Q3 2023 Federal Agricultural Mortgage Corp Earnings Call
Okay.
Good afternoon, and welcome to the farmer Mac third quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a comfort specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportune.
Teach west questions. Please note. This event is being recorded I would now like to turn the conference over to job, but naturally senior director Investor Relations and Finance strategy. Please go ahead.
Good afternoon, and thank you for joining us for our third quarter 2023 earnings Conference call I'm Chopping address senior director of Investor Relations and finance strategy here at farmer Mac.
We begin please note that the information 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 the risks and uncertainties that could cause.
Cause our actual results to differ materially from those projected please refer to farmer Mac's 2022 annual report and subsequent SEC filings for a full.
All 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 earnings release posted on farmer Mac's website farmer Mac dot com under the financial information.
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US from management. This afternoon is our president and Chief Executive Officer, Brad Burnham, who will discuss third quarter business and financial highlights and strategic objectives, and Chief Financial officer. Upon a ramesh 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 Norcal Brad.
Thanks, Joe Good afternoon, everyone and thank you for joining us.
I'm very pleased to report another record quarter for earnings our sixth consecutive quarterly record.
Our capital base remains strong, which along with our disciplined asset liability management.
I interrupted access to the capital markets enables our long term strategic growth objectives, while also providing a buffer against market volatility and changing credit market conditions.
These results once again demonstrated the resiliency of our business model and the success of the strategic initiatives designed to grow our company profitably while and this is very important to us while fulfilling our mission to Rural America.
And also generating shareholder returns across changing market cycles.
In the third quarter, we recorded core earnings of $45 $2 million, reflecting a 35% increase over the same period last year.
We achieved gross new business volume of $2 $3 billion during the quarter we saw.
Costing a total outstanding business volume of $27 $7 billion as of September 30th 2023.
Volume growth this quarter was driven by new advantaged securities with existing Counterparties in the wholesale financing space.
Specifically, we added a 500 million dollar advantaged security and rural utility segment, and several advantaged securities and the farm and ranch segment, which more than offset maturing securities by a net $225 million.
The overall growth in wholesale financing over the last six months, primarily reflects many of our institutional counterparties utilizing our wholesale financing facilities that offer their counterparties a competitive cost of funds.
Also these counterparties are layering and longer term non preamble repayable advantaged securities to manage their asset liability maturity profile.
Given the current level of interest rates and the pricing of these securities.
As competitive instruments, given their other market options.
We entered the fourth quarter with a strong pipeline of existing and new large financial institution Counterparties and we believe this renewed interest in wholesale financing, which drives the egg vantage product will continue well into 2024.
Also contributing to our overall volume growth this quarter, it's an effective business development activity across more diverse business segments platforms.
The agricultural finance a line of business grew over $400 million in the third quarter predominantly due to the previously mentioned advantaged securities growth increases in longer term standby purchase commitments and incremental loan purchase volume in corporate finance.
Activity has been picking up in the corporate finance segment, reflecting our commitment to build a strong reputation in the marketplace with really a first class team of people.
While volume tends to be lumpy on a quarter to quarter basis.
Opportunities in this segment are generally more accretive from a net effective spread standpoint.
We remain focused on this segment, which is a key component of our diversification strategy is central to our mission and impactful for earnings and continued growth.
Activity in our farm and ranch segment continues to be moderate to flat as a result of higher interest rate environment, but.
But prepayment rates also remained at historically low levels.
The number of loan applications and approvals during the third quarter was relatively steady reflecting borrowers adjustment to the new rate environment.
Cultural mortgage market has seen a shift to primarily variable rate product as borrower sentiment generally expect rates to decrease over the next five to 10 years.
Turning to our rural infrastructure line of business, we saw healthy loan purchase volume growth in our rural utilities and renewable energy segments.
New rural utility loan purchase volume. This quarter was the result of borrowers normal course capital expenditures related to maintaining and upgrading utilities infrastructure.
As well as the investments in broadband infrastructure and our continued focus on telecommunications investment in Rural America.
Our renewable energy portfolio grew over $100 million during the first nine months of the year, reflecting our robust efforts and investments to grow this portfolio.
And our pipeline is strong heading into year end.
Renewable energy is both an important economic development opportunity for Rural America, and a business opportunity for us at farmer Mac.
As I've discussed in previous calls we plan to invest additional resources that will help us further penetrate the renewable energy market if opportunities arise.
In recent months as the market stabilize find the original banking crisis earlier. This year, we've consistently presented our product offerings as a potential capital efficiency and liquidity conduit for our customers and agricultural finance and rural infrastructure lines of business.
We believe that this is because of the relative value of farmer Mac, what we bring to the agricultural and rural credit markets.
We believe that it's even greater when credit is a bit tighter, allowing us to further deliver upon our mission to build a trusted secondary market for credit to Rural America.
For example, we have helped customers and the farm F. A R. M. The farm securitization program to achieve their return objectives by utilizing the content that we have created to free up capital and manage their balance sheets more optimized.
