I think we're in a good spot to get started. Okay, great! Well, good morning, everyone. I'm Jalpa Nazareth, and I am super excited to kick off Farmer Mac's first-ever Investor Day event. So the presentation we're going to show you today is available on our website, and we're planning to post the entire event after it concludes. I wanna quickly remind you, as we always do, of our presentation will contain forward-looking statements which are based on management's current expectations and assumptions. We will also be presenting certain non-GAAP financial measures. Reconciliations of these financial measures will be found in our most recent filings. We have a great agenda planned for you today.
First, you're gonna be hearing an overview of Farmer Mac from our CEO, Brad Nordholm, followed by a review of our business and credit from our Chief Business Officer, Zach Carpenter, and our Chief Credit Officer, Marc Crady. We'll have a short break around 11, after which Todd Batta, our VP of Government Affairs, is gonna provide a review of our public charter. Lastly, Aparna Ramesh, our CFO, will present a financial roadmap, followed by a 30-minute Q&A with the management team. Note, we're gonna be taking questions in person as well as from all the users on the webcast. So at this time, I'd like to turn it over to Brad Nordholm.
Thank you, Jalpa, and let me offer my welcome to everyone. It's really nice to see you here. I appreciate you coming out, and for those who are tuning in by video, welcome to you as well. This—as Jalpa said, this is a big day for Farmer Mac. We are celebrating the 25th anniversary of our New York Stock Exchange listing. Over the last three days, we have had our quarterly board meetings here. We had our annual shareholder meeting at 8:00 A.M. this morning, at which time we announced the election of two new directors to the Farmer Mac board. And at the conclusion of that, we got to go downstairs and ring the bell. And you know, ringing the bell is something that is fun. You get to be on TV and all that.
But for Farmer Mac, it is much more than that right now. You may have noticed that we're beginning to roll out some new branding of Farmer Mac. We are determined to tell the breadth of our businesses, the stability of our business model, the strength of our mission, and the success, frankly, of our employees and our financial performance in a more compelling way. At the back of the room, Lisa Meyer has been leading that initiative. The opening bell at the New York Stock Exchange today was a prime opportunity to do that. We had a couple of interviews afterwards. There are gonna be feeds, and opportunities to use that.
A new video we have was looping on the floor, it was right behind Cramer, all of which is good, and, we think as more people become aware of the Farmer Mac story, it will be very good for Farmer Mac, it'll be good for investors and, ultimately, just lead to additional success. Success playing on success. I wanna tell you a little bit about the Farmer Mac story. But let me begin with just a couple of financial highlights. We are a company that has delivered top decile, total shareholder return performance the last 1 year, the last 3 years, the last 5 years, the last 10 years. We have had 13 consecutive years of dividend growth.
All through that period of time, we've had about one quarter the volatility in net earnings, as measured by standard deviation, of any of our index financial peers on the New York Stock Exchange. We have never had a losing year. So why is that? What is it about the Farmer Mac business model and about what we're doing that delivers financial results? I challenge you to find someone who operates with a stronger CAGR and lower risk and lower volatility than Farmer Mac. What is it about Farmer Mac that enables us to deliver those results? And that's what I'm gonna try to tell you.
We're also an organization that, at the core of that story, is a government-sponsored, congressionally chartered GSE, government-sponsored, entity, that enjoys extraordinary advantages in funding, and in charter, that enables us to deliver those above-average return levels, and very importantly, because of our funding strategies, enables us to deliver that with lower risk than just about anyone you find. So I'm gonna be talking about that as well. So a bit on mission. What does it mean to be a congressionally chartered, government-sponsored entity with a mission? It really, at Farmer Mac, it comes down to a mission to increase the accessibility of credit for rural America. That is why we are here. That is why we have a congressional charter. If we do that well, it means that we lower the cost of borrowing to rural borrowers.
I'll talk about our four business segments: farmers, ranchers, agribusinesses, Rural Utilities and project finance rural utility Renewable Energy . It enables us to issue bonds across the curve and access the debt capital markets in other ways, including new securitization initiatives underway. But it also enables us to align our internal values around how we work, the people we hire with a passion for our mission, and expertise in finance and operations, in underwriting and understanding American agricultural rural America and all that goes with that. So some people would challenge me and say: Well, oftentimes, mission-driven is an excuse for average performance, an excuse for not doing the best you can do, an excuse for not driving the business forward in as aggressive a way as possible, and it's prudent under the circumstances. I don't think that's the case.
Our employees who do have this passion for mission, who do have this expertise, who do have this focus on a very interesting and unique niche, and who are able to really capitalize on some of these inherent advantages that we have as, as a GSE, they're all shareholders of Farmer Mac. Having strong financial performance, having a commitment to mission, and having strong, steady growth and financial results are not intentional with one another. For a well-managed organization that gets these objectives clearly stated and attracts people who want to execute on that, it really is... I've said in a couple of situations before, it really is what supercharges our performance. So how did Farmer Mac come about? You really have to go back to the mid-1980s, when in the United States of America, we had a very significant crisis in American agriculture.
That crisis was really caused by a couple of factors coming together. The very high variable interest rates of the early eighties. Paul Volcker wrung out inflation, but at the cost of short-term rates in the teens, you'll recall. The fact that most agricultural borrowers were borrowing variable rate because their financial institutions did not avail themselves of the asset liability management practices to offer fixed-rate product. So rapidly increasing operating costs for many farmers and ranchers across the U.S. and plummeting commodity prices, some of which can be traced all the way back to the grain export embargoes during the Carter administration. And that double whammy really caught up with American agriculture in the mid-eighties and resulted in the failure of many American farms, bankruptcies.
Some of you may be old enough to remember Willie Nelson and Farm Aid, going back to: How can we help and support American agriculture more? It resulted in agricultural financial institutions failing. The Farm Credit System required a federal bailout. Commercial banks that were focused on agriculture had many financial problems and some failures. And in that environment, very well-meaning people, from across the political spectrum, in Washington, D.C., said, "We need to create another source of liquidity for rural America and American agriculture." And that was Farmer Mac. Let's create an organization that operates a little bit like Fannie Mae and Freddie Mac, that can take agricultural loans, guarantee them, support securitizations in the market, and fast-forward a few years, also borrow long-term and do on-balance sheet funding of the purchase of those loans.
By doing so, let us bring more fixed-rate lending product into the market, and let's create more liquidity for lenders, commercial banks, Farm Credit banks, and others. Create more liquidity so that they can do more to serve rural America. We've had a couple charter modifications since the original charter, resulting from the 1987 legislation, was put in place in 1988. One gave us the ability to do direct loan purchases. Another gave us the ability to, in 2008, to purchase credit associated with rural electric cooperatives, generation and transmission electric cooperatives, and energy projects otherwise qualified for our U.S. Rural Utilities Service financing. So fast-forward, those very early years, it took Farmer Mac a while to get started, but the growth started accelerating as we approached the year 2000, and it's been accelerating ever since.
Today, starting from nothing, we're a financial institution with about $30 billion of assets under management. So what does it mean to be a secondary market? What is this operating model? When we talk about purchasing loans, we are purchasing loans from... and sometimes that partnership at inception, sometimes after the fact, but we're purchasing those loans from upwards of 1,000 financial institutions. Whether it is local commercial banks, Farm Credit banks, some credit unions, specialty finance companies, making loans to farmers with the understanding, and in many, most cases, forward commitment from Farmer Mac to purchase those. We always do the underwriting, and a lot of those are table-funded. It means in partnership with commercial banks and Farm Credit banks that are servicing agribusinesses, in partnership with large specialized financial institutions, providing credit to Rural Infrastructure .
Regardless of the sector, we are working with a network of up to 1,000 financial institutions to underwrite the loans that they are doing to these sectors, to buy those loans from them, most cases table-funded, to give them back cash liquidity so that they can do it again. And we are, and this is very important, we are doing two types of funding. We're taking down credit that we issue in the debt capital markets as a government-sponsored entity, discounted notes, medium-term notes, bonds, at minimal spreads to U.S. Treasury. We can issue out to 30 years. That's something banks don't do. We're not a depository. Our funding is structured to match the asset that we're purchasing from that financial institution. That is why you see such stability and such forward visibility in our earnings at Farmer Mac.
