Q3 2022 Federal Agricultural Mortgage Corp Earnings Call
Good day and welcome to the farmer Mac third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to jump in Nazareth director of Investor Relations and Finance strategy. Please go ahead. Good afternoon, and thank you for joining us for our third quarter 2022 earnings conference call and felt the Nazareth director of Investor Relations and finance strategy here at farmer Mac as we begin please note that the information.
<unk> provided during this call may contain forward looking statements about the company's business strategies and prospects, which are based on management's current expectations and assumptions. These statements are not a guarantee of future performance and are subject to risks and uncertainties that could cause our actual results to differ materially from those project.
Please refer to farmer Mac's 2021 annual report and subsequent SEC filings for a full discussion of the company's risk factors on today's call. We will also be discussing certain non-GAAP financial measures disclosures and reconciliations of these non-GAAP measures can be found in our most recent Form 10-Q and earn.
<unk> release posted on farmer Mac's website farmer Mac dot com under the financial information portion of the investors section joining us from management. This afternoon are president and Chief Executive Officer, Brad normal, who will discuss third quarter business and financial highlights and strategic objectives and Chief Financial Officer.
A part of <unk>, who will provide greater detail on our financial performance 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, John Good afternoon, everyone and thank you for joining us.
I'm 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 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.
They have enabled us to deliver a very very strong quarter.
We 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 and ranch segment across multiple products, including egg batches 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 advantaged securities to manage their asset liability maturity profile given the recent.
Increases in interest rates.
And the comparative competitiveness, a farmer Mac advantaged pricing relative to other market and federal reserve derived options.
Year to date, we've added a net $580 million and new farm and ranch advantaged 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. It is viewed favorably by long standing counterparties.
This is a quarter for the harvest of many agricultural crops in Rural America.
Yeah, and farm and ranch loan purchase volume growth. This quarter has performed ahead of our expectations.
Simply put borrowers are adjusting to the higher rate environment and they're 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 and our farm and ranch long term standby purchase commitment product with one of our farm credit system customers.
See this is 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 finance segment saw net growth of $67 $5 million during the third quarter, primarily due to our continued efforts to support loans to larger and more complex agribusiness is focused on businesses span the food supply chain.
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 real infrastructure. This line of business added $510 million of business year to date in renewable telecommunication 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 bounce a strong contributor in 2022.
Farmer, Mac has acquired $162 million and telecommunications loans year to date, holding a total balance of $243 million as of September 30th.
While loans to telecommunication 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 telecommunication providers as it is an area of growing import.
To rural communities.
Our renewable energy portfolio ended the quarter at nearly $200 million.
At September 30th 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 of 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, and a business opportunity for us at farmer Mac.
During our last earnings call. We discussed the successful execution of our second 300 million dollar securitization transaction involving 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 costs for the end 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.
This we hope will continue to build on our strong reputation instant.
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, Our Chief financial officer to discuss the financial results in more detail.
A part of.
Thank you Brad and 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 as borrowers had less of an incentive to P. P. In this higher rate environment.
As we look ahead, we believe our strong capital position.
It really bodes us well as this trend continues and as we look to further our growth objectives.
So I need the core earnings our core earnings for third quarter, 2022, what a record $33 $4 million or $3.07 per diluted common share compared to $37 million or $2.83 per diluted common share in second.
2022 and.
And $27 $6 million or $2.55 per 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.
The 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 at a record $65 $6 million.
Bed to $69 million in 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 <unk>.
Driven by compositional shift in our program assets and generally widest spreads across the board we have seen upward pressure pricing on corporate finance loan and I'd match volumes as a result of the higher rate.
There's another revolving factor that I'd like to describe and this has contributed to net effective spread as well over the past few years.
Opportunistically raised low cost debt and capital and the excess capital essentially offsets our urgency to me is more expensive dumb and callable debt in a rising rate environment.
This will continue to create a downward pressure on our non-GAAP funding cost as the short end of the curve continues to increase with fed actions our liability side of the balance sheet remains extremely strong as well.
We continue to benefit from this low cost debt.
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.
All forward looking funding strategy and prudent approach to hedging have also allowed us to maintain and enhance profitability. Despite an inversion in the yield curve.
Operating expenses have increased 15% year to date compared to the same period last year.
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 investment in both head count and technology over the next one to two yet.
We 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 enhance deal. So.
In summary, operating efficiency was 29% through September and better than our strategic plan target of 30%.
And 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.
However, as we make decisions to invest in infrastructure and funding platform.
And scale for the group, we may see some temporary increases above the 30% level.
