Federal Agricultural Mortgage Corporation Q1 2023 Earnings Call
In a rematch 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 will turn the call over to President and CEO , Brad Nord home brands.
Thanks, Jonathan and good afternoon, everyone.
For joining us today.
I am very pleased to announce we delivered a great quarter with new all time records for revenue earnings and net effect of spread.
And all time records in the growth rates of these three metrics.
Our results not only highlight the resiliency of our business model, our disciplined approach to asset liability management and our successful efforts over the last few years to grow and diversify our revenue streams, but also the alignment of our team with our long term strategic objectives and passion for fulfillment.
Our mission throughout changing market cycles.
For some time apart and I have talked with you about our disciplined approach to asset liability management.
We've emphasized that our ability to issue long dated fixed rate debt in all rate environments and economic cycles is a core competitive advantage that when combined with our approach to asset liability management helps to produce consistent spreads and provides remarkable forward visibility to future earnings.
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The recent volatility in the capital markets and failures of depository institutions provide a stark contrast between farmer Mac and banks.
We're not a bank and we don't rely upon deposits as a source of funding.
The terms governing our debt securities are contractual in nature, and we are not depositors hold the optionality of when and how to call our debt.
We will continue to talk about these differences and Wi farmer Mac's business model is resilient and has the ability to deliver such consistent results.
In the first quarter of 2023, we book core earnings of $38 9 million, a 50% increase over the same period one year ago.
We've provided a gross $1 7 billion in liquidity and lending capacity to lender serving rural America, resulting in total outstanding business volume growth of over 500 million from year end to $26 5 billion as of March 31, 2023, which annualized is about a seven five.
Percent growth rate.
The volume growth this quarter was primarily attributable to the efforts we've made over the last few years to diversify our business model across numerous key markets.
We achieved $608 million of net new business in rural infrastructure.
We acquired nearly $100 million in telecommunications loans in the first quarter of 2023.
There is growing investment in fiber and broadband in Rural America.
These telco assets are highly accretive in terms of NDS and are another reflection of our attempts to diversify our asset portfolio.
We remain committed to increase investment in the telecommunications and broadband sectors.
Our highly mission centric and we look forward to providing additional updates on this new avenue of growth for farmer Mac.
Our renewable energy portfolio also experienced a strong start to the year with approximately $80 million and net growth from several counterparties.
Our participation in broadly syndicated renewable energy transactions has increased the number of potential counterparties to source transactions from in future years.
Pipeline remains strong in near future as we continue to focus on upsizing existing deals and bring new renewable energy opportunities with additional resources committed to this area.
Yes.
Outstanding volume in the agricultural Finance line of business was relatively flat from year end, largely due to continued economic uncertainty and broader market volatility.
We do see opportunities to help our customers with their liquidity needs as they navigate the recent disruptions in the banking industry.
Volume in the farm <unk> Ranch segment declined sequentially.
Due to two reasons. The first is the seasonally a large number of scheduled payments due to the majority of the farm <unk> ranch loan customers, which are annual or semiannual with payments falling on January 1st of the year.
Second is that many of those borrowers.
In that period of time are focused on the renewal of existing lines of credit ahead of the spring planting season.
Outstanding volume and our corporate AG finance portfolio was relatively flat from year end.
As persistent volatility and uncertainty in the market slowed down deal opportunities in the first quarter with many transactions on pause waiting for signs of stabilization in the macroeconomic outlook.
When we spoke to current and prospective institutional customers. During the recent global AG investing conference in New York, We heard a recurring theme that there was a large balance of institutional money ready to be put to work in the cultural space.
In recent weeks, we have also seen more opportunities that continues to be accretive from a net effect of spread standpoint.
We remain focused on this sector. It's a key component of our diversification strategy central to our mission and impactful of earnings and continued growth.
We told you about our successful execution of our third securitization in February of this year on our call and.
And we continue to receive excellent market feedback as well as demand for agricultural backed securitization products.
This program aligns very well with our core mission to lower our cost for our borrowers and improved credit availability in Rural America.
We remain committed to being a regular issue in the securitization market. It has now become routine for us.
With a set of securitization products that align with borrower and investor interests.
Looking ahead, our underlying business model, our strong capital position and our uninterrupted access to debt capital markets throughout the various market disruptions.
Uniquely positions us to partner with our customers to help them manage their business and the risks they face around future capital requirements and liquidity.
The foundation of our strategy is our consistent financial and operational execution, coupled with proactive management of our balance sheet and funding sources, which has and we expect will position us well in changing credit environments and create more opportunities to enhance shareholder value.
And fulfill our mission.