We're very disciplined about it, and we have access to debt capital markets that are the envy of almost all financial institutions. We do a second thing, and that is securitization of those same types of loans. Something new we're doing. It's a way for us to diversify our funding, but we'll get to it a little bit later. It's also a way for us to grow our market, to grow market share. And when we securitize loans, we may provide a guarantee of a senior 90%-95%. The junior position is being sold to third-party entities, completely moved away. We're eliminating all kinds of risks when we do that, from credit risk to, interest rate risk, to basis risk on refunding and other things, and it's a growing area for us.
But the bottom line is, our ability to manage the inherent risks in matching assets and liabilities is exceptional. We're gonna be talking today, first I'll introduce it, Zach and Marc will be talking further about it, about four important business segments at Farmer Mac. I'm gonna talk about just Farm & Ranch , which is part of our focus on American agriculture. Rural utilities is the other part, Rural Infrastructure is the other part. But Farm & Ranch , and the agriculture mortgage market, are the biggest part of our assets under management today. They're driving the first securitizations that we're doing. And so what is this market, and what's the size of it? American agriculture, arable land, land planted with permanent crops, forest. American agriculture is an unlevered sector. Only about 27% of American farms, for example, have any mortgage.
You'd never find that in commercial real estate. You'd not find that in housing. But only about 27% have mortgages, and those that do, have mortgages that are conservative, sometimes starting out 50%-70%, but on average, maybe 40%-45% after a little bit of seasoning. Why is that? Well, at Farmer Mac, for one, we don't just lend against value, we lend against cash flow. And so when we go through that discipline of lending against cash flow, and many in the sector—others in the sector do as well, it keeps that loan-to-value, that initial loan-to-value down in a competitive market environment.
You put it together, that low number of farms that are encumbered with mortgages and the relatively low loan-to-value on the mortgages that are out there, in aggregate, you have an absolutely minimal 10% debt-to-asset value against mortgages in the sector. So who are the people who are doing this lending? Who are our customers? Who are our competitors? How do we get our business? If there are $350 billion of mortgage loans out there to American farmers and ranchers, some is coming from the Farm Credit System, congressionally chartered as well, but a very much larger but much more of a regional patchwork of institutions. Some of them very large and strong in comparison to Farmer Mac, some very small compared to Farmer Mac. But they're active in the sector.
We compete with them, but in many cases, they are also our customers. We'll provide long-term standby purchase commitments to buy loans from them under certain situations, typically, if they become capital constrained or if there's a credit issue. There are other non-Farm Credit System lenders out there. The market is about 50/50, Farm Credit and non-Farm Credit, and they include insurance companies, agricultural banks, those are commercial banks that are classified as agricultural banks because of the concentration of agriculture business that they have, and non-bank lenders. Those non-bank lenders include, specialty finance companies that may be backed by private equity, may be backed by global agricultural commodity companies, and others. They are all part of the competitive landscape, which provides opportunity for business development and that also competes with us.
So when we put this together, we really have an opportunity and have demonstrated, I think, exceptionally stable, consistent business growth over the really more than the last decade. And if you go back even longer, 20 years, you'll see just a continuation of the same pattern. About 14% CAGRs measured over a 10-year period of time. And you may wonder, well, is that coming because of margin expansion, or is it becoming because of growth? Well, those of you who have been looking at us in the last 2 years have seen there's been a little bit of margin expansion, about 10%-15%. That's true.
We believe that while that margin expansion will slow and maybe contract a little bit, in the next year, as you saw in the first quarter, it's not going to contract or revert to where it was four or five years ago, because we are more opportunistic in how we price our product, and we have a growing diversification of our segments of business, which include segments of business which are more accretive, which have higher inherent net margins. So you look at this and you say, "Well, is that because of margin expansion?" No, that's not the story. The real story here is organic growth and what Farmer Mac does to fulfill mission of bringing purchased loans through, and other loan products, from this large network of lenders that we have.
I might just add it, we threw a Fed funds line up there just to demonstrate that our growth is not highly interest rate sensitive... during periods of rapid increase or rapid decrease, we're able to just keep growing. So just a little bit more on these market segments before I turn to Zach and Marc to provide you some case studies and really explain how it is that we developed the business. Just in summary, if we look at Farm & Ranch , these first mortgage loans that we purchased, why is it that we are able to generate this business? First of all, we offer very, very competitive pricing and efficient process.
By efficient process, I mean, we put our systems out in those financial institutions so that the data necessary to originate a loan can be inputted for our analysis, approval, commitment, and closing. We have opportunities to accelerate that, and I'll comment on that. We have interest rate environments which accelerate the opportunity for new Farm & Ranch business. Now, the last couple of years has been down a bit because refinancing has been off and borrowers have been concerned about operating a higher interest rate environment. But now that's stabilizing. We're starting to see a turnaround in that. And it also drives wholesale finance opportunity. We will make loans to financial institutions, wholesale loans, secured by pools of their Farm & Ranch loans on an over-collateralized basis. They may want to keep the interest rate risk, the margin on their balance sheet.
That's fine, as long as we're well collateralized and can do it on a wholesale basis. And because of the credit requirements for doing that, that too, is profitable business for us. In corporate agribusiness, which is newer to Farmer Mac in the last four years, it really comes down to having first-class bankers. The people who drive the underwriting, the origination, the servicing of Farm & Ranch , of corporate agribusiness, of rural electric cooperatives, of renewable energy, are different. They are specialists who understand the ins and outs of those unique business segments. Corporate agribusiness, you won't be surprised to hear, these are very experienced bankers who come from places like JPMorgan Chase and from places like CoBank and other of the top name corporate agribusiness, agri-finance, lenders in the United States, because it is specialized.
As they bring to bear their relationships with other financial institutions and demonstrate that Farmer Mac can execute in doing this business, we see more and more opportunity. In fact, next Monday and Tuesday in Washington, D.C., Zach will be hosting our first-ever Agricultural Finance Forum, where we're bringing together 60 of the leading, commercial bank, agribusiness lenders, Farm Credit System lenders, and really solidifying, helping solidify our reputation with them, that we are now in the same echelon as they are, capable of executing every bit as well as they can, and we see that as an opportunity to drive more business. If we think about rural infrastructure and finance, what is it about these segments where we have advantage? With rural utilities, it's certainly competitive pricing.
That again, goes back to our funding and the fact that we operate Farmer Mac on what we call an efficiency ratio, keeping our expenses at less than about 30 basis points relative to our margin. Growth opportunities with broadband investment and increasing demand for rural electricity. And then renewable energy. This is a newer market segment in the last three years. You look at our numbers, we have doubled our outstandings each of the last three years. The addressable market is huge relative to Farmer Mac. The inherent credit needs are long-term amortizing, fixed-rate financing. Bingo! There's a competitive advantage for Farmer Mac. The credit metrics are roughly BB plus, BBB minus metrics, right on spot for Farmer Mac and the way we operate our company and the way we manage credit risk.
So many inherited advantages, and this is an area where you are seeing not just strong demand for new investment in renewable energy projects due to the Inflation Reduction Act, but also because of the plummeting cost of those technologies relative to traditional technologies. So, big opportunity for us. So what are some of the opportunities for further growth at Farmer Mac? We think we have a lot. And I would just note that I arrived at Farmer Mac about five years ago. A large portion of our management team, Chief Business Officer, a newly created position, Chief Financial Officer, and many others in leadership, have been assembled in the last five years, most of them four years ago. And I would note that when I came to Farmer Mac, I saw a very stable, very strong, very advantaged company, but a company that could do more.
I can elaborate on that, but that was my vision. And so when we hired a Chief Business Officer, when we hired a CFO, as we've hired many other senior executives across Farmer Mac, who you're gonna be hearing, some of whom you'll be hearing from today, they came here because of that shared interest, that shared vision of driving more growth and innovation at Farmer Mac. Want to be crystal clear about it, that that's why they're here, and that's why we have so much confidence in the growth opportunities that we've identified. We feel in many respects, we've now built the platform. We've really staffed up these four segments. We're improving our technology platform with Shaun Datcher 's leadership. We're really ready for more growth. And so what are those opportunities? I've enumerated some of them here.