As we've said on previous calls securitization is a tremendous opportunity for farmer Mac is highly central to our mission and we are committed to being a regular issuer in the market for the set of securitization products that align with both our borrower and investor interests.
The momentum and excitement that you heard today about our record results.
Not have been possible without our team's continuing dedication and commitment to our long term strategic plan.
So the alignment across our organization and with our customers to bring even greater efficiencies, the agriculture and rural infrastructure sectors.
Our business approach combined with a high caliber of talent across the organization is really paramount to continuing delivering consistent positive results.
That is why we expanded our long term incentive compensation program to all of our employees in the organization during the third quarter.
This new incentive plan is intended to align all of our employees to the company's long term performance and significant achievements and also position each of our employees for their long term financial success.
Our underlying business model strong capital position and uninterrupted access to the debt capital markets throughout the various market disruptions uniquely positions us to partner with our customers to help them achieve the growth their businesses and manage 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.
This has positioned us well and changing credit environment and its expected to continue to create more opportunity.
And shareholder value and fulfill our mission.
And so with that I'd like to turn the call over to a partner with mesh our chief financial officer to discuss our financial results in more detail.
Yeah.
Thank you Brad good afternoon, everyone.
Record third quarter 2023 results highlight a balanced and measured approach continued strong credit quality and resiliency across market cycles. We.
We achieved $2 3 billion of gross new volume this quarter.
Some of the key components included $1 billion wholesale financing and the agricultural finance line of business. The majority of which was the refinancing of existing advantaged securities.
$500 million of wholesale financing in the rural infrastructure segment.
$204 million.
A long term standby purchase commitments $231 million and.
The new corporate excellence loan purchases and unfunded commitments.
$205 million in farm <unk> ranch loan purchases.
$91 million in new utilities loan purchases 44 million of which was telecommunications alone.
And $17 million in new renewable energy loan purchases.
Even after repayments and maturities we grew approximately $900 million this quarter.
Outstanding business volume and this speaks to the benefit of strategic decisions over the last few years that we have made to diversify our portfolio and create opportunities in all interest rate environments.
Core earnings were $45 2 million or $4 13 per share in third quarter 2023, and this reflects a 35% year over year increase.
This increase was driven by record net effective spread of $83 $4 million in third quarter 2023, compared to $65 6 million in the same period last year.
Percentage stones on net effective spread in third quarter remained at 120 basis points and this was primarily driven by our low cost excess capital debt funding strategies in previous low rate environments as well as our ability to redeploy book.
Excess capital and the lower cost debt into higher earning assets.
This phenomenon was further enhanced by the continued trend towards highest spread volume that is evident in our new segments like corporate accidents and renewable energy the.
The capital that we raised Opportunistically when rates were at historical lows in 2020 in 2021 has reduced the need for us to raise more expensive dumb and callable debt in this rising rate environment.
We continue to defensively hold approximately $800 million in cash and other short term instruments in our liquidity portfolio.
Not only does this help us where the potential market disruptions.
Excess and highly liquid capital generates immediate returns in our high nominal rates environment.
This benefit is expected to continue to create a downward pressure on our non-GAAP funding costs as the short end of the curve continues to increase with the fed actions.
And the reinvesting of excess capital generates additional redone with an upward repricing of our short term investment portfolio.
While the rise in short term rates.
<unk> provided an asymmetric benefit to earnings we project limited downside to earnings if rates decline in the future and this is due to our proactive equity capital allocation strategy.
Where are we on luxury and leerink duration to minimize volatility.
Specifically, we expect to redeem some of this benefit over the medium term if rates decline as we have started extending maturities and our investment portfolio.
These are the practices that are consistent with our disciplined approach designed to help minimize the earnings volatility.
Despite some macro headwinds we continue to see strong access to debt capital markets and a flight to quality investments, which allows us to be very well positioned to fund new asset opportunities as they arise.
As Brian highlighted in his comments, we have spent and will continue to spend a significant amount of time and resources to enhance our infrastructure and engage with our customers and investors to support a robust and liquid market for our farm securitization product.
The characterization has many beneficial aspect for farmer Mac. It allows us to diversify our funding and handset optimize our balance sheet by efficient deployment of capital and it also enables our growth strategy by targeting new asset opportunities into our conduit.
While we're closely monitoring a changing market dynamic we expect to return to the market in the first half of 2020 full with another similar farm securitization transactions as the previous three transactions.
As we highlighted last quarter, our fundamental asset liability management approach, where we match fund the duration and convexity of our assets and liabilities in all rate environments remains unchanged. As this practice has allowed us to successfully navigate changing market environments.
Contain earnings volatility a.
Our business has certain natural hedges that we've described to you before and we've honed these overtime to help insulate us from interest rate volatility.
This is a key differentiator for us relative to other financial services entities, especially depository institutions.
For example, when interest rates rise prepayments also tend to decline, but interest on excess cash and capital would likely increase and we would continue to have strong market access as we do not rely on deposits as a source of funding.