Now I'll turn the call over to our partner <unk>, Our Chief financial officer to discuss the results in more detail.
A part of.
Thank you Brad and good afternoon, everyone. Our record first quarter 2023 results highlight a balanced well measured approach continuing strong credit quality and resilient.
You can see across market cycles.
We achieved $1 $7 billion of new business volume this quarter and some of the key components include $500 million.
Andrew infrastructure advantage bonds 145 million and gross corporate agricultural finance loan purchases, which is about 135% higher than last year at this time.
And 73 million and gross renewable energy loan purchases.
After repayments we grew.
$600 million this quarter and our outstanding business volume and this speaks to the benefit of our diversified portfolio.
Notably there's been strong execution in our rural infrastructure line of business.
Sure.
With $28 $9 million of $356 per share in the first quarter of 2023 and this reflects as Brad noted a 50% year over year growth, that's driven by record net effective spread of $77 2 million in the first quarter of 2023 compared to <unk> 50.
$7 8 million in the same period last year.
As Brad highlighted despite the earnings pressure that many financial institutions are currently facing.
Our net effective spread this quarter increased appreciably and was at 115 basis points. This.
This was primarily driven by significant reduction in our cost of borrowing and strong pricing in the rural infrastructure sector.
Despite short term interest rates speaking.
Cost of funds have trended systematically downward.
This is because of our disciplined asset liability management practices, where we hedged our risk effectively.
Changing our funding mix to take advantage of opportunities as the yield curve changed.
Another significant driver of the lower cost of funds is from the low cost of debt and capital that we raised opportunistically.
<unk> historical lows in 2020 in 2021.
These decisions have continued to pay off and we've reduced the need for us to raise more expensive dumb and callable debt.
Rising rates environment.
Benefit is expected to continue to create a downward pressure on our non-GAAP funding cost as the short end of the curve continues to increase with fed action.
The reinvesting with excess capital generates additional return with an upward repricing of our short term investment portfolio.
The rise in short term interest rates has provided an asymmetric benefit to earnings we project limited downside to earnings when rates decline.
The reason for this is that we expect to retain some of the benefit over the medium term if rates were to decline as we have proactively started extending maturities and our investment portfolio. Again. These are all practices and an example that are consistent with our disciplined approach that is designed to help minimize earnings volatility.
Brian highlighted important differences between our business model and those of traditional depository institution.
And the week of the banking crisis.
<unk> conducted a review of our own asset liability management practices.
As a result of this review highlighted that our disciplined hedging strategy, where we match the duration and convexity of our assets and liabilities in all of REIT environment has significantly contained earnings volatility our liquidity and capital position are well in excess of all regulatory ratios and our projections show minimal.
And our profitability and market value, regardless of the direction and size of any REIT shops that we might apply to stress our balance sheet.
We highlighted improvement in pricing in the rural utilities segment, which has also been a contributor to the higher <unk> in the first quarter of 2023. This.
This was driven by higher spread volumes related to the telecommunications sector.
This sector has nearly doubled year over year to $356 million as of March 31, 2023. This.
This increase was slightly offset by flat to lower pricing and the agricultural finance line of business that stemmed from increased competition for high quality credits and limited loan origination in the sector. However.
However, we are seeing opportunities ahead for us to partner with our customers, especially as the rate increases begin to taper.
Turning to operating expenses. These are increased by 11% year over year and that's been primarily due to the full year compensation impact of new hires that will gradually brought onboard throughout 2022 and the <unk>.
Actual expenditure in the first quarter, that's been associated with our multiyear technology investment in our Treasury and cash management systems to enhance our trading hedging and reporting platform.
This modernization effort is expected to position us to be defensive against cyber and fraud threats in the future and also allow us to scale, our portfolio and diversify our product offering.
We expect our run rate operating expenses to increase at a pace above historical averages over the next several years given our plans to continue to make investments in luck team and infrastructure to support our growth and strategic objectives.
As of March 31, 2023, our operating efficiency was 28% and below our strategic plan target of 30% and Thats, primarily because revenue growth increased at a significantly higher rate than expense growth.
We will however continue to closely monitor our efficiency ratio.
As we invest in loan infrastructure and funding platforms.
Our loan processes to accelerate growth.
We do expect to see some temporary increases that could go above the 30% level.
Our credit profile is holding strong in aggregate despite the economic headwinds.
While 90 day delinquencies increased $27 million sequentially to $71 million or 27 basis points of our entire portfolio. It was primarily due to $16 million and farm planting loans that are attributable to a single borrower that became delinquent in first quarter of 2023.
This increase is in line with the seasonal rise consistently observed during the first quarter and related to the January one payment date on most of our portfolio.