They range from technology innovation in the lower left around collateral value efficiencies. Doing appraisals is one of the real sources of of friction in the agriculture mortgage business. It takes too long, way too long. And yet we have tens of thousands of data points of loans in every one of the 50 states in the United States. How do we start using that to come up with value estimates that can be substituted and may be better than the old-fashioned manual appraisal process? Next up, title insurance. How can we take the friction out of the title insurance process? How can we collapse the time it takes to underwrite and close a loan for those financial institutions, advantage them and their relationships with their customers, advantage us in a go-to source of funding?
How can we do that using data and technology? Around each of the other opportunities, we've developed new capabilities. For example, pool purchases and loan servicing. We've been doing securitizations now for a couple of years. We recently announced that we had done some pooled purchases from a large financial institution. We are able now to bring in pools with hundreds and hundreds of transactions, and we're able to slice and dice that data to value it properly upfront, and then to administer it after the fact. That becomes a competitive advantage in forging new relationships with new types of financial solutions that want liquidity, not just on a loan-by-loan basis, but because they want to exit a business, or they want to change a business or focus on something new.
So I'm not going to elaborate on all of them, but suffice it to say that at Farmer Mac, we see growth opportunity and are really excited about it. So let me just conclude by kind of rewinding to where I started, and that is, we have demonstrated years, decades, really, of very, very consistent growth. Growth with less volatility in earnings and more consistent and high mid-teen, mid-teens CAGR in terms of revenue and profits, than I think any. I'd challenge you to find a financial institution that matches it. We've done so because of our inherent advantages as a GSE in funding.
We've done so because of highly aligned and motivated, mission-driven employees, who, many of whom come from rural America, who find Farmer Mac to be the place where they want to just work like crazy and accomplish all kinds of great things and support a mission. We've done it because of a crystal-clear kind of focus on our strategic alignment and what we want to do. So, I want to really turn the mic and the podium to Zach and Marc so that they can tell you with a greater attention to detail about exactly how we're going about this. You can get a sense for who our customers really are and what drives them to Farmer Mac, and what our competitive advantages are, and our underwriting issues in doing business with them.
Thank you. Well, great. Thank you, Brad. Good morning, everyone. I'm really excited to be here. I think Brad did a tremendous job setting the stage for talking about our business portfolios, the growth opportunities we have, and where we see we could take this in the future. So really, our goal today is, I'd say, highlight in more detail our portfolios, and talk about a few key points for each initiative. So our role as a secondary market, what does that mean? And how do we differentiate ourselves using that? Who we support, who are our customers, and how do we support them? More importantly, what are the key business drivers for these portfolios in helping drive us-- drive our growth in the future, and how does Farmer Mac differentiate ourselves with our customers, in these transactions?
In addition, for each portfolio, we're going to highlight a case study, and this is a real-life example of a transaction we purchased from one of our customers. And so our goal here is to highlight, you know, who the customer is, what their borrower need was, and how Farmer Mac resonated as a capital source to support our customer. Marc Crady, my colleague, our Chief Credit Officer, will join me and talk about, well, what are the credit considerations? How do we assess risk, and how do we ultimately, ultimately make the right decision for our mission, our customer, and Farmer Mac? So let's talk about Farm & Ranch , and as Brad mentioned, a key foundational business in our agricultural line of business. So, you know, our focus here is to provide innovative financial solutions to our customers.
Our customers happen to be a network of financial institutions that support farmers and ranchers across the United States. These customers provide agricultural real estate loans to farmers and ranchers in support of ag production, from young, beginning, small farmers to family farms, all the way up through large, integrated farming operations. Brad noted a large network of active customers. We have actually over 1,500 active customers in Farmer Mac's network. Over the last three years, we've purchased loans from over 530 different customers in 48 states, representing over 110 different commodities. So a vast network of institutions that we look to support as a secondary market. We offer a broad suite of products, and I think Brad did touch on it as a secondary market.
One of our unique natures is our ability, given our funding capabilities, to support long-term fixed-rate amortizing term loans. Not just long-term amortizing term loans, but a broad suite of different products, leveraging long-term nature of these assets to support farmers and ranchers through the cycle. Ag is a cyclical business, and we need to provide products and services to support the cyclical nature. Given the strength of this underlying asset class, which is farmland, in this case, there is very low risk of loss to Farmer Mac. And in this market, we generate a pretty effective and healthy Net Effective Spread and a very strong return, given these low-risk characteristics with the farmland asset class. But let's talk a little bit about business drivers in this space. I think first and foremost, ag is cyclical, right?
Commodities and input prices are gonna ebb and flow, and it's gonna be different by different segments of the ag economy. As that take place, a couple things are gonna happen. Borrowers are gonna tap into their equity and their land to support working capital, to support liquidity, to enhance their operations, to grow their operations, and in many instances, probably leverage their operations to buy additional farmland. One thing that's interesting about farmland supply is there's not a lot of it, so when it comes to market, it's very sought after, and in many instances, farmers are gonna leverage their land to be able to provide that acquisition capital. Farmland has also shown resiliency and value appreciation, and there's a very strong correlation with borrowing needs as that land value increases.
And Brad mentioned this earlier, about 10% of farmland is levered, at modest LTVs, to say the least. We believe as generational transitions occur, and additional interest in this asset class, especially from institutional investors, and I'll talk about this in a little bit, that's gonna drive future borrowing opportunities, for our customers and essentially for the secondary market of Farmer Mac. And lastly, our customers, which are the financial institutions here, are gonna continue to manage capital, liquidity, and growth in an ever-changing regulatory environment. The benefits of being a secondary market is not only providing products and solutions for their borrowers, but us providing products and solutions for these customers to manage their balance sheet. So a few points of differentiation that I want to focus on. First, innovative product set.
Very few institutions out there are able to provide long-term fixed-rate loans to support the needs of farmers and ranchers. Farmer Mac is one of those institutions, and the entire banking sector is not able to provide that type of capital. Second, and Brad mentioned this, competitive pricing, efficient processes, and a relationship focus. We pride ourselves on focusing on our customers and enhancing that relationship, but while also supporting their borrowers. And lastly, and I think one thing that's very gonna be important for growth for us in the future, is automation and disruption, specifically of the ag lending process. Brad touched on this. How can we make the time for a farmer and rancher to get a capital from the secondary market as quick as possible? We're thinking ahead.
How can you push a button, transfer all the data to Farmer Mac, get approved, rate lock, and fund within six days? It's visible, and we're investing in technology and data and automation to get that done. So Marc, let's turn to our first case study. So this is a typical transaction we see in Farm & Ranch . This is a family farming operation in South Dakota. They're farming, alfalfa and grinding hay to sell to local dairies and feedlots. And we purchased this loan from a local bank serving the South Dakota market. What the borrower wanted to do is a few key things. First, refinance numerous loans, into one consolidated debt package. Second, get a long-term fixed-rate loan. And third, leverage some equity to, enhance and expand his operations.
So we provided a 30-year fixed-rate amortizing term loan, $5.3 million, to our seller to provide it to the borrower. Why was Farmer Mac resonating in this situation? Innovative product set. The borrower wanted to lock in a low interest rate during the time, wanted to extend the maturity of his debt profile and consolidate it down, and through our competitive and efficient process, we're able to provide that seller, who cannot provide that type of product to the borrower, the liquidity and the need to do it as quickly and efficiently as possible. Marc, typical Farm & Ranch deal.
Yeah.
So how do we think about credit and the considerations to make the right choice?
Yeah, these are really good loans for us. This one in particular is a family farming operation that's been around for 50 years. The collateral is excellent, as we've mentioned. In this case, it was 55% loan-to-value, and that's about typical for us, at least it's average. We, of course, look at the financial statements. Primarily, we're focused on reasonable leverage, in this case, strong debt service coverage and a credit score. This was very mission-focused for us. This financing supported the expansion of the farm, and this is a good example of where we provided long-term financing, 30-year fixed-rate financing at very competitive pricing with an efficient underwriting and approval process. We've touched on this, but we're a through-the-cycle lender. Agriculture is a cyclical industry, and we're gonna be there for these farmers and ranchers, even when times are tough.
In those cases, we're really focused on the liquidity in terms of our financial analysis.
Great. Marc, a quick follow-up to that. I mean, we've seen a pullback in commodity prices from the 2022 highs and sticky input costs. You know, given we're a lender through the cycle, what are some of the considerations from an underwriting perspective we look in this environment?
