhance shareholder value.
I also want to take a moment to recognize that our company earned four culture Excellence Awards.
Issued by Andrew Gage, a research company that conducts national top workplaces recognition program the.
The four categories, which farmer Mac was recognized for innovation.
Employee appreciation.
Compensation and benefits.
And leadership.
These recognitions are important to me and to our company, especially in the context of our solid financial performance. It's.
It is important that we deliver results and fulfilling our mission, while also providing a remarkable customer and employee experience.
Thank our employees for their honest and enthusiastic participation and this survey and their dedication to farmer Mac and our vitally important mission.
And with that operator, I'd like to see if we have any questions from anyone on the line today.
Thank you we will now begin the question and answer session if you'd like to ask a question. Please press Star then one on your Touchtone phone.
If a speaker phone we ask that you. Please pickup your handset before pressing the keys to withdraw your question. Please press Star then two.
Today's first question comes from Marla Backer with Sidoti. Please go ahead.
Thank you.
A couple of questions.
Following the strong results this quarter earlier in the year, you had been a little bit more cautious I think regarding prospects of business volume growth.
You talked about.
That you expected prepayments to decline.
Given the rising interest rate environment, but it seems like there is some appetite now for.
For new.
Loan growth.
And it's not just the payment side of the equation can you give us a little bit more color there.
You touched upon it in your prepared remarks about farmers getting use to perhaps higher expenses higher interest rates can you talk a little bit about what you think has changed.
Yes, Hi, Mara Brad.
Brad here I'd be happy to.
I'm also going to turn to Zack Carpenter, our chief business Officer.
Some additional color on this topic, but your observation is correct earlier in the year, we were cautious.
We're not feeling exuberant about business volumes right now, but they are a bit stronger than we did expect maybe six months ago, or so and while the prediction of much lower prepayments.
Rates has certainly been borne out.
The growth really across all lines of business that has been.
Well, it's required a lot of hard work.
But it also I think as I said exceeded our expectations of six months ago, and one point I'd like to make just before turning it to zac is that over the last year, you've seen us be much more deliberate in how we break out our segments of our line of business within farmer Mac.
How we originate underwrite administer.
How we set our credit policies and credit administration.
For our different lines of business has really become clarified along those segment lines and in addition.
To providing more insight for you into how those lines of businesses are doing I think for US. It also is a very.
Good reminder of the benefits of that.
Diversification that we have developed.
And really built into the.
The business here at farmer Mac over the last few years, but with that let me turn to Zack to give you. Some good day to date color on what's going on.
Thanks, Brad and Mario Great question, I think really Brad.
Accurate in terms of volume growth, especially over the last couple of quarters and really the diversified nature of farmer Mac.
The rapid increase in interest rates earlier this year did cause us to take a more cautious tone, but now with our business model focus more in <unk>.
Diversified approach, we're able to leverage some of that new focus, especially in telecom and renewable energy as well as our relative value as Brad noted in aggregate of securities and having many different areas of opportunity and growth in this volatile market did create an opportunity for us to grow in all operating segments Airlines.
Business this quarter that being said the <unk>.
Environment does remain volatile.
Interest rates continue to increase especially in the short term.
Sector. So it is prudent for us to remain cautious as we go forward. However in a much more diversified business model, we have a lot more opportunity to continue appropriate growth even in this volatile environment and we're optimistic that with the numerous products and segments that we have we're able to take advantage even.
In this environment.
Okay. Thank you that makes sense I have one other question and it's about the securitization.
We launched that program last year did another one in this past third quarter.
Or you think you know that this could be something more regular than annual.
Graham could we see you know.
Multiple.
Issuances within.
A year.
The short answer is yes.
I think if we look beyond $2023 in 2024.
We are planning to be able to issue as frequently as quarterly.
Now, whether we do that will depend on market conditions, but building. This program takes a combination of educating the market on our investor base.
And improving or not improving but changing our in house systems for how quickly we can aggregate data that's needed for the securitization in the farm to market expects in order to go to market.
So we've been doing a lot of that foundational work over the last year and it's been one of the things that has.
Paced our issuances to date.
But our priority you want to shed some light on how they might increase and what it will take for them to increase yeah, absolutely, Brian I think you covered it really well.
The two factors Mala one xactly back book alluded to obviously with the rising rate environment, you've got to make sure that we've got a consistent deal flow coming in especially in components.
It makes sense to securitize, the <unk> ranch in particular.
A number of borrowers may have already locked in lower interest rates.
So that's certainly one factor and then the second factor is.
I would say the operational readiness that we are able to exit this both in terms of being able to predict the deal flow and then shortening the amount of time between what we would see as the.
Coupon on the pool of securitized loans versus what the nominal rate environment is I think that's a really important factor for us as well to consider as we think about the pace of issuances.
Said I think we were extremely encouraged by our second transaction, which was really a true test of the program because it was in the face of some really challenging and volatile market conditions, especially for fixed income product and given the response that we did receive from the market.
I am encouraged and we do think that we'll be in a position to do another transaction.
As things stabilize and as things normalize a little bit.
Keep in mind when do you think.
Over the next 12 months, but certainly within the 12 to 24 month horizon, we could get to a point where.
Where we are doing more than two to three issuances, where you are in getting to that point.
Okay. Thank you.
And our next question today comes from Gary Gordon a private Investor. Please go ahead.
Okay. Thank you.
Couple of questions. If you don't mind first.
Since every quarter ours again, I that I can calculate there were no charge offs in the quarter is that correct.
That is correct.
Oh, Okay terrific I would personally.
Highlight this is a terrific results.