Turning to credit.
Credit profile continues to be strong despite the economic headwinds 19.
90 day delinquencies were $44 million or 17 basis points of our entire portfolio compared to $21 million in second quarter, 2022, and $55 million in the same period last year.
Our credit underwriting and policy has remained consistent.
Sequential 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 payment date.
As of September 30 of 2022, the total allowance for losses was $15 $2 million, which reflects a half a million provision Julian talks a lot.
The 400000 dollar provision to the rural infrastructure portfolio was primarily driven by net new loan volume.
$100000 provision in the agricultural and that's good for you was related to the deterioration of the single agricultural storage and processing alone.
Now turning to capital.
Farmer Mac's, one $3 billion of core capital as of September 30th 2022.
He did a statutory of assignment by $514 million or 66%.
Cole capital increase from year end, primarily due to an increase in retained earnings.
Our tier one capital ratio improved to 14, 9% as of September 32020 due.
From 14, 8% as of year end 2021, and this is 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 is a very fundamental part of our long term strategy to support continued growth.
Low cost and then show the steady execution of our business model.
After the successful execution of our second bond series securitization transaction in August we are encouraged by the demand for agricultural docked securitized product opportunity because these align very well with our mission and foster continued success.
The pharma 2020 do dash, one transaction was structured around two tranches of senior guaranteed tranche and the Spartan and guarantee punch both of which were very well received by the market.
Despite a volatile environment for structured products.
The success of this transaction further demonstrates farmer mac's capability to diversify long term funding sources.
We tend to use the conduit.
Perhaps generate additional lift.
Most importantly, this capability is highly central 12 weeks.
We expect to return to the market soon with another similar securitizations as we are committed to making this a more programmatic effort in the future to continue to build liquidity for our investors.
So in summary.
<unk> delivered exceptional quarterly results.
It's hopefully 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%.
With that Brad I'll turn it back.
Thanks apart.
We are extremely proud of our third quarter results and believe our performance Friday, yet. Another example of that dynamic and enduring nature of <unk>.
<unk> 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 the pick a cultural economic cycles.
<unk> 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 wanted to take a moment to recognize that our company earned four culture Excellence Awards.
Goodbye and or gauge the research companies that conducts the national top workplaces recognition program.
The four categories, which farmer Mac was recognized where innovation employee.
[noise] appreciation.
<unk> benefits.
And leadership.
These recognitions are important to me, Andrew our company, especially in the context of our solid financial performance it.
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 you touched on phone.
Using a speaker phone we ask 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 you know prospects of business volume growth you talked about you know, but you expected pre prepayments to decline.
Given the rising interest rate environment, but it seems like you know theres an appetite now for <unk>.
For new.
Our loan growth.
And it's not just the payment side of the equation can you give us a little bit more color. There and you know you touched upon it in your prepared remarks about farmers getting used to you know, perhaps higher expenses higher interest rates can you talk a little bit about you know what you think has changed.
Hi, Brad.
Brad here I'd be happy to.
I'm also glad to turn to Zack Carpenter, our chief business Officer to give you. Some additional color on this topic, but your observation is correct earlier in the year, we were cautious Oh, we're not feeling exuberant about business volumes right now, but they are a bit stronger than we did.
Expect a maybe six months ago, or so and while the protection are much lower prepayments.
Reis has certainly been borne out yes, the growth really across all lines of business that has been.
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 and how we breakout our segment.
All of our lines of business, whereas in farmer Mac, how we originate underwrite administer how it sort of credit policies and credit administration.
For our different lines of business has really become a clarified Ah 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 the 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 the fact that give you. Some good day to day 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 focused more in depth.
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, an activator 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.
As a business this quarter that being said the 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 Securitizations.
You launched that program last year did another one in this past third quarter are you thinking that this could be you know something more regular than an annual program could we see you know.
Multiple issuances within a year.
Yeah.
The short answer is yes, I think if you look beyond 2023 and 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, 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 and.
The forum to market expects, an order and 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 a paced our issuances today, but.
But apparently wanted to shed some light on how they might increase and why don't pay for it and to increase yeah, absolutely. Brian I think you covered it really well at the there are two factors Mala one exactly basketball alluded to there's obviously with the rising rate environment. We've got to make sure that we've got a consistent deal flow coming in especially the products that we think.
Well it makes sense to securitize, the farm and ranch in particular.
Number of borrowers may have already locked in lower interest rates. So.
So that's certainly one factor and then the second factor is I would say the operational readiness that we are able to access it both in terms of being able to predict that deal flow and then shortening the amount of time.