Yeah, I mean, I think it's the same, you know, regardless of the cycle, and I'll just sort of emphasize what I already said. It's we're really focused on liquidity. You know, if a farmer or a rancher, you know, has good liquidity, then they can make it through the cycle. And if they don't have liquidity on the balance sheet, you also referenced that there's typically an opportunity to re-leverage the real estate and bring liquidity back into the operation.
Great. All right, we're gonna move on to one of our newer businesses in the agricultural line of business, Corporate Ag Finance . And our focus here is to support financial institutions that provide capital to agribusinesses and the food supply chain. This is still very mission focused, right? These businesses buy significant amounts of agricultural commodities to produce food, fuel, and fiber. Some key examples: corn to produce ethanol, wheat and barley for food and beverage production. So again, right in line with the mission of serving farmers and ranchers and driving the ag commodities to market. Very different than Farm & Ranch . These are typically much larger transactions, so I'd say at least $50 million, up to hundreds of millions of dollars, based on the size of the borrower and the financing needs.
Typically arranged by larger financial institutions, in many instances are participating or led by a Farm Credit System institution, and typically have numerous lenders. So it's a multi-lender or a syndicate transaction supporting the overall financing need, and Farmer Mac is typically a participant in that deal. While these transactions are secure, they do differ from Farmer Mac, Farm & Ranch . So typically here, we're underwriting the business model, the ongoing cash flow-generating ability of the business to support its operations, support its debt service, and be successful in the future. So enterprise value transactions, again, focused on cash flow generation support, similar to Farm & Ranch , but not relying as much on the land collateral.
Given these risk characteristics, the yields in these businesses are very accretive to Farmer Mac, and generally, our Net Effective Spread here is one of the highest across all our portfolios. And even from a risk-return standpoint, we have a very accretive return given these numerous risk characteristics. So business drivers in this space generally depend on kind of what sector in the ag space we're supporting. Is it dairy processing? Is it forest products? Is it food and beverage manufacturing? All those have different cycles, all those move up and down, but the one key theme here is these businesses are going to invest for scale, invest for manufacturing and processing capabilities, and grow with the food, fiber, and fuel space.
So is that an acquisition that comes up, and they're going to need capital for it, or they can continue to invest in, you know, manufacturing efficiencies? This is an ongoing need that we'll continue to see. In addition, Farmer Mac supports our customers. Again, as a secondary market, we're a risk mitigator for financial institutions. As these institutions want to grow with their customers, right, they're going to get into a point where they need to manage concentration limits, exposure limits, capital, and our secondary market solutions can provide that risk mitigation by selling us loans to our balance sheet so they can continue to grow with their borrowers. I'd say the primary differentiator here for Farmer Mac is our secondary market structure. It's very unique, right? As a-- essentially, as a capital provider, we're non-threatening. We're not originating loans.
We're not competing for the borrower relationship. We're purely there to provide capital to the lending institutions arranging the transaction. That's unique and very valuable. And so all these financial institutions that we've developed relationships with over the last four years look on us very favorably because our secondary market structure is purely there to support their needs and their borrowers' needs. I'd say this differentiator, coupled with our mission focus and, you know, being dependable through the cycle, really makes us an attractive participant in this space, and we've seen significant growth here over the last four years. All right, so let's talk about a quick case study in corporate ag, and this is a great example of a food supply chain agribusiness that purchases a significant amount of commodities to produce bakery goods.
Long history in the space, a 170-year-old integrated bakery. And essentially what happened is there was a large commercial bank that was providing financing for a family office sponsor to buy the borrower, as well as the borrower needing additional capital to support future operations. Farmer Mac purchased a participation in a $910 million transaction. Again, a syndicated transaction supporting our customers. So why did Farmer Mac resonate in this space? Well, clearly our mission, right? In a lot of these, most of our portfolios, mission focus is critical. We support ag. This financial institution was arranging a transaction for a long-term bakery, and this bakery or seller, or the ultimate borrower, was looking to grow. But also more importantly, our secondary market structure. We're non-threatening, we're non-competitive.
The arranger of this transaction looked at Farmer Mac very favorably versus other financing alternatives, other lenders, because we're non-competitive and we're not originating loans, and they don't have to worry about us, as well as the dependable ability to provide capital through this cycle. Marc, these are much different deals than Farm & Ranch .
Yeah.
So a lot of different credit characteristics. So how do we think about these types of transactions in corporate ag?
Yeah, in this case, our considerations were, I mean, this is a business that's been around for a long time, 170 years old, owned by an experienced investor with dry powder to invest additional capital if necessary. A large commercial bank led this transaction, and this business, in particular, had stable cash flow and margins, primarily driven by non-cyclical demand for bakery products, strong customer diversification, long-standing customer relationships, and customer contracts that allow the borrower to increase prices when their input costs increase. So they buy flour, butter, sugar, that sort of thing, and they can pass those price increases along to customers.
Awesome. Let's move on to our wholesale finance line of business. So in Farm & Ranch and Corporate Ag finance, we're talking about buying loans and putting them on our balance sheet from our customers. Wholesale finance is a different business model. So here we're financing financial institutions that are holding the loans on their balance sheet for specific reasons. Our customers range from large financial institutions to institutional investors, funds, and real estate lenders. The characteristics of these transactions vary, but generally to strong, highly rated, large financial institutions that also provide financing to borrowers in the sectors we serve. So insurance companies providing loans to farmers and ranchers, you know, to put on their balance sheet, were secured by those pools of loans, typically over-collateralized, as Brad mentioned earlier, and can be fixed or floating-rate securities, and this differs, right?
So we're financing the organization, providing financing to farmers and ranchers. They're going to manage their asset liability dynamics one way, and we support that dynamic. Given the strength of these customers, very highly rated, and the strength of the collateral securing our facilities, these are very low-risk transactions for Farmer Mac. Our Net Effective Spread here is lower than Farm & Ranch , given that low-risk nature, but our return is probably highest across all our portfolios, given these low-risk characteristics. You know, business drivers here generally reflect our customers' needs for liquidity and financial liquidity and funding needs. Especially in volatile times, these institutions are really looking to diversify their funding sources.
A good example is, you know, during COVID, the bond market froze up, and as our institutions want to continue to finance their ongoing needs, they need to find different alternatives. So they look to a unique product like Farmer Mac that can offer wholesale financing to provide that liquidity. As I mentioned, a strong driver of growth here that we see in the future is the significant interest in the institutional market for farmland. It's an inflation hedge. It's not necessarily correlated with other broad markets, and we're seeing significant capital deployed in this space. And as these funds look to deploy capital in the farmland space, they'll look to Farmer Mac as a wholesale solution to leverage it. So a few key differentiators. There's not a lot of capital sources like this in the market, so we're a unique player.
Institutions looking to diversify their funding sources outside of the capital markets or FHLB or deposits will look to Farmer Mac to really augment their capital stack. And given that our mission focus, we're dependable through the cycle. We had lots of customers during the COVID volatility that looked to Farmer Mac to provide necessary liquidity and funding when other markets froze up, so that dependability and our mission focus was critical. So on our wholesale finance case study, this is an example of a large, highly rated insurance company looking to diversify its funding sources. The collateral securing our wholesale facility was high quality farm and ranch-type loans. The insurance company wanted to put it on our balance sheet to match its pension obligations, right?
So this is why some of these organizations want to continue to hold it on balance sheet. We structured a $750 million wholesale facility to allow the borrower to grow, right? To continue to provide liquidity to farmers and ranchers across the United States. Farmer Mac's value proposition here was, this was a unique facility. The insurance company wanted to augment its capital stack with competitive pricing, unique alternatives, and a dependable capital provider, and that was ultimately what the need for this facility was for. But Marc, a different kind of portfolio for Farmer Mac, what do we look at from a credit perspective?
These are very low-risk loans for us. Zach mentioned, in this case, our counterparty was a large investment-grade insurance company with a diverse portfolio, a long, successful track record of originating, underwriting, and servicing agricultural loans. Our collateral is a pool of farm and ranch loans that we would put on balance sheet, so very low risk. And a strong, well-structured financing agreement. So in addition to having the investment grade counterparty, in cases where there's a delinquent loan in our collateral pool, the agreement requires the counterparty to pull out that delinquent loan and put in a performing one, so our collateral pool remains very strong at all times.