And Conversely, when interest rates decline loan purchase volume often increases, but prepayments also tend to increase and interest earned on our liquidity portfolio, usually we're able to manage our interest rate risk by exercising callable issuances and maintaining our spreads and this is the differentiator that I mentioned.
Relative to depository institutions.
These natural business dynamics are not perfect offsets they do counterbalance to mitigate volatility from changes in short term interest rates.
Our liquidity and capital positions also remain well in excess of all regulatory ratios.
Our projections show minimal change in our profitability and limited exposure to movements in interest rates, where the market rates are projected to go up or down.
As of September 30 of 2023 farmer Mac had 297 days of liquidity and this is another important data point as it validates our resiliency against short and medium term market disruptions.
Turning to operating expenses these increased by 24% year over year and this was primarily due to the expenditures that are associated with our multiyear technology investment in our treasury and cash management system to enhance our trading hedging and reporting platform.
This modernization effort is expected to position us to more effectively defend against cyber and fraud threats.
Also allowing us to scale, our portfolio and diversify our product offerings.
I'll note. This effort is not a like for like but its geared to the future and aligns with our business and funding strategy.
We also plan to continue to make investments and strategic focus areas, such as renewable energy and we intend to moderate our asset infrastructure, including our servicing and loan platform to support our growth and strategic objectives. As a result, we do expect our run rate operating expenses to increase at a pace above 2023 and his.
Article averages and for this to continue over the next several years.
Our operating efficiency was 27% through September 30th and it's well below our strategic plan target of 30%, primarily because revenue growth increased at a significantly higher rate than expenses.
We will continue to closely monitor our efficiency ratio and manage it as we have done to stay within a band around 30%.
As we make investments in our loan infrastructure and funding platforms and innovate our loan processes to accelerate growth, we may see temporary increases above the 30% level.
Our credit profile remains very strong in aggregate despite economic headwinds we saw a decrease in 90 day delinquencies from the second quarter, which as of September 30th reflects 15 basis points across our entire portfolio.
The total allowance for losses decreased sequentially to $18 $9 million in the third quarter and this reflects a $200000 decrease from second quarter 2023.
This decrease was primarily attributable to a $3 8 million relief from the allowance for the agricultural finance portfolio to reflect the full payoff of a single AG storage and processing alone in the third quarter and this was partially offset by $3 $6 million provision to the allowance for the rural infrastructure.
Portfolio due to a single telecommunications loan that was downgraded to substandard during the quarter.
Turning to capital Farmer, Mac's, one $4 billion of core capital as.
As of September 30th 2023 exceeded our statutory requirement by $581 million or 69%.
Cole capital increased sequentially, primarily due to an increase in retained earnings.
Tier one capital ratio as of September 30th 2023 improved to 16% largely due to strong earnings results and higher retained earnings.
Entailing credit standards that reflect a risk profile, coupled with strong levels of capital.
A fundamental part of our long term strategy.
We are anticipating overall stress in credit market for macro headwinds and we are proactively monitoring our exposures.
We expect our strong capital position to allow us to remain resilient and be a source of low cost liquidity for our customers and borrowers even in difficult times.
So in conclusion, our entire trip team delivered strong quarterly results, surpassing the key metrics that we highlight on each call while staying within our credit framework.
Notably we delivered a record 19% return on equity this quarter and stayed well below our efficiency target of 30%. We believe that our balance sheet is well positioned for uncertainty and we are more optimistic than ever to deliver on our long term strategic plan objectives and with that Brad Let me turn it back to you.
Thank you Alberto we are extremely proud of our third quarter results and we believe our performance provides yet. Another example of the dynamic and enduring nature of farmer Mac's business model.
Which continues to be well positioned to deliver earnings growth and strong profitability for the remainder of 2023 and into 2024.
Our high levels of capital enable us to continue to execute.
Our solid long term strategic plan.
And remain focused on our mission to increase the accessibility of financing.
American agriculture and rural infrastructure.
We're aligned across our organization and with our customers to bring even greater efficiencies and lower costs and provided financing to lenders.
The benefit of their farm and ranch agribusiness and rural infrastructure customers.
And now operator, I'd like to see if we have any questions from anyone on the line today.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Any time Youre question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Bose, George with K B W. P.
Please go ahead.
Hey, everyone. Good afternoon.
Wanted to start with a question on spreads so it sounds like spreads could stay closer to this.
Elevated levels at least in the medium term in the past you've discussed a normalized spread range I think its 95 to 105 is that still kind of the normalized level, we should think about and if so how should we think of sort of the trajectory of spreads getting from here to there.
Yes Bose.
I wish I could provide a perfect answer to that because we have contributions to that positive variance coming from both our treasury operations and how we're funding in this higher interest rate environment.
As well as the increasing diversification of our business and to.
All lines that have more accretive higher spreads so lumpy first oh, sorry, Carpenter, our chief business officer to give you a little bit of additional color.
Spreads on our different commercial lines of business, and then a panic and kind of wrap it up with further comment on treasury.
Yeah, Thanks, Brad and a great question I think it's been more apparent, especially over the last 12 to 18 months.