I mean, what we would see as the you know the.
Cooper on the pool of securitized loans versus what the nominal rate environment does.
That's a really important factor for us as well to consider as we think about the pace of issuances that said I think we were extremely encouraged by our second transaction, which was really a tooth path of the program because it does in the face of some really challenging and volatile market conditions, especially for our fixed income product and.
And given the response that we did receive from the market.
We're encouraged and we do think.
That will be in a position to do another transaction I'm asking.
As things stabilize and as things normalize a little bit.
Keep in mind, when we think.
It's not over the next 12 months, but certainly in the plan.
As a 24 month horizon, we could get to a point.
Where we are doing more than two to three issuances and getting lucky.
Yeah.
Okay. Thank you.
And our next question today comes from Gary Gordon a private Investor. Please go ahead.
Okay. Thank you a couple of questions. If you don't mind first I ask this 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.
I like this it's a terrific results.
Second two questions on the hedging or in the interest spread.
Obviously this is 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 Oh, the drastic change in rates.
Okay, I'm gonna have a part of an elaborate on what we're doing but I'm just kind of stay out of the gate that the.
The discipline that we've used over and over and over again and I always say this.
Way too much but the discipline of my years really doesn't change much in the up or down environment.
Yeah, exactly Gary I think you can say this.
Looking at any assets and see how it changed quarter over quarter, you will see a slight uptick in our.
And he has been a lot of this comes from the fact that you know we have been extremely proactive.
When rates were low in it really extending our desktops as well as raising capital when we didn't need it. So that is something that's really paying off for us. It makes us a 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 winter.
<unk> go down we like to have a bank of callable debt that we can draw upon so we manage it.
Interest rate risk when rates go back down.
So we are doing some of that and perhaps dropping off a little bit of B N E. S. That'd be could get if we just left it alone, but we think that's prudent and it's really that dynamic.
Managing as toggling and keeping our interest rate risk within a band that is.
Allows us to be in a position where any S remains very very consistent and the only other point I'll make is you know what.
Well its position as a result of the blip in a rising rate environment, you certainly seen that play out even though there's a little bit of an English and in video.
We continue to benefit from that because we've got our bankers are really equity that continues to price.
It's good to you.
Okay. Good thanks, and last the partner you mention or gave three reasons why the a b any as a matter of fact, the spread was a higher than normal I know quarter to quarter or theres. Some random error, but you pointed to a little less hedging because severe high capital ratio are better.
Mix I am more of farm and ranch and then I believe you said more of wider spreads available in the market.
Those factors.
Are they sort of likely to keep the spread.
Is this 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 are there you know prospects for higher spread as these factors.
Grow.
Yeah, you know I think that there are a couple of Oh, you're 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.
Zach and his team are doing.
And really the pricing benefits that we're seeing on the loan side of the business.
And how those compositional shifts happening that's what that's the base significant part because this morning three the other piece that I would say that we're really managing and hedging around is a relatively short.
With that we'd like to see extend out a bit which has a function.
On the nominal rate 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 I'll, just caveat that you know we try not to peg it to a single 0.1% to 110.
We tried to stay within a band and you've always heard from us.
You've seen a shifting with this business compositional change as we move towards higher priced assets.
It was just targeting them 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 so that's really again, where we think you know it is.
Police, whereas two placements.
Based on what Youre seeing in the market today and kind of the current Max yeah anything to add to that.
In terms of how it works 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.
We were able to.
The relative value player versus the bond market out there so as credit re prices, we're able to take advantage on the loan side now that being said.
Even at a more or less volatile interest rate environment. 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 renewed.
Renewable energy project Finance for example, correct yes.
Right.
Okay. Thanks, a lot.
Ladies and gentlemen. This concludes today's question and answer session I would like to turn the conference back over to Brad Norton for any closing remarks.
Yes, thank you very much Rocco.
Mentioned, a little while ago.
We have recently received four awards for cultural excellence and how much I appreciate it.
Our employees and.
Their contribution to that.
I'm, sometimes asked by investors well.
Their inherent tension.
Being a mission driven organization with a clear mission social purpose. If you will on the increasing 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 a point to it for a moment.
Helps provide some context.
That when you have great people and you have a very very clear mesh and 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 any yes.
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.
Half 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 the people the financial construct the.
The discipline the consistency of all those things.
It can become a very powerful lunch and so when we talk about the resiliency of the farmer Mac business model, that's really that's what we're talking about.
And I'm I'm 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 about whether there's 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, and 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.
Yeah.