Great. So let's flip over and talk about our rural infrastructure line of business, and our first portfolio here is rural utilities. And so our focus is to support financial institutions that provide capital for rural electric generation, distribution, transmission, cooperatives throughout the United States. Again, a cornerstone of our mission, really, to serve rural communities. These are highly rated cooperatives, that provide an essential service, electricity, to rural America. These transactions are typically secured, by the power generating and distribution assets of the borrower. Given the long-term nature of these assets, these borrowers are typically looking for long-term, fixed-rate loans, leveraging the secondary market and our funding capabilities to provide that type of product. Given the real strength of the borrower and the secure nature of our loan, again, these are very low-risk, transactions for Farmer Mac.
Our net effective here is probably the lowest across our portfolios, but our return is still very accretive, just given the low-risk characteristics of the borrower. Business drivers, the ongoing need for electrification. These companies continue to need capital expenditures to expand their generating capacity, expand their distribution network and the transmission lines. And I'd say a big component of that, more recently, is the growth in the rural populations. So since 2020, since essentially COVID, rural populations have been increasing. The prior decade, it was probably net flat to decrease, and so we've seen growth in rural populations, and the rise of remote work is allowing them to live where they want to live and still do their job. That is creating additional demand for electrification in rural communities.
In addition, I'd say this is a big component of future growth for us, the electrification needs of new technologies, artificial intelligence, data centers, electric vehicles. It requires a tremendous amount of electricity, and that is going to continue to help these rural utilities need more generating assets to support that demand in rural areas. A few key differentiators for us is really our innovative product set to support long-term, fixed-rate loans in a dependable and efficient manner. We're competitively priced, we can efficiently onboard, and our customers look for us to be that value proposition. I'd say the second thing is really dependability, and at times, the ability to write really large capital checks, right?
Some of these times, if you're building a large renewable energy generating facility, you need a lot of money, and given the low-risk characteristics of these co-ops, we're able to provide that capital. This is a perfect case study for our rural utilities business, an 88-year-old distribution co-op serving rural Georgia. We supported the seller here, our customer, a cooperative financial organization, providing capital to this borrower to increase its distribution capabilities, as well as provide fiber broadband to its territories. The need reflects the continued population growth in the rural Georgia market, where this co-op was serving. We provided a long-term, fixed-rate, 30-year loan to support this fiber build. So why Farmer Mac? Again, our mission fits very nicely with this: to support rural communities.
Our seller was very appreciative of our focus here, and it ultimately aligned with the borrower's financing needs. But also, our ability to support a long-term, fixed-rate loan in a very efficient and competitive way, really made us the partner of choice for our seller in this transaction. Marc, a foundational business model for us. How do we think about the credit component?
Yeah, yeah, yeah. Another low, low-risk loan for us. 88 years old, this utility was founded in 1936. Our internal rating corresponds to an investment-grade rating. The considerations, the credit considerations that we primarily focused on, this utility has rate-setting autonomy, provides an essential service, electricity, serves 36,000 customers, so no customer diversification, or I'm sorry, no customer concentration. And it gets its power supply from an investment-grade generation and transmission utility under a contract that lasts for many decades. And we look at financial statements and do financial analysis on all of our loans, and in particular, here in Rural Utilities , we focus on leverage and debt service coverage.
Great. So we'll conclude today talking about, I'd say, our two of our newest portfolios in rural infrastructure, Telecommunications, and renewable energy. As Brad mentioned, we've doubled renewable energy portfolio the last couple of years. Last year, our Telecommunications portfolio increased 60%, so a really new area of focus for us. So we'll talk a little bit about what that means. So, on the telecom side, our focus is to support financial institutions that provide capital to support broadband, fiber, wireless, towers, telecommunication companies serving rural America. A very mission-focused portfolio as we look to bridge the digital divide for rural communities. Overall, this is very much like loans we see in corporate ag finance. So the transactions are typically larger in size, so $50 million up to hundreds of millions, led by large financial institutions that are typically multi-lender and syndicated transactions.
Farmer Mac is typically a participant in one of those transactions. And we underwrite and look at the business the same way, right? So we look at these these businesses to see the ability to generate cash flows on an ongoing basis, support its operations, support its debt service, and have a successful model into the future. Telecommunication transactions typically have a much higher yield than a Rural Utilities space. They're floating-rate loans and have a much shorter maturity, so do provide nice asset diversification for us, right? Rural utilities is long-term fixed rate. Telecom is short-term floating rate, so that's a nice balance. And given the high interest rate yield that we receive here, it's a very accretive and effective spread for the rural infrastructure line of business and a very accretive return, given the risk dynamics.
Few business drivers here, and I'd say the first and foremost is bridging the digital divide. I mentioned earlier that the rural populations are growing. The rise of remote work is growing. That increases the need for faster internet speeds. So these companies are looking to put more fiber assets in the ground to support fiber to the home or broadband fiber to get that internet speed out to rural America. Strong government support, RDOF, BEAD, numerous government programs that provide additional grant money for these companies to put fiber in the home. So they get the grants out there, but they need borrowings upfront to support that grant over the long term, and that's why they can leverage the secondary market for increased growth opportunities.
And lastly, a significant amount of private capital, and I'd say more or less, the infrastructure funds look very favorably on this asset class. There are a significant amount of companies out there that have spent years putting fiber broadband in the ground, and that's a very valuable asset. It's the fastest internet you can get. And as this capital is deployed to consolidate this industry, we expect additional borrowing opportunities for Farmer Mac. So what's our differentiating factor here? It's our secondary market structure. Again, we're not competing for the borrower relationship. We're not originating loans. We are a dependable capital provider for organizations arranging these transactions. That is unique to us, and that makes us a very attractive participant. I'd say our dependability and mission focus, be there through the cycle.
Those two differentiators with experience and understanding the space really make us an attractive participant. All right, here we have a 70-year-old Telecommunications company that's been, you know, operating in the Carolinas and Virginia areas for quite some time. And more recently, they've been expanding to provide fiber broadband to the rural communities. What is that offering? It's offering quicker internet speeds to their territories, much quicker than coax and DSL, but also it's helped mitigating some of the declines they saw in their legacy voice and cable services. We supported the seller, a cooperative financial institution, by providing a part of a syndicated $191 million syndicated loan facility to support this fiber build-out. So our value proposition here was clearly our mission. It aligns very nicely with what the borrower's needs.
They wanted to bridge the digital divide and provide faster fiber internet to rural communities. Since we're a secondary market, again, we're a dependable, non-threatening capital provider. We're there to support the financial institution arranging that deal, and that's typically what you see in these types of transactions. And lastly, you know, experience matters. We've hired the right people. We have the right experience to assess these deals, to understand the right risk dynamics, and make the right decision for our customer and Farmer Mac. Marc, one of our newest portfolios-
Yeah.
How do we think about telco and what's important to the credit consideration?
Yeah. Again, this is a business that's been around for a long time, founded in 1951. This business provides a full suite of communication services. It's led by a Farm Credit institution, has significant experience in the space. What we liked about this deal in particular was it had a recurring revenue business model. About 80% of the project was funded with government grants. The customer churn was minimal, increasing revenue per customer is what the borrower showed, and the company had a very strong market share in its region, and also, again, we're focused on the financials, of course, a reasonable leverage and a strong debt service coverage ratio.
One thing I just want to highlight, I mentioned earlier that these are two of our newest portfolios, and relationships and experience matter. We've recently hired a Head of Renewable Energy with significant experience. He's been around for about 6-8 months, and excited to announce that we've just highlighted a new Head of Telco that will be joining us and has 25 years of experience. We're really trying to put some structure and foundation in place to grow these into the future. Let's finish with our Renewable Energy portfolio. Focus here is to support financial institutions that provide capital for the construction, development, and operations of Renewable Energy generating projects. Again, a very mission-focused business for us as we look to support the transition to sustainable energy.
Our portfolio here is primarily solar-generating projects, including community solar, wind-generating products, and associated battery storage. Our focus here is a little bit more broad, so we also want to focus middle-market transactions in this space that, you know, generally have as many alternatives to arrange transactions in the market. In many instances, Farmer Mac can hold the entire facility, 100% of the debt needs in this transaction, but we also participate in multi-lender, larger syndicated transactions. The projects generally start as project finance projects. So, loans to, you know, construct the wind or solar-generating facility. There's a financing need for the tax equity or credit bridge loans to take advantage of the tax incentives.