As our business lines are diversified into the new areas of growth as Brad said are at much higher accretive spreads than our historical lines.
All lines of business.
Especially in this environment, where our farm and ranch mortgages have slowed down given the interest rates you are seeing a much more inclusion of volume from our telecommunications renewable energy and corporate agro finance lines of business, which by their nature have a larger spread higher accretive spread than our historical overall portfolio those.
Deals are lumpier in nature larger.
I also attended to grow quicker, especially in this environment, where farmer Mac has been named U S affordable use of capital for.
For these types of transactions so as we grow in these new areas as well as growing some of our historical segments I think you'll see more of a wait to these higher accretive spreads I'm going forward, but I will say as Brent mentioned, it's very hard to predict and some of these new lines of business are spotty at times in terms of Paydowns and maturities. So just in this environment.
<unk> seen a significant growth in some of those new areas just to add a little bit to that.
If for example.
With some decline in rates, we saw a pickup in our farm and ranch origination activity.
As an example could have a slightly dilutive impact.
Act on our spreads.
If we are successful accelerating the growth of renewable energy it could have an accretive impact to our current spreads, which one will accelerate faster is quite difficult to predict.
But I think we can confidently say that looking out a couple of years. It is not our expectation that we would revert to a 1995 basis point and yes that we will be north of that because of the composition of <unk>.
And growing diversification of the portfolio, but a part of it can you add to that yeah, absolutely and I just went out later and one other comment around our business composition I think it absolutely has to do with business composition, but I will also say that you know an exact alluded to this.
Rural infrastructure portfolio. If you just go back several years the spread on that portfolio was significantly lower than it is today and that's been a huge contributor. In addition to the new lines of business. So it's just another example of the fact that we've been able to be a very consistent provider.
Liquidity and debt financing to our Counterparties have you been able to do that while not just maintaining but also increasing spreads. So I just I just want to add one comment and then in terms of Treasury you know I would just say that our funding strategy has has really come to fruition in this rising rate environment and I I mean, some of those comments.
While you're on a would you would you likely heard both but.
I'll just note a couple of things right and I think a natural question as you know, we'll just sustain especially as the fed pauses is likely to pause.
You know we have some inbuilt hedges within our funding strategy and one of them has to do with the callable. So we will actually layer in callable and we continue to do that and that actually has the effect of being a little bit dilutive to spreads, but if we do that deliberately because we do not want to be in a position where.
If rates dramatically trended downwards.
We were caught in a situation where our funding costs outpaced our.
Our ability to put loans on so these callable spreads tend to come on at slightly wider margins relative to people that spread. So we have consistently layer that in but it is a hedging strategy. So that's just one thing that I'll I'll know more to the positive it's going to help us maintain that spread band of north of about 100 days.
The second piece that I will just highlight around funding strategy has to do with how we manage our duration. So we anticipate being close to or at the peak of the cycle are we obey systematically and have very systematically extended some of our investment portfolio, while maintaining our interest rate.
Our risk profile and that again has the effect of providing a natural hedge if rates were to trend out. So all of this is to say booths that are you know, while we try to manage to a 95 to 105 basis point and yes.
I think given where we are headed book from a diversification of our lines of business as well as our funding strategies I think it would be fair to say that we'd be at the upper end of that as we look out into that.
Okay, Great that's very helpful.
And then actually switching to the dividend can you just remind us how you look at the dividend as it sort of a payout.
And then just given that the returns are going are sort of above.
Sort of somewhat of a normalized level.
Could that be a little bit lower just as the roe's remain elevated or to just yet philosophically how youre looking at it.
Yeah in terms of the dividend that's something that we'll look at very seriously as we get into February of 2024 based on your own results were quite.
Disciplined.
And revisiting it annually you'd have seen what has happened each year for the last X number of years a consecutive increases in dividends given these results. It's.
A very reasonable to expect further increasing the dividend, but I really I'm not going to provide any guidance on exactly how much that might be today.
The factors that have gone into it in the past have been what is our growth rate and consumption of capital.
What is the outlook for earnings.
And the past years, that's resulted in dividends that have been.
Outside of 35% of after tax earnings.
Oh, that's not a hard and fast target however.
So when we do that evaluation, we won't be looking at growth acceleration and potential need for capital.
You know as securitization programs mature we may find that we have.
Fortunately less increased need for capital.
That will also be a consideration.
And then just general outlook for the for the business so stay.
Stay tuned certainly we will be.
B.
Strongly considering taking action on dividends in February.
Yeah.
The next question comes from Bill Ryan with Seaport.
Search partners. Please go ahead.
Good afternoon, Thanks for taking my questions.
First one.
Obviously, we hit on the revenue side, a little bit earlier, but thinking about expenses you are up 21% in the second quarter or 24% in the third quarter.
And what you it sounded like you alluded to on the conference calls you have the ability to really kind of manage that as at the revenue mix of directional change it a little faster a little bit slower.
Could you start off by talking maybe about some of the levers that you have to kind of you know dialed back a little bit on the investments you know subject to revenue growth.
