Q1 2023 Federal Agricultural Mortgage Corporation Earnings Call
Quarter with new all time records for revenue earnings and net effective 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 of 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.
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 one 7 billion in liquidity and lending capacity to lender serving rural America.
<unk> 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 5% 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 as there is growing investment in fiber and broadband in Rural America.
He is telco assets.
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 telecommunication and broadband sectors, which are 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.
The 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.
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.
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 during that period of time are focused on the renewal of existing lines of credit are ahead of the spring planting season.
Outstanding volume and our corporate Agg 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 agricultural 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 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 an 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 interest.
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.
Strong credit quality and resiliency across market cycles.
We achieved $1 $7 billion of new business volume this quarter and some of the key components that include $500 million.
Infrastructure advantage bought 145 million and gross corporate agricultural finance loan purchases, which is about 135% higher than last year at this time.
$73 million in growth renewable energy loan purchases.
After repayments, we grew about $600 million this quarter and our outstanding business volume and this speaks to the benefit of our diversified portfolio and notably business strong execution and our rural infrastructure line of business.
Core earnings were $28 $9 million or $356 per share in the first quarter of 2023.
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 $57 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 that 115 basis points.
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 our cost of funds have trended systematically downward.
This is because of our disciplined asset liability management practices, where we hedged our risk effectively while 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 when rates were at historical lows in 2020 and 2021.
These decisions have continued to pay off and we've reduced the need for us to raise more expensive dumb and callable debt.
I think rates environment. This 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 and.
The reinvesting go back to this capital generate additional return with an upward repricing of our short term investment portfolio.
While the rise in short term interest rates has provided an asymmetric benefit to earnings.
Limited downside to earnings when rates decline.
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 we.
Voluntarily conducted a review of our own asset liability management practices.
Also this review highlighted that our disciplined hedging strategy, where we match the duration and convexity of our assets and liabilities in all rate environments have significantly contained earnings volatility.
Liquidity and capital position.
Well in excess of all regulatory ratios and our projections show minimal change in our profitability and market value.
A list of the direction and size of any REIT shop that we might apply to stretch the 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 was driven by higher spread volumes related to the telecommunications sector and this sector has nearly doubled year over year to 356 million.
As of March 31, 2023.
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, 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 initial 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.
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 team.
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.
And innovate 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.
90 day delinquencies increased $27 million sequentially to $71 million or 27 basis points, if I die portfolio. It was primarily due to $16 million.
And from 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 drive 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 zone. The borrower's 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 2022, 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 that reflect a 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 $300 million securitization transaction in evolving and difficult market conditions.
This has created a well received new investment opportunities for leading institutional investors.
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.
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 with that 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.
System 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 to ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys to.
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, but now they are ready to sell just for a very simple example, silicon Valley Bank.
Approximately 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.
Our feeling under capital pressure today, the second way that it can.
Arise.
Banks that in the past may have had a bias towards doing.
Three or five or seven year first mortgage.
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 the farm <unk> Ranch program.
Very few refinancings and higher overall <unk>.
Interest rates, having 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.
Finance business, you mentioned it last quarter that it was kind of a little bit larger.
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 of condoms 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 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 while farmer ranch as we've noted now bucket or our formal comments and I've also noted them just now while it's down for farm and ranch or volumes or 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.
Segments of business.
For us they are contributing to those higher numbers. They are part of that story.
And the volumes there.
Our not just holding up they are growing for us in this environment. So yes, we can talk about a logjam.
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 you've seen from us year over year.
Keep delivering those steady returns throughout 2023.
Okay. Thank you I'll take the question.
Okay.
Our next question comes from Gary Gordon Private Investor. Please go ahead.
Okay. Thank you.
<unk> on the but.
A remarkable sprite 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.
Yes, I'll add.
Trying to get to that Gary It's a it's a very interesting question, but I 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 of that a partner 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.
On how other factors and how we run our book are contributing to that.
Sure. Thanks for the question Gerry so about a year ago.
No, we actually segregated our portfolio into segments.
And 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 and.
Then treasury as it split up between the actual funding desk and then our investment portfolio.
So when we actually spread the interest rate.
Benefits across the operating units what we do is we assume that with all other things being equal.
In which we would fund the balance sheet. If we did not have a treasury desk would be to match funding every single.
Loan relative to the benchmark interest rate based on the tenor of that loan.
Reality.
We don't assume any interest rate risk, but we will actually hedge us synthetically convert a fixed or floating rate.
Asset into an appropriate liability and actually match, the duration and convexity of the asset and liabilities.
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 below the market rates that we calculate that credit is ascribed to the treasury unit for.
So essentially what has happened over the past year has been that we've been able to Opportunistically fund.