And then ultimately, when the project gets to completion, short- and long-term loans to support the ongoing support of the project. Given the complexity of these transactions, there's a lot of moving parts, we look to partner with strong sponsors that have invested in Renewable Energy for a long time, financial institutions that have arranged these transactions, top-tier construction firms, using top-tier equipment, and strong operators. And typically, these transactions have long-term power purchase agreements in place with high-grade counterparties. That provides a tremendous amount of cash flow support, given the strength of the counterparty buying the power from these projects, so we get really comfortable from the risk profile there. This portfolio has a strong Net Effective Spread, very accretive, and a very strong return, given that risk characteristics. A few main key business drivers.
First, the 2022 Inflation Reduction Act that extended the tax incentives for Renewable Energy generation and battery storage projects. The power industry is continuing to diversify its generating sources, reducing the need of fossil fuels and looking at low-cost Renewable Energy power generation as a nice addition to its portfolio. And I touched on this in telecom. The significant technology improvements is requiring a significant amount of electrification needs. Data centers requires a tremendous amount of electricity constantly, and so a lot of these companies are looking for Renewable Energy powers because of the low-cost power-generating ability of it to support these data center needs. We differentiate ourselves a few key ways, and one being, we are able to finance the numerous amounts of loans in these structures.
We can provide construction loans, we can do tax equity credit bridge loans, and then we can do long-term fixed-rate loans that most commercial banks in this market can't provide. Given our mission focus, we're again focusing on smaller transactions, where maybe it's a little bit more difficult to find a financing in the market that Farmer Mac can step in and provide that support. And then again, we're providing liquidity and risk management for the customers arranging these deals. As they exceed hold limits with certain sponsors or if the transaction concentration gets too big, they can offload some of that risk with Farmer Mac as it meets our risk profile. So let's conclude with our last case study. This is a financing project to build a 125-MW project in rural Georgia.
The need is for a local rural electric cooperative to get more low-cost power to support new data centers being constructed in the service territory, while also supporting its local communities with electricity. A mid-tier regional bank arranged this transaction, and Farmer Mac was a part of the multi-lender syndicate. Farmer Mac resonated here 'cause our mission, our mission to support Renewable Energy and the transition for the borrower to get that capital to support its customers in rural America. Again, since we're a secondary market, we're a very unique capital source for our customer who's arranging that transaction. So, Marc, what's, what's the credit considerations here from a Renewable Energy perspective?
Yeah, we look for experienced partners in these situations, and that primarily includes experienced sponsors, developers, construction contractors, equipment providers, and lead banks, too. You mentioned we have an experienced lead bank that led this transaction for us. And in terms of the debt structure, we had, in this case, a loan that amortized over 15 years, supported by a 15-year power purchase agreement with an investment-grade off-taker that was contractually obligated to take all the power at a fixed price. So that's a really good structure for us.
Great. Well, I just want to conclude with a couple key themes. I mean, first and foremost, we wanted to demonstrate the diversity of our business model. Especially over the last five years, we've grown in new lines of business. We've expanded and deepened our position in our foundational lines of business, and that's really supporting the diversity going forward. Second, benefits of the secondary market. There's many unique things we as a secondary market can do to support the ultimate borrower, but also to support our customers, the financial institutions, as they manage their balance sheet. The strong business drivers in a lot of these businesses that we're supporting, we have a lot of tailwinds, and we're set up for success to support that growth long term.
And ultimately, you know, Farmer Mac and our mission is at the forefront of what we do, and our mission is to support rural agriculture and rural communities, and our business model has set us up for success for that. So, Brad, I'll turn it back over to you.
Good. Jalpa, correct me, but I think we're going to go to a break right now. Oh, the video. Oh, thank you, thank you. Yes. I mentioned, when I got to the podium earlier today that we have been working to bring more tangible branding to Farmer Mac, to express more clearly the breadth of our business and what we do. So among many, many other things, this is a video that we just, recently, put together. I think we previewed it a couple of days ago, for the board and employees for the very first time, so you're catching this fresh. But it's the beginning of a whole series of things that tell the Farmer Mac story in a more compelling and in a bit more of a emotive way as well.... Do I need to click?
There's a place where we grow things, build things, make things better. Put our hands, our hearts, our backs into it. It's a place h ere
called rural America. Some things in rural America will never change. Values that tie people to each other and to the land, and yet these communities are changing and growing. Today, farmers digitally optimize production in real time. There's a growing focus on soil health. Producers are harnessing sustainable energy generation alongside food production, and ranchers are herding cattle with drones. It's a new frontier, and Farmer Mac is proud to be part of it. As the nation's premier secondary market for agricultural and rural infrastructure credit, we're uniquely positioned to provide our customers and their borrowers with flexible and innovative financing that fuels prosperity and rural America through good times and bad. We're accelerating rural opportunities, allowing farmers and ranchers to thrive, because when rural America thrives, we all thrive. This is the place called rural America.
Central to our nation, its impact can be felt everywhere, from Main Street to Wall Street, from the suburbs to the cities, all across America, and Farmer Mac is proud to be part of it. Farmer Mac, accelerating rural opportunities.
Okay, we're going to a short 10-minute break now. Let's call it 11:15 sharp. Purpose is just to stretch your legs, get something to drink. I would note that we have a number of members of management here. They have name tags on. We also have a couple of board members here. They've just wrapped up one of the board sessions and joined us, so I hope you feel free to introduce yourself and ask for independent corroboration on anything you've heard or just a different perspective.
Always loving you. But if I let you go, would you be happier? Darling, I would break my heart if it was gonna make us whole. I would rip myself apart if it was gonna heal your soul. I would pick up all the pieces. I don't need a million reasons. Oh, to break my heart for yours. I'd be lying if I said that it'd be easy, to realize that I wouldn't have you by my side, but I'd do it if that's what you needed. I say that I could let you go, and I pray I'll never have to know. You'll always be the one I love the most. Darling, I would break my heart if it was gonna make us whole. I would rip myself apart if it was gonna heal your soul. I would pick up all the pieces. I don't need a million reasons.
Oh, to break my heart for yours. I could spend forever always loving you. But if I let you go, would you be happier? Darling, I would break my heart if it was gonna make us whole. I would rip myself apart if it was gonna heal your soul. I would pick up all the pieces. I don't need a million reasons. Oh, to break my heart for yours, for yours. I got a new dress just to meet you downtown, and you walked me through the park-
The way that you like, if you wrap me in your arms and never stop. Heart beats so loud that it's drowning me out. Living in an April shower. You're pouring down, baby, drown me out. Ooh, ooh, ooh. You're just like a river. Ooh, ooh, ooh. You're just like a river. Ooh, ooh, ooh. You go on forever. You're just like a river. Blowing bubbles in the bath, can't stop from thinking lately. You could be the one, happy owner of my babies. Hope they have your eyes and that crooked smile. Was a desert 'fore I met you, I was in a drought. Heart beats so loud that it's drowning me out. Living in an April shower. You're pouring down, baby, drown me out. Ooh, ooh, ooh. You're just like a river. Ooh, ooh, ooh. You're just like a river. Ooh, ooh, ooh. You go on forever.
You're just like a river. You never let me down. I feel you everywhere, your face is all in my head. Covered up in your sweat, it turns me on that you care, baby. You love me, flow just like a river. You're just like a river, that's what you are. You're just like a river, that's what you are. You're just like a river, that's what you are. You're just like a river. You're just like a river. Heart beats so loud that it's drowning me out. Living in an April shower. You're pouring down, baby, drown me out.
I see you calling. I didn't wanna leave it like that. It's five in the morning. My heart is just on the dash, 'cause my wheels are rolling. Ain't taking my foot off the gas. Ending on a two for one night, see the end of my line, staring deep in your eyes, eyes. Been sitting on the edge 'bout to take it too far. Messing with my head, how I'm messing you up. If you wake up in your bed, alone in the dark, I'm sorry. Gotta leave before you love me. Hey, hey, leave before you love me. Hey, hey, leave before you love me. Hey, hey, leave before you love me. Hey, hey, leave before you love me. I should be going, but when I leave, a part of me, I... So I'm getting honest, yeah, yeah, no. If I can just get you right.