As of March 31, 2023, the total allowance for losses was $17 9 million, reflecting an $800000 increase from year end 2022.
Kris was primarily attributable to a single agricultural storage and processing loans. The borrowers currently undergoing bankruptcy proceedings. We expect this situation to be resolved in the next several months.
Now turning to capital.
Farmer Mac's, one $4 billion of core capital as of March 31, 2023 exceeded our statutory requirement by $534 million or 65%.
Cole capital increased from year end 2020, due primarily due to an increase in retained earnings.
Tier one capital ratio improved to 15, 7% as of March 31, 2023 from 14, 9% as of year end 2022, largely as noted due to strong earnings results as well as the reduction in risk based capital consumption that is good from our third securitization transaction.
Maintaining credit standards.
Our risk profile, coupled with strong levels of capital is extremely fundamental to our long term strategy.
During our last earnings call in February we discussed the successful execution of our third $300 million securitization transaction and evolving and difficult market conditions.
This has created a well received new investment opportunities for leading institutional investors, but I'd also like to highlight that this is just another example of our diversified sources of funding.
In conclusion, our entire team delivered exceptional quarterly results, surpassing the key metrics that we highlight on each call, notably we delivered an 18% return on equity and an efficiency ratio of 28%.
We believe that our balance sheet is well positioned for uncertainty and we're more optimistic than ever to deliver on our long term strategic plan objectives and without drive let me turn it back to you.
Thanks <unk>.
We experienced a strong start to 2023, despite the backdrop of economic uncertainty and market volatility.
I am extremely proud of our team and the excellent progress we are making.
On our multi year strategic initiatives.
We believe we are well positioned to deliver strong financial performance.
Consistent returns for our shareholders over the rest of 2023.
Even though there is uncertainty in the economy.
And now operator, I'd like to see if we have any questions from anyone on the line with us today.
We will now begin the question and answer session.
A question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
Draw from the question queue. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from.
Bill Ryan from Seaport Research partners. Please go ahead.
Good afternoon, and thanks for taking my questions.
First one for Brad.
You mentioned the regional banking crisis, a few times in your early commentary.
And I was wondering if you're seeing any additional inquiries coming in about potentially additional volume coming your way.
Banks might be looking to.
Let's just say increase their liquidity positions or capital levels.
Yes, Bill we are paying a lot of attention to that and there are two potential ways and I emphasize potential ways that that can occur there may be banks that whole portfolio of loans that otherwise they might have sold to us in the past that now they are ready to sell just for a very simple example, silicon Valley Bank.
Proximately 700, and some odd million dollars first mortgage loans on vineyards in California. So that's slowly working its way through receivership, but we'll keep an eye on that and other similar situations.
As well as those banks that may hold portfolios like that.
That are appealing under capital pressure today.
Wave that can arise.
Thanks, Ed in the past May have had a bias towards doing three or five or seven year first mortgage.
Loan and arm.
And holding on our balance sheet and today a couple of things are working against some one they may be having liquidity and capital constraints that they werent experiencing six months to 12 months ago, and the others with the shape of the yield curve it really favors.
Longer term fixed rate debt, where we have in the Arab advantage in funding, especially in comparison to a bank that is dependent on deposits. So.
It hasn't those two opportunities haven't been reflected in the numbers yet.
And it's very difficult to project.
To what extent they may be reflected in future numbers, but.
We're keeping a close eye on it and.
Just common sense.
<unk> tells us that yes, there should be some additional opportunities coming because of that.
There is still a headwind out there, particularly for first mortgage loans for.
Farm <unk> Ranch program of.
Very few of refinancings and higher overall.
Interest rates, having a kind of depressing your stifling effect no origination but.
These two factors that I, just mentioned provide a benefit of a tailwind for us and should provide some additional opportunity.
The remainder of the year.
Okay.
One follow up.
Since you mentioned it last quarter that it was kind of a little bit.
Log jam given the disruption in the capital markets.
You kind of echoed that comment again this quarter whats it going to take to kind of free up the volume, it's kind of like sitting there ready to go.
Well right now a higher portion of the first mortgage loan and farm and ranch opportunities are going to be associated with the transfer of real estate and.
You can read some of our publications for feed and others and our Chief Accounting Officer, Jackson Tankage, commenting on land values, which have held up remarkably well see a pie higher interest rates too high already high land values and you'll have a higher cost of carry of more challenging kind of economic value proposition. So we're.
Not seeing a big increase in the transfer of land that is motivating.
New financing opportunities, but I would draw your attention build back too.
Our comments and our presentation of our numbers across all of our segments and wildfire when ranch's, we've noted now bucket or our formal comments.