Two points on the yield curve and issue debt that's been below the market rate.
So that's one factor.
Other factor is just the system benefit that we received when we extended our debt.
Well, it's raised additional capital to preferred issuances that related to an excess of capital that gets reinvested in the investment portfolio that reduces our cost of borrowing but those are the two big drivers, but the former explanation really desktop.
In all environment, how we really ascribe that any yet and a portion it across.
Lines of business that agricultural pronouncing brutal infrastructure finance and then the treasury.
Okay. Thanks.
Follow up on that.
It sounded like I heard that.
Some of those benefits due to the rise in rates and some of them made.
Be lost in a falling rates, which suggests some asset sensitivity to the book.
Did I hear that correctly or no.
There's no there's no real asset sensitivity. So I think the key thing here is that we actually hedge our interest rate risk such that we have no or minimal exposure to any changes in the repricing of our changes in the benchmark rate.
The only risk that we might be exposed to.
When we change the tenor of our liabilities stock relative to the asset stock is when there is actual changes in credit spreads. So there's no real change.
Risks that we experience in different regions because of the way in which we hedge book.
No.
So the best way to think about this is it.
The duration of our assets and liabilities are perfectly matched.
We were able to do this because we can actually opportunistically hedge.
Liabilities against our assets.
Bob do changing interest rate environment.
Many different phenomenon than what.
What other institutions that allow us to minimize our risk, but also be fairly opportunistic on where we found out the curve.
Okay, I don't want to that but.
Follow up is then the real benefit that your cost of funds that you've generated is has improved versus credits.
Credit spreads out in the marketplace.
Yes that is definitely the case and it has to do with the fact that.
We see.
Seeing.
Really strong flight to quality in general for GSE, and so we compare pretty well to other GSE. So that's one point. The second one is just the fact that.
We've been conducting consistent investor outreach and Theres strong demand specifically for our debt issuances and also given our size.
Able to issue in a way that really matches, our investor's preferences.
Don't do bulk issuances, we can do some really customized issuances.
It's a small benefit but certainly all of that adds up and it helps us really issue at rates that are below market.
Especially in this environment.
Okay. Thanks, a lot.
Sure.
The next question comes from Brendan Mccarthy from Sidoti. Please go ahead.
Yes. Thank you for taking my question.
I was wondering if you could provide some additional color on the telecommunications sector no volume had a huge jump this quarter, what really drove that.
The jump in volume there.
Bob probably two factors.
And by the way. Thank you very much for joining us today.
Probably two factors one is that.
We have.
Zack Carpenter and our business development team have been.
Much more active that team has really been built up significantly in the last couple of years.
And that includes the build out of the rural infrastructure team, which is now what I would describe is in place and mature and so they've been reaching out to institutions keep in mind, we're a secondary markets. So we're always originating with ore from other financial institutions.
They have been reaching out much more consistently and aggressively incredibly I would also add.
To originate that business.
So for example.
There is one.
Institution of farm credit institution debt.
With with which we have been doing a significant amount of telecom over the last year. So that's been a positive.
The other I think factor is that.
For those telecommunications firms that are predominantly focused on rural America, which of course is where our interest is.
There is significant capital investment going on there is investment.
At this point right. So when you think about that those spreads tend to be you know a rule you can see a segment on average is about 36 basis points today. It was in the twenties about a year ago and with this increase in telecom, which has been a small amount you know telecom tends to be in the.
Mid one hundreds so about 150 basis points. So when you think about a change in business composition towards telecom that rule 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 for Ya.
Yeah, you're a good apartment mentioned in 150 basis points. So that you don't have the telecom I've I've seen a few of the telecom deals going through here that have been.
[noise] 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 you know, they're just as an example.
Any us on those loans 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 when we 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.
Alright. Thank you that's helpful.
And lastly could follow up you know given the the diversification of the loan book you know in rural utilities and renewable.
But you still feel that you know in any <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.
And that because we've talked about that a lot.
The star is really a line from a funding standpoint this quarter.
I think that.
Going forward.
We will look for accelerating growth and our telecom.
And 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 creative 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 real utility business, how that exactly shakes out I don't know I think 90 to 100 <unk> N.
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've seen is opportunistic treasurer, you've seen the benefits of diversified portfolio, you've seen the benefits of more opportunistic pricing.
There 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 market place 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 you know seeing that 110 range, maybe even a bit higher.
Is 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 it our voices just how proud we are of these results. It feels like it's a combination not of just you know.
Everything working in 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 employs.
All.
Executing on.
On our strategic plan are farmer, Mac, and just showing better and better results from but.
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.
Conferences now concluded.
[noise] you for attending today's presentation you may now disconnect.
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