I'd rather be lonely, yeah, than rocking on your body through the night. Yeah, I'm the type to get naked. Won't get my heart up or breaking, 'cause I'm too gone to be staying, staying. Been sitting on the edge, 'bout to take it too far. Messing with my head, how I'm messing you up. If you wake up in your bed, alone in the dark, I'm sorry. Gotta leave before you love me. Hey, hey, gotta leave before you love me. Hey, hey, leave before you love me. Hey, hey, leave before you love me. Hey, hey, leave before you love me. Sitting on the edge, take it too far. Messing with my head, how I'm messing you up. I'm sorry. Alone in the dark, I'm sorry. Hey, leave before you love me. Are you drunk enough, not to judge what I'm doing?
Are you high enough, to excuse that I'm ruined? 'Cause I'm ruined. Is it late enough, for you to come and stay over? 'Cause we're free to love, so tease me, ooh. I make no promises, I can't do golden rings, but I'll give you everything. Magic is in the air, there ain't no science here, so come get your everything. I make no promises, I can't do golden rings, but I'll give you everything. Magic is in the air, there ain't no science here, so come get your everything. Tonight!
You want everything tonight?
Is it loud enough? 'Cause my body is calling for you, calling for you. I need someone, to do the thing that I do.
... Hmm, I'm getting low, energy taking control. I'm speeding up, my heartbeat dancing along. I make no promises, I can't do golden rings, but I'll give you everything. Magic is in the air, there ain't no science here, so come get your everything. I make no promises, I can't do golden rings, but I'll give you everything. Magic is in the air, there ain't no science here, so come get your everything. Tonight.
You like tonight.
'Cause I need your green light, day and night, say the truth is mine. 'Cause I need your green light, day and night, say the truth is mine. Say the truth is mine. Say the truth is mine. I make no promises, I can't do golden rings, but I'll give you everything. Magic is in the air, there ain't no science here, so come get your everything. I make no promises, I can't do golden rings, but I'll give you everything. Magic is in the air, there ain't no science here, so come get your everything. Tonight.
Are you a brutal heart? Are you the brutal heart that I've been looking for? 'Cause if you're looking for a love, you can look right through. Hearts, hearts that break, but not in two. And arms that can't hold you, that's true. So you... So you...
I don't mind at all. I don't mind that you only call me when you want. And I'm just glad you want me at all.
Hello?
He's actually here, I think.
Hello? Oh, hi. Hi, everyone. If everyone could start taking a seat, please.
Okay. It's a real pleasure for me to introduce Todd Batta to you. I don't think you've really heard much from him on earnings calls or on prior presentations, but Todd has been at Farmer Mac since 2019. I met him even before I started as CEO of Farmer Mac, and it took me six months to bring him over. But he's held the highest level staff positions at the Farm Credit Administration, at the United States Department of Agriculture, with key agricultural senator focus senators offices, and brings twenty-plus years of insight and expertise on federal and state agricultural policy and execution. Todd is our department of 20 FTEs who runs Government Affairs at Farmer Mac, and he's going to give you a little overview of things we're doing.
I wanna make sure that he describes for you why it is that we're not subject to day-to-day influence from Capitol Hill and other places. Charlie and I were just talking about what happened at Fannie and Freddie years ago, and why it is that the charter that we have is something that you can count on going forward. That our activity is focused on how we enhance our position, both in Washington, but our ability to deliver mission in the countryside. So with that, Todd?
Thanks, Brad.
Thank you.
I'll note the 20 FTE when we talk on our budget, Aparna. Brad did a good job of giving an overview. I'm the Head of Government Affairs at Farmer Mac, and just wanted to quickly talk a little bit about our charter, and how we got to where we're at, and then talk through some things that are happening in Congress right now as it relates to oversight, and review of our charter. So Farmer Mac, Brad provided a great overview earlier. Farmer Mac was created in 1987 by Congress to provide a secondary market to increase liquidity and capital and support for American agriculture, rural utilities, and rural communities. We're regulated by the Farm Credit Administration, as you know, also the Securities and Exchange Commission, as a publicly traded company.
And importantly, we are also overseen by Congress through the House and Senate Agriculture Committees, and that's an important part of the review of our charter and our mission and the parameters of how we operate and what we can and can't do. And it's through—I'm gonna skip to kind of the next thing here and talk about Farm Bill. So it's through a Farm Bill is where Congress takes a review of all credit policies. So a Farm Bill is a comprehensive piece of legislation that Congress looks at every five years, and this bill governs and regulates all the policies and programs that impact rural America, anywhere from farm to fork.
So when you think about a Farm Bill, this is farm price support programs, it's food security, it's trade, it's conservation, it's energy, it's credit, it's access to opportunities for rural America in terms of economic development. So this is the key driver. It is the key piece of legislation that helps the vitality of rural communities. Embedded in a Farm Bill, when we say the word Farm Bill, what does that really mean? It's an omnibus piece of legislation. So Congress takes dozens of statutes, puts them together into one bill, reviews them on a cyclical basis of every five years, and then moves forward with the authorization.
A Farm Bill contains 12 titles, credit title being one that we pay attention to, because within the credit title, Congress will review the Farm Credit Act, which is where we derive our authorities from, along with the Rural Electrification Act, where we derive our authorities from. Congress is in the midst of this cycle right now of reviewing. You heard from Zach and Marc, and they were talking earlier about opportunities that we see on the horizon. And so how do we relate our mission to some of the interests of things that are happening within Congress? Obviously, broadband delivery and energy are two areas of focus, supporting the next generation of producers, which gets into the mission of our small farm work and our family farm work. And we have some great opportunities, potentially.
We've been working and engaging with stakeholders and thinking about how we can more holistically improve how we do business, how we can more efficiently do business. And so we're excited with the Farm Bill kicking off. You know, it's an interesting two weeks in terms of Congress with the Farm Bill because the House is really starting to kick off the process. Tomorrow, Glenn Thompson, who's the chairman of the House Ag Committee, is expected to release the language of what's the House bill, so we'll get a, we'll get a preview of what that actually looks like at that point in time. And they're looking to mark up, which is really the kickoff of the process.
And so within that bill, we've been talking with Congress, and we've been talking about ways that we can more effectively deliver credit, ways that we can enhance our mission to deliver on the priorities that are out there for rural America. And I would just note that this is the start of the process, so we're just starting to kick this off. It's gonna be a long journey in terms of the way, but we've had great discussions about, again, how we can more holistically continue to fulfill our mission on how we do it and how more effectively and efficiently we can. So I'll leave it there. I'll turn it over and look forward to responding to any questions you guys have during the Q&A session.
But it is really an exciting opportunity to be here to talk to you guys directly about some of the things that we're focused on in terms of our mission, our mission delivery, how we can enhance how we're doing our Telecommunications, rural infrastructure work, support agribusinesses, and support American agriculture.
Thank you so much, Todd, and good morning, everyone. It's such a pleasure to be here with all of you, and I also want to echo Brad's thanks in terms of taking the time to be with us today. Lots of familiar faces, and you know, and thank you also to those of you who've tuned in to the webcast. You know, let me just start out with a headline: Another boring quarter for Farmer Mac. When we see that headline on Seeking Alpha, I've got to tell you, you know, some of us stand up and cheer, and that's usually in you know, Gary Gordon has written that article.
You know, I promise for the next 30 minutes not to be boring, but what I will give you is perhaps a little bit of an overview around our funding strategies, asset liability management, you heard about that from Brad, you know, some of our key metrics, the things that we focus on, where have we been and where are we headed. So, you know, you'll see a little bit of numbers behind some of the case studies and some of the portfolios that you heard from both Zach and Brad. Okay, so, you know, where have we been? Let me just decompose, you know, this somewhat busy slide for you.
But for those of you who've tuned in to some of our equity presentations, you've probably seen, you know, a semblance of this, so this should be somewhat familiar to you. But for those of you who are a little bit newer to our story and to our financials, let me just give you a sense of, you know, just how we think about our financials. Right? So, at a very macro level, you know, by now you've learned we're not a bank, we're a financial institution and a secondary market, the premier secondary market, providing credit to rural America. And so we fund our balance sheet not through deposits, but we fund it through a series of unsecured debentures, and we can do that at all points on the curve. And these debentures are contractual.