Yeah.
Oh sure Barney go ahead.
Yeah, Hi, Bill.
I think you hit the nail on the head right, we make our investments are fairly aggressively but in line with our growth strategy and as you can see them you know, we target, 30% and you know, we're well south of that and you know probably right in line with historical averages.
Couple of the levers that we do have some things are.
Fairly baked in such as the fixed investments we've made in our technology platform.
But I'll just say that we are looking to accelerate the spending on.
That particular investment largely because you know we see ourselves doing pretty well in terms of just how that project is tracking so well we do have a few levers there in terms of how much we want to layer in and this is something.
Something we can do.
Through this year as well as next year and then we've got some other planned investments that I talked about that with respect to our loan origination strategy been so.
Again, I think we can we can piece that as we need to in a way that is consistent with our with optimizing our expense profile and then the final area that we do intend to make investments, which could drive up our overall head count which is a little under 118 right now.
Has to do with some of our plans to expand into the renewable energy segment and again that is something that we plan to do and we think that it will pay off in terms of just the higher and he asks that you've already seen are within that segment, but but again. That's also a lever so the way in which we you really.
<unk>, our spending profile is to really look at this quarterly basis, and we track very closely to how our revenue projections are coming in.
And we've left enough in Apple's boom, such that we can dial things back because we need to if we don't think we're going to hit our revenue predictions, but as you heard from the revenue story, we have no reason to not believe that to be.
Okay. Thank you for that answer in kind of a follow up question and this is came off some money center banks that reported a couple of weeks ago, and they were kind of talking about Basel III and <unk>.
Tax equity investments may be receiving an incrementally higher risk weighting than what they are right now which.
Implied it might impact some of the renewable energy projects going forward that are financed partly finished this means.
I was curious if you had any thoughts on the matter and it seems counterintuitive, but they go that way ultimately because obviously renewable energy is so important but I was just kind of curious how you're thinking about it.
Yeah, Yes, we've thought about it a lot first of all we have not been making tax equity commitments, we've been making commitments to us.
Senior.
Secure project financing.
For renewable energy projects, so straight debt.
Hum.
Proposal is to increase the capital requirement for tax equity, which again, we're not doing but many of the big banks are from 100% to 400% and that would have more than a chilling effect on the tax equity market.
Hmm.
And that would be too bad it would if if that happened it would slow down the investment in new renewable energy projects.
But our view on this is that the addressable market.
As of about two years ago was about $8 billion to $10 billion.
With the Oh here is inflation reduction act and the additional incentives for renewable energy projects.
The expectation is that that may have as much as doubled.
We're starting from a very low base, and we have inherent advantages and our ability to price and structure project financed compared to other banks.
It's very difficult for banks to me one of your fixed rate amortizing loan commitments as an example.
So we are starting from a very very low base, so to take market share as we quit effective people in the field and develop the farmer Mac brand and capability in that market. We don't think is particularly difficult from where we stand so even if the market were to contract by say a quarter or a third.
Because of constraints.
The tax equity market.
We still feel that there's plenty of market for us to build market share and for many years to come quite frankly.
Okay, one last probably very quick question.
Probably rhetorical question in a way, but what is the status of the farm Bill I mean, I'm, assuming given what's going on in Congress, just just kind of going to get extended probably.
Yes, it changes every day, but this morning.
Congressman Scott from Georgia, who is the ranking minority member of the House Agricultural Committee.
Out with.
With an indication that it was his opinion that the farm bill should be extended a year before.
Before.
The new bills acted upon is that joins the two a majority.
Minority Senate leaders stamina, and the majority of the ranking.
Majority.
Loss leader.
J T Thompson.
Pennsylvania, where that view, so it's pretty clear that we're.
We're going to probably see an extension maybe.
Maybe sometimes it really needs to be done really needs to be done by the end of the year.
You know there is a scenario under which the extensions for less than a year and it puts pressure on them to act on it during the first half of 2024, we will see obviously Congress has a very very ambitious and politically rot schedule in front of it between now and the new year and then.
And then into 2024, so our base expectation is that we have a one year extension.
Thanks for taking my questions.
The next question comes from Brendan Mccarthy with Sidoti. Please go ahead.
Great. Good afternoon, everybody and thanks for taking my question. Just wondering if you can quickly comment on the telecom loan downgrade that led to the $3 6 million provision I guess was that you know mostly anticipated or was that more of a.
Surprising is that.
I can outsides.
Figure that is typical.
No.
As Mark Rady, our chief credit officer to jump in here, but look.
For us to have no way of thousands of loans and for us to have loans that occasionally our downgrade at the point, where they require a special allowances is not at all unusual.
We're putting a spotlight on this one because it sticks out because it happens to be the only one.
So that's important to keep in mind, but I'll, let mark give you a little bit of color. Obviously, we're not going to name names, but a little bit of color on the nature of the credit softness that resulted in the downgrade on the allowance.
Yeah. Thanks, Brett.
Yeah.