Second two questions on the.
Hedging or in the interest spread.
Apparently one of the worst bond market's ever in U S history.
Did this change your need for hedging or are there any necessary steps you have to take in the face of a drastic change in rates.
I'm going to have a parent.
What we're doing but I'm going to just kind of stay out of the gate.
The discipline that we've used over and over and over again and I know we say this.
Probably too much but the discipline of years really doesn't change much in the up or down environment.
Yes, exactly Gary I think you can.
Maybe if you just look at our Mes and see how it changed quarter over quarter Youll see a slight uptick in our EMEA and a lot of this comes from the fact that.
We have been extremely proactive.
When rates were low in it really extending our debt terms as well as raising capital when we didn't need it. So that is something thats really paying off for us it made sense.
It puts us in a position to be more opportunistic as we go out into the market now one thing that we are doing and speaking of hedging and we've mentioned this before when rates go down we'd like to have a bank of callable debt that we can draw upon so we manage.
Interest rate risk when rates go back down.
So we are doing some of that and perhaps clubbing off a little bit of that.
That we could get if we just left it alone, but we think that's prudent and it's really that dynamic.
Managing and toggling and keeping our interest rate risk within a band that allows us to be in a position where our EMEA remains very very consistent so and the only other point I'll make is.
We're very well positioned as a result of this both.
Both in a rising rate environment, you certainly seen that.
Even though there's a little bit of an inversion of the yield curve. We continue to benefit from that because we've got our bankers really equity that continues to price as fed actions continue.
Okay. Good thanks, and last the partner you mentioned or gave three reasons why the.
As a matter of fact, the spread was higher than normal.
So quarter to quarter or Theres, some random error, but you pointed to a little less hedging because severe high capital ratio better mix.
Ranch and then.
I believe you said more of wider spreads available in the market.
Those factors.
Or are they sort of likely to keep the spread.
Does this one O three spread now more in the reasonable range or at the high end of the range and you've got some volatility or their prosper.
Prospects for higher spread as these factors.
Grow.
Yes.
I think that there are a couple of.
Youre exactly right and the three factors and I would actually break them down a little bit slow. There. One is just business composition and the work that Zach and his team are doing.
And really the pricing benefits that we're seeing on the loan side of the business and.
And how those compositional shifts of mean, that's a very significant part of this mining three the other piece that I would say that we're really managing and hedging around is relatively short.
I said that we'd like to see extend out a bit which has.
Our function.
Based on the nominal.
As the fed continues to raise rates and we see the short end of the curve go up and we have a bank of investable assets. Those are certainly putting upward pressure on the EMEA.
We have seen and that is the piece that will continue to hedge.
So to minimize this volatility but those are the two significant dynamics that are really playing out.
And then I'll just caveat that we try not to peg it to a single 0.1% to one but we tried to stay within a band and you've always heard from us.
Youre seeing a shifting with this business compositional change as we move towards higher priced assets.
Just targeting an 85% to 95 basis point range, we're really targeting something that's more within the.
The 90 to 100 basis point range give or take so that's really again, where we think.
As a good place for us to placement.
Yes.
Based on what Youre seeing in the market today and kind of the current mix anything to add to that.
In terms of outlooks no I think a part of it was right I mean, we've seen this time and again in volatile markets credit spreads are going to widen for certain types of credits we've seen that in aggregate we were able to.
The relative value player versus the bond market out there so.
Re prices, we were able to take advantage on the loan side now that being said.
Even at a more or less volatile interest rate environment and some of these new products and lines of business. We are entering in and have a higher net effective spread component than we've had in prior years.
They are small, but they are growing so over time, there will be more meaningful part.
But in the short term as they grow they will contribute modestly to some of the growth.
<unk> Energy project Finance for example, correct yes.
Yeah.
Okay. Thanks, a lot.
Ladies and gentlemen, this concludes today's question and answer session.
Let's turn the conference back over to Brad Norton for any closing remarks.
Yes, thank you very much Rocco.
I mentioned, a little while ago that we.
We have recently received four awards for cultural excellence.
And how much I appreciate it.
Employees and.
Their contribution to that.
I'm, sometimes asked by investors well theres not there inherent tension being.
Being a mission driven organization with a clear mission social purpose. If you will of increasing the availability of credit for Rural America isn't there an inherent tension between that and delivering great financial results.
And I think that the.
Is this recent award just to point to it for a moment.
Helps provide some context.
That when you have great people and you have a very very clear mission, a very clear purpose, which by the way is very motivating to those people.
And when you have a very disciplined approach to your financial objectives for example around us.
And around efficiency ratios.
We can consistently deliver 15% plus return on equity, we can consistently be a top quartile or even dessau.
Natural performer, we can have.
<unk> recognition for our employees and for farmer Mac is a great place to work and we can everyday measure quantify our progress in fulfilling our mission by showing the steady forward rate of growth in our business and so.
I really.
Would love to challenge anyone back about whether that is an inherent tension because while it takes work to manage that.
It's not just something that we're working to manage this is actually a strength that we are trying to harness even more.
Because when you get this all line mission for people the financial construct.
Disciplined the consistency of all of those things.
Can become a very powerful entrance. So when we talked about the resiliency of the farmer Mac business model. This really is what we're talking about.
And.
I am going to spend more time talking about this in the future because I believe it is a clear source of differentiation from farmer Mac from many other companies in the public markets in fact most.
And.
Every time, we get questions.
Whether there is tension or whether our results can be sustained.
I think this is a very important part of the answer so I look forward to talking more with you about that.
Thank you operator, thank you everyone.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yes.