So unlike deposits, we actually have the ability to either call or to issue debentures at all points of the curve. So tremendous funding advantage, and I'll talk a little bit more about that. So when we think about our top-line revenue, we are not dissimilar from how banks think about their top-line revenue. So banks think about their top-line revenue in terms of a net interest margin, so it's really the yield that is earned on the loans that are provided, less the cost of funds, right? So that's the simplest explanation for how banks think about their net interest margin. We do something very similar.... So you heard from Zach around these different borrowers that we actually will fund either through our counterparties, such as banks, financial institutions, insurance companies, etc.
But we will lend them, you know, for a period of time, you know, at a rate that's market competitive. And then we fund that through these unsecured debentures and more recently, through securitizations, and I'll talk about that momentarily as well. So when you add all of that together and you take that yield less the cost of funds, you get to essentially a margin, and that's our gross margin. And that's really what you see on a series of these blue bars. We do not call that net interest margin, we call that net effective spread. And the reason for that is very simple: we actually do take on, through our funding process,
A way in which we fund our balance sheet is through the use of derivatives, and we don't do that for speculative reasons, we only do that for risk management. And so when we think about this, we think about it as a non-GAAP measure, and it's a very important distinction for us in terms of net interest margin versus our Net Effective Spread. Our net interest margin is really our GAAP measure, and our Net Effective Spread is really our non-GAAP measure, and so that's really what you see in terms of top-line revenue. So if you're wondering, why is it called Net Effective Spread? Well, just think of that as yield on the loans, lesser cost of funds, and it takes out the volatility that you get inherently from dabbling or executing in swap and derivative markets.
Okay, so when you think about our bottom line revenue, that's really shown in the orange boxes. And so that's our top-line revenue, our net effective spread, and from there, we strip off our general administrative expenses, compensation expenses, taxes, etc., and we get to a net income. And so the net income, you know, is really just that, but we call it Core Earnings because it's taking out this volatility that I explained to you around dabbling in derivatives and in swap markets. So now that you know, you understand exactly how our P&L is constructed, you know, how have we done? You know, Brad highlighted a very important number to you in terms of just how we've grown, and a lot of that is dependent on, you know, how well we've executed on our earnings profile.
So our stock has had a 10-year run of about 14% relative to the S&P 500, you know, which has grown at far less. And a lot of this is the success of our top-line revenue, which has had about an 18% NES CAGR, translated into a 16% Core Earnings CAGR over the past 5 years. And so how have we achieved this? You know, you heard about the different lines of businesses, and I'll get into some of the segment profitability that's really driven some of our success in the top-line revenue numbers that you see here.
And so that's, that's been a huge component of this, and especially in the last five years, as we've expanded into these new revenue streams, such as corporate ag finance, such as Renewable Energy , more recently, Telecommunications, all that on the platform of an extremely stable portfolio of agricultural loans within our farm and ranch sector, as well as our wholesale funding segments, that crisscross both our agricultural segments, but also our rural infrastructure segments. You know, what you really see is this incredible diversification that allows us to fulfill our mission, but also allows us to grow and expand into new markets while widening our margins. So that's been a big driver, especially in the last five years, of our ability to do that.
Funding is an extremely important component of all of this, and managing your funding such that you minimize your volatility is absolutely our number one strategy, right? Even though we're a publicly traded company, we do not focus on quarterly earnings. You will not see that sort of, you know, up and down, zigging and zagging, that you might see with other publicly traded companies. The reason for that is we have a very disciplined asset liability management process in place, and I'll talk about that. Okay, so let me very quickly touch upon segment profitability. You know, we've got two major lines of business. You know, you heard about that earlier: agricultural finance and rural infrastructure finance. That's really how we've chosen to demarcate our portfolio.
Within each line of business, we have two distinct segments: farm and ranch, corporate ag finance within agricultural finance. Within rural infrastructure, we've got rural utilities, and we've pulled out Renewable Energy . And over time, you'll start to see, as the telecom portfolio grows, we'll start to really take that out of, you know, that segment, so that you can really understand the drivers and the dynamics that drive profitability within each of the segments that do have a very different sort of borrower base and other dynamics. So if you just look at our volume, you know, we're just a little shy of about $30 billion. This is really reflective of the fact that we've had a tremendous amount of growth, frankly, across all cycles, but especially in the last five years.
Brad talked about, you know, what attracted a number of us. Certainly, you know, I came to Farmer Mac and not knowing that much about agriculture, but with deep expertise in banking, but really excited about the opportunity to come to an organization that was just right-sized, but with a focus on growth, with a focus on innovation, and with the ability to really execute because it had such a strong financial base, as well as such a strong credit base. So you'll hear a little bit more as I get into some of those metrics. So when you think about our net effective spread, and I talked about what net effective spread is, you know, the range of our net effective spread is anywhere, today, from 40 basis points to about 200 basis points.
If you go back five years, and this is an important and key point, and it speaks to really the diversification of our revenue streams and going into these newer lines of business, fulfilling our mission as we step outside of the farm gate, we've been able to really have more variability in our net effective spread. That is really important because in the last five years, you know, I think we can all attest to the fact that we've had anything but a normal set of conditions in terms of an interest rate environment. So we've been able to really triage very effectively and be there for our customer base, just as Zach described, and that has all translated into a very steady, and actually an increasing trend of profitability and margin growth...
Well, if you just look at the net effective spread , you might say to us, "You know, why don't you just do corporate ag finance all day, every day? You know, why are you in rural utilities that's only yielding you 40 basis points? Why are you in farm and ranch that's only yielding you 99 basis points?" I think what's really important is to think of us not just as a P&L company. We're not a services company. We're a balance sheet company, first and foremost. We think about our balance sheet in terms of spread, fee income, assets under management, and all of that generates different components of a revenue stream. Although we're not a bank, you know, we do have a primary regulator. That's the Farm Credit Administration. We're the only secondary market.
We've got an office that's actually dedicated to us, and pays a lot of attention to us, and we take our mission as a GSE very, very seriously, and included in that mission is a responsibility to be well-capitalized and to be safe, safe and sound. So we are governed by a host of liquidity and capital ratios. I won't get into all of those today, but suffice to say that we are a regulated capital entity. And so as we think about that, it's not dissimilar from how banks allocate capital. We use a risk-weighted asset mechanism to really think about every asset that we bring on our books. And in times such as this, where entities have to go out and raise capital, it can be incredibly expensive.
And so when you are trying to enter a market and you're thinking about the risk and return dynamics, that consumption of capital becomes a very important metric, and we pay very careful attention to that. So we not only look at the P&L dynamics in terms of our net effective spread and our top-line revenue, we also look very carefully at how much capital does each asset really consume. So not every dollar that we bring on our balance sheet is created equal. So really, as you're thinking about this and considering us as an investment opportunity, think of us in terms of our risk-adjusted gross return on allocated capital, and that's that, that column right at the end. And what you can see is that, and let me just, you know, point out a couple of examples, right?
If you look at Renewable Energy , it's extremely accretive in terms of net effective spread at 155 basis points. Contrast that with farm and ranch. You know, it's a full third higher, right, at 99 basis points. But if you look at the risk-adjusted gross return on allocated capital, given the risk profile of the underlying collateral. And I will just posit that Renewable Energy is actually fairly, you know, riskless for us, you know, for a lot of the reasons that you heard from Marc and Zach as they went through it. But just given the way capital is allocated across these segments, they have a very similar profile in terms of, you know, what I would call the risk-adjusted gross return on capital. So we look at both metrics.
You know, how are we taking every single dollar of capital that we raise from, Wall Street, our debt, our securitization, and how are we deploying that effectively to continue to generate that return on equity? So, so that's really how we think about this.
As you look at our profile of our financials, what you'll see, given the way in which we've raised capital fairly accretively over low interest rate cycles, coupled with disciplined asset liability management, and frankly, accelerated by some of these new revenue streams that we've actually brought on with Zach's team over the past five years, we've really expanded our bottom-line net effective spread from what used to be a target of around 80-90 basis points going back five to seven years ago, to now 118 basis points, which is really the high-water mark I'll note as of 2023. So a lot of this has to do with the diversification of revenue streams, and it's something that you're going to continue to hear from us and have heard from us in our different earnings calls.
Well, you know, you can't really be in the lending business without paying attention to credit. And, you know, part of my background before I came to Farmer Mac, Brad recruited me in the fall of 2019. You know, I knew about Fannie and Freddie. I had lived through the financial crisis, you know, in 2007 and 2008. That's when I joined the Fed. You know