The downgrade was was not a surprise as Brad mentioned U S. Our telecom portfolio seasons, where we're expecting additional downgrades in the future, but this was the only one we downgraded this quarter and in telecom, though I will note that.
Borrower is a large telecommunications business.
The company had weaker than expected operating results in the quarter, increasing leverage there's some some large debt maturities that are that are coming in 2025, and some other kind of secular challenges in the telecom industry. So I wouldn't say, it's sort of out of the ordinary are unexpected and.
I guess, what we will expect in the future.
Got it that's helpful. So you'll probably fair to say that you know just kind of given the shift towards some of the higher spread businesses and in raw infrastructure Finance would you.
Is it fair to say just maybe we might expect a higher degree of provision for losses over the next one to two years.
I won't predict that we will have higher provisions for losses in the next couple of years, but I think we will have more credit stories that we'll be working on incorporate agribusiness telco don't know about renewable energy.
And compared to you know.
Farm <unk> ranch and rural.
We're all electric cooperative business in the past yeah, there'll be incrementally more of those but we are absolutely confident that we're getting compensated for the risk and that we have the ability to manage these risks.
So yeah on the on the in the allowance at the medication they show up.
But you're also going to see it in the profitability.
Great. Okay. That's helpful.
Yeah, and Brendan I would also say that we've got a very robust capital position well in excess of regulatory requirements. So overall the balance sheet is very well positioned Lady Smith.
Absolutely yeah that makes sense.
And then one more question for me just I know last quarter, we talked about some changes to the egg express.
Youre underwriting standards I believe it was boosted the loan to value provisions a bit but just wondering if there was a noticeable increase in volume kind of directly attributable to the change from last quarter.
Yeah, I think we can pretty well quantify the percentage increase in the number of overall applications that now qualify for <unk> Express, but so how can you offer some color on that yeah. Great question and we're very excited about that product enhancements. Unfortunately, I think the biggest headwind in that space as the higher interest rates right, so regardless of product.
I think that's just been sticker shock over the last 12 to 18 months, which really which really slowed down or basically stopped the refinancing market in this space. So.
That being said I think what's a positive story here is the percentage of new loan applications coming through our platform is much higher in the AG Express space than it ever has been in the past, meaning this product as being much more competitive.
More.
A positive reaction in the market so as a.
Total compensation of all loan applications, it's shifting more towards the AG Express and we believe as borrowers get more accustomed to this higher rate environment, and see new purchase opportunities and or start to refinance over the next couple of years at this product will drive increased.
Interest and even a higher concentration or composition of our total applications that that is something that today is that it's now approaching 70% by number of applications 60 to 70 subtract depending on the box yeah, Yeah, and keep in mind that with zero four years ago right.
Wow, Okay, great. That's helpful. Thank you.
That's that's all from me.
The next question comes from Gary Gordon a private Investor. Please go ahead.
Okay. Thank you Hello to everybody.
Two questions. One is are the large percentage of your new business that's wholesale.
What is that is this sort of a one off or does it say something about the stresses on the banking system.
Yeah.
Gary This is this it's actually it's a really positive story.
Zach share with you.
But in addition to exactly what's going on right now and driving the growth I.
I want to just go back and also like this to earlier discussion about any us.
And talk for just a moment about what has been an evolution in our pricing philosophy, Eric farmer Mac over the last four to five years.
Going back four or five years ago, we kind of calculated what's the minimum return we need and that was our price.
And today.
Pay attention to that but we also pay attention to where.
Or is the market.
And what alternatives do customers house.
And what does it take for us to capture market share and is that market share of profitable.
And what you saw over the last couple of years was our deliberate decision not to chase business that wasn't profitable and a lot of that was the wholesale business.
And now we're seeing an absolute reversal of that and so we're being opportunistic.
So I really want to emphasize that.
Thinking about pricing not as a minimum and what do we need here at farmer Mac.
But what is fair compensation for the risk in the marketplace and what can we take from the marketplace, while fulfilling our mission is.
It's driving much more of what we do now.
Yeah, Gary Zack Carpenter, Great question, and we're very excited about the potential outlook in this space.
Going back in history, you know <unk>.
Three years ago, we had a couple of Counterparties and we've had them for a long time, but we didn't have was now the right people and the right mindset in place to really go out and get our brand in the market to see what opportunities are available and I think over the last two to three years, we've developed that personnel in house and that talent to really get out there and understand it.
And make sure our brand is resonating.
I think the second thing is why why strong opportunities now part of it's the market.
So layer and the strong individual.
Brand that we have internally to get out there and calling the right people were also a strong relative value in the market. There's very few opportunities to provide wholesale financing on agricultural loans.
And in a market, where bond yields and rates are volatile on a daily basis, and we have a secured product is very strong relative value to these counterparties.
I think it's a combination of how we built the team how we're out there communicating with these counterparties and how were up relative value to other potential opportunities there.
We're out there and I think part I mentioned the earlier, Brad mentioned it out from a pricing.