I've also noted them just now while it's down for farm and ranch are volumes for some of our rural infrastructure and specifically.
We all utilities and renewable energy project finance are up they're up substantially.
And those are accretive they are higher.
Yes.
<unk> business.
For us they are contributing to those higher numbers that are part of that story.
And the volumes there are not just holding up they are growing for us in this environment. So that we can talk about a log jam as you described it and farm and ranch, but in other areas of our business.
We're not experiencing that in fact, we're experiencing more opportunities as I mentioned, we're allocating more resources to renewable energy project finance right now and.
That increasing diversification of our portfolio is giving us greater strength and ability to deliver the steady returns <unk> seen from us year over year.
Keep delivering those steady returns throughout 2023.
Okay. Thanks for taking my question.
Okay.
Our next question comes from Gary Gordon Private Investor. Please go ahead.
Okay. Thank you.
Questions on the AR, but the remarkable spread interest spread.
First.
The benefit was all attributed to the over the a year ago is attributed to the financing group Treasury.
I assume the way you calculated as some calculation of your cost of funds versus some sort of average.
So I mean.
And why isn't the cost of funds attributed to an operating unit rather than the finance group.
Yeah, a lot of power to get to that Gary. It's a it's a very interesting question, but first kind of draw your attention to a part of that positive change being attributable to these.
Accretive lines of business, where we're seeing a little bit stronger growth right now.
As you point out.
The majority of it is attributable to how we run our book and our Treasury operations and all at a par to take you through some of that detail. Both the simple math denominator numerator question that youre getting out, but then maybe a bit more detail.
And how other factors and how we run our book are contributing to that.
Sure. Thanks for the question Gerry so about a year ago we.
No, we actually segregated our portfolio into segments.
With that.
We are now able to get a more granular view of just how we can actually allocate any between the operating units that you mentioned agricultural finance and rural infrastructure Finance.
Treasury as it split out between the actual funding desk and then our investment portfolio.
So when we actually read the interest rate.
Benefits across the operating units what we do is we assume that with all other things being equal.
The way in which we would fund the balance sheet. If we did not have a treasury desk would be to match funding every single.
Alone relative to the benchmark interest rate based on the tenor of that loan.
In reality, what we don't assume any interest rate risk, but we will actually hedge us synthetically convert a fixed or floating rate asset.
And appropriate liability and actually match the duration and convexity.
The asset and liability.
It gets to be a little bit technical but essentially the way to think about this is the funds transfer pricing mechanism that we use provides a baseline of what funding costs would be out in the marketplace and the absence of the treasury desk. So to the extent that the assets are being generated at a spread above.
This market read they get credit for it to the extent that the treasury funding desk is able to issue debt.
This market rates that we calculate that credit is ascribed to the Treasury unit.
So essentially what has happened over the past year has been that we've been able to Opportunistically fund at certain points in the yield curve and issue debt that's been below the market rate.
So that's one fact.
Other factor is just the specific benefit that we received when we extended our debt.
Cause when there is actual changes in credit spreads. So there's no real change a risk that we experience in different reason button because of the way in which we hedrick book So.
Best way to think about this is.
The duration of our assets and liabilities are perfectly matched.
And we're able to do this because we can actually opportunistically hedge or.
Our liabilities against our assets in response to changing interest rate environments, So very different phenomena and then.
What other institutions my account that allow us to minimize the risks, but also be fairly opportunistic on where we find out the cove.
Okay, I don't want to.
The follow up.
The real benefit you.
Your cost of funds with you've generated is has improved.
Persists credit spreads out on the marketplace.
Yeah that is definitely the case and it has to do with the fact that you know we seeing really strong flight to quality in general four G. S fees, and so we <unk> pretty well to other G. S. C. So that's one point the second one is just the fact that we've been.
Conducting consistent investor outreach and they're strong demand specifically for our debt issuances and also given a size were able to issue in a way that really matches our investors preferences. We don't do bulk issuances, we can do some really customized issuances and that's Ah, it's a small benefit but certainly <unk>.
All of it adds up and it helps us really issue athletes that are below market, especially in doesn't bug.
Okay. Thanks, a lot.
Sure.
The next question comes from Brendan Mccarthy from Sweden.
Mhm.
Yes. Thank you for taking my question I was wondering if you could provide some additional color on the telecommunications sector volume you'll have a huge jump this quarter, what really drove that.
The drummer Boeing there.
Proper two factors.
And by the way. Thank you very much for joining us today.
Probably two factors Wanna is that we have.
And as a carpenter in our business development to hear back then.