We believe in this market, we are a strong relative value and these bonds that are put in place are generally medium to long term not pre payable born so it really is sticky revenue for us and if the market shifts, which you did a couple of years ago. We were very thoughtful in terms of putting additional capital out there that might not be appropriate from a revenue or return.
Active so we're excited about the opportunities where we're strong relative value in this market and we think 2024 it will be.
Hopefully positive for us.
Okay. Thanks. Upon also mentioned she said the core capital ratio was 16%.
Where is that sort of in the normal range or where you feel comfortable.
How about how should we think about that 16% number.
Yeah, I mean, I think 16 is probably a great place to be for a couple of reasons one.
Well actually I appointed three reasons and.
It gives us a ton of flexibility and.
One of the reasons is that we just raised a lot of low cost capital that we have no intention of calling because it's sub five sub five and a half per foot.
That's perpetual capital that's incredibly accretive for us so that would probably stick around the second driver has to do with our securitization program that affords us the ability to get a lot of tier one capital relief and having done three transactions. So far that's been a huge driver of that but I think the third factor that I think we're the most proud of has to do with just the <unk>.
Organic growth in our capital base that comes from strong retained earnings while maintaining our credit profile and its all of those reasons that you just heard Gary from Brian and come back just around the revenue accretion and that's really driving a big component to plywood at 15%. So that's suddenly outpaced what.
We had anticipated, but it's a really good problem to have and as we look out ahead just linking this with some of the other questions.
It gives us a lot of degrees of freedom, one to fulfill our mission, but due to really grow and expand into these new lines of business that tend to be the capital consumptive and we can do that without really having to foresight.
Forced ourselves to go out into the market and raise our extensive capital I wouldn't want to be you know in the market not recent capital so.
I don't think we have a targeted band, but as we see our expensive sources of preferreds coming due.
Make some decisions relative to that our routine, though and there was a securitization, but we just have a few levers right now that we can play with it it's a really good place to be.
Okay. Thank you very much.
The next question comes from Deforest Hinman retail Investor. Please go ahead.
Hey, Thanks for taking my questions Good sea.
New sell side.
I am on the call.
Hum.
35% earnings growth very impressive spreads higher pretty.
Our unique results given the current environment, so very strong results.
Question on.
Hiring activity Oh.
Open open positions, you're looking to hire.
How many people we hired.
So far this year.
Uh huh.
Account.
Is somewhere in the 180 384 range something like that.
I think we started the year at 150 960, something like that so simple.
Simple math 24, 160, maybe about 14, 15%.
Net increase in head count.
The base salary increase would not be 14% to 15% because.
You don't have to have.
<unk> leased not yet or.
There are two cfos.
These tend to be positions that are filling gaps.
Throughout the organization as we expand.
It's something we keep a very close eye on.
And it comes back to the efficiency ratio.
We do view.
Our compensation expense you know it is a very large portion of the expense obviously, there's some variability to it than that.
Just with performance in our short term incentive plan and our long term incentive plan results.
But we view you know base salaries.
And people expenses is really a fixed expense here. So we're very cautious about adding new people, but we do add with them when they can drive additional revenue. So for example, we've recently added.
Some physicians are.
And some leadership frankly around our renewable energy business development.
Underwriting we expanded our servicing portfolio at midyear, we added a couple of positions associated with that.
So we're being mindful of the overall expense, but also.
The.
Profile of the people, we're adding in making sure that we're adding people who are revenue generators as well as those who.
Are administering other important parts of the organization.
Okay. Thank you and I did want to ask about the energy portfolio as well, we did see a little bit is a multipart question a little bit of slowdown in.
Sequential growth in that.
Business been seeing a lot of headlines in the news about offshore.
Projects getting a.
Stalled or looking for changes in.
Tax subsidies and other things.
Are you seeing that was in.
The.
The land based projects the rural projects, whether they be solar wind any color you could provide there would be.
Uh huh.
Now keep in mind, our focus is our.
Land based projects.
Massive offshore wind projects are many years out if at all.
Looking at the more immediate opportunity solar wind and rural areas also convergence of energy and agriculture, and anaerobic digesters methane gas capture systems.
Which arent quite interesting but.
In fact, I would describe it right now as we're building the infrastructure to accelerate the growth rather than having the infrastructure in place <unk> seen a turndown Zach you have some color there.
Yeah. Good question I would highlight is that our pipeline in the renewable energy space remains very strong I think you know to your prior question in terms of head count.
We wanted to get more infrastructure in there to meet the demand that we see in the market.
So that does impact you know getting the loans through the process underwritten and closed that being said just in this space.
These loans take a long time to work through the process. There is a lot of loan documentation legal documentation that needs to get done.
He is willing to finally close and then start construction and or get to a point, where the construction is complete and their operator, so they take a lot longer time to move through that process and some of our other lines of business. So frankly, what we saw in this quarter was working through that process and we have like I said, a very strong pipeline and we feel that as those get to the point up ready to close and fund that.
We'll be providing a helpful financing to support our Counterparties and our mission.
Okay. That's very helpful. And then just on some of the <unk>.
Mechanics of the growth I think on the last call we talked about some of the larger syndicates that were lending in the energy space, our European banks and Japanese banks.
Have we.
Come to some agreements with getting put in those syndicates. So we could be seeing.
Additional growth fourth quarter heading into 2024 or is it more for 2020 for 2025.
GUL.
Cool or milestone.
Yes, it's a great question. Our primary focus is on those counterparties that support the large broad syndicated transactions.
I do want to emphasize as Brad said, we needed to get some leadership and infrastructure around this team to support the growth that we saw in the market. So.
Primary focus was to get the right expertise in house now to pivot to focus more on working with those counterparties.
We believe to support the foundation of this business, we do want to look at those larger syndicated deals that happened at appropriate risk adjusted return.
To meet our needs are there larger generally and we want to rely on the strength of those counterparties that are in the market constantly so I would reaffirm that our outreach strategy and the partners. We're working with will be those organizations that lead those large syndicated deals.
I mean do you have any timeline you can share with us though.
Oh I'll just refer back to the pipeline is very large and very strong and so we feel confident that over the next few quarters and into the next couple of years that.
We will see increased growth opportunities.
Okay. That's all my questions.
Keep up the good work very good results.
The next question comes from Chip Oat with Carrie Street Partners. Please go ahead.
Right good afternoon.
This question is for a partner.
Apart.
I think the answer May give you a chance to brag a little bit.
Two months ago.
A very credible cell side shop.
Who specializes in financial services initiated on farmer back with a very informative in depth report.
What caught my attention.
Is that the third leg.
Of their thesis.
Pacifically.
Mentioned.
What they consider to be an exceptional treasury and finance operation.
Never in my career have I ever seen something like that.
Specifically broken out.
I certainly agree.
I'm sure everybody else does but for instance.
If you lie.
The Morgan back, presumably it's just to assume that they have a top shelf.
Alright and finance.
Operation.
But this report.
Focused on what you're doing but it didn't really say why it's just that.
It's really really good.
Do you.
Now what they are referring to your better.
Sorry.
Better than where better than who.
Ann.
What are you doing and what I call farmer Mac to point at all.
To merit.
Those congratulations.
So can you just talk to you.
Well I won't drag, but maybe I'll just stick to some of the facts that you know really appreciate your question Oh I'll, just say that you know what we did isn't unusual I think what we did was just consistent and it's consistent and disciplined execution from a funding standpoint from an asset liability management staff.
And when you do that and you also play not for the short term the play for the long term sometimes.
Sometimes you can actually outpaced.
Your peers are.
And so I'll point to a couple of specific things when rates were very low we went out and raised a family.
The teachers capital.
And we've talked about that but you know we literally would be realized at that point in time, how advantageous it would be.
Also we're careful during a period of stress, which again is a very intuitive thing to do too.
To shore up our liquidity profile and so we made sure that we had an abundance of cash if ever there was a market disruption then we'd be well positioned again, we raised a lot of that during a period when rates with the third thing. We did was we extended our debt.
Really looking at the rate cycle and seeing not just relatively speaking, but on absolute term.
Rates are pretty low.
So to us people very intuitive decisions and we were also paying very close attention to what the fed was signaling and where the trends were headed in terms of inflation. So and so we did all of these things with the expectation that when you're at the bottom of the recycle there's only one way for rates to go and desktop.
And so as this has played out and inflation has indeed been a huge factor I think the only thing we didnt anticipate was how fast and how much the fed was going to raise rates.
And that's really I think what caught a lot of other players.
You know on the Wednesday, they probably didn't fully appreciate but besides the signaling in terms of raising rates very quickly, but because we've made those moves that I talked about we just found ourselves extremely well positioned and we didn't have to actually go out and raise either expensive debt or expensive capital.
And I think that's really plays to our advantage and we're able to then diversify.
And to solve these new lines of business without really taking on a lot of additional cost. So I'll just I'll stop there, but I do appreciate you know are you know you'll be a question and I hope that provides you with a little bit of color around how this all came to be.
Okay was there a follow up.
Now I'll follow up thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Brad Nord home for any closing remarks.
Thank you operator, and thank you all for joining US today, it's been a real pleasure to have you on an and.
Actually listened to and do our best to address your very thoughtful questions. So thank you very much for those.
We are extremely proud of.
What we've done here at farmer, Mac, and we're extremely proud and confident of how we're positioned as we look ahead to 2024.
We look forward to sharing very strong results with you.
In future quarters, Theres, nothing that we see on the horizon.
Is causing us to.
Huge anxiety other than obviously the huge turmoil in the middle East and maybe to some extent.
Our U S treasuries funding schedule.
For the remainder of 'twenty, four and going to 'twenty three.
[noise] into 'twenty four we're keeping a very close eye on that.
But in terms of our business in the markets, which we operate.
<unk> are very solid right now and as I say, we are very confident very optimistic about 2024. So thank you for joining us and please get back to.
<unk> with any questions.
We look forward to speaking with you again.
And then three months if not sooner.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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