Much more active that team was really been built up significantly in the last couple of years and the that includes the build out of the rule of infrastructure team, which is now what I would describe as in place and mature and so they've been reaching out to institutions.
Institutions keep in mind, we're a secondary market. So we're always originating with or from other of financial institutions.
They've been reaching up much more consistently it aggressively incredibly I would also add to originate that business. So for example.
There's one.
Institution of farm credit institution that.
With with which we have been doing.
What amount of telecom over the last year. So that's been a positive.
The other factor is that.
For those telecommunications firms that are predominantly focused on rural America, which of course is where our interest is there are significant capital investment going on there is investment.
And broadband there is investment and other forms of communication and that's all a part of improving rural.
<unk> infrastructure some of it stimulated by government.
Programs some of it.
By New technologies, but there's there's real capital investment going on out there and that leads to opportunity for us.
Great. Thank you and I agree to that.
Are you able to disclose the spread bigger telecom.
Typically generates on average.
Yeah, I think we do break out our business segments by average depressed, Oklahoma, we do but it's it's really it's really mashed into the rural utility segment, but I'll just give you you know perhaps some averages here, but if you just look at where we were just about a year ago.
You know a rule utilities segment, you'll see as a result of telecom has an average gone up about 13 basis points right. So when you think about that those spreads tend to be you know I'll go with you to see a segment on average is about 36 basis points today. It was in the twenties about a year ago.
With this increase in telecom, which has been a small amount telecom tends to be in the mid 100. So about 150 basis points. So when you think about a change in business composition towards telecom Federal infrastructure segment is where you can really track it and you can see a fairly notable double digit increase in basis points.
Spread on average across the board.
Yeah.
Yeah, Apart I mentioned 150 basis points, the telecom I've I've seen a few of the telecom deals going through here that have been.
Even materially higher than that Brendan. We also have if we look at project Finance, we've mentioned that is an area where while the numbers aren't large the percentage increases are.
And they're just as an example.
Any us on those along those deals will be.
150 to 250 basis points compared to 100, 115, which is what we've been talking about is our average right now so.
Talk about telecom or are we talking about project finance for renewable energy projects being highly accretive we're talking about factors of one and a half to two and a half X.
Great. Thank you that's helpful.
Lastly, could follow up you know given the diversification of the of the loan book.
Utilities and renewable but.
But you still feel that <unk> target range of 90 to 100 basis points is pretty measure going forward.
[laughter]. Thank you for asking me about we would've been somewhere.
Not because we've talked about that a lot.
The star is really a line from a funding standpoint this quarter.
I think that <unk>.
Going forward.
We will look for accelerating growth and our telecom.
And Ah renewable energy projects financed portfolios, so yes accretion there.
On the other hand, we will not back away from doing as much farm and ranch business.
Historic Farm and ranch spreads as we possibly can.
That's so absolutely core to our mission.
So I think you can see some continuing support for this any us.
Going into the next quarter to from accretive assets as well as Treasury operations, and then maybe see a little bit of dampening effect.
Beyond that as we look to.
Comparative pickup and farm and ranch.
And some of our lower yielding rural utility business, how that exactly shakes out I don't know I think 90 to 100 <unk>.
And yes is looking pretty conservative to us today based on where we are and I think we've.
I always tried to provide conservative.
Indications of where that any essays I remember a time when we were talking about 85 to 95, but.
What you're seeing is opportunistic treasurer, you've seen the benefits of diversified portfolios, you've seen the benefits of more opportunistic pricing.
Was a time when farmer Mac not too long ago, and farmer Mac was kind of had a price what's the minimum we need to earn and I think now we are much more attuned to what's available in the marketplace and that also is contributing to some higher returns. So I think 90 to 100 feels very very conservative and for the remainder of this year.
Seeing that 110 range, maybe even a bit higher.
It's not out of the question at all.
Got it. Thank you. Thank you.
This concludes our question and answer session I would like to turn the conference back over to read normal for any closing remarks.
Yeah, well again I would just like to thank everyone for joining us today.
I Hope you can hear our voices just how proud we are of these results.
It feels like it's a combination not of just you know.
Everything working on one quarter, but.
To them greater and greater extent every quarter, we go on.
Our overall business plan I think are very strong management team are enthusiastic and very very capable employees.
Executing.
Executing on.
On our strategic plan are farmer, Mac, and just showing better and better results from it.
One of our directors. The other day describe this is that just a continuation, but upward shift and our curve and I think that is an apt description and.
Again, I hope you hear our pride and what we're doing so thank you very much for your interest.
Hesitate to follow up with any follow on questions were.
Very happy to talk more about this and.
With that operator, and our gratitude we can conclude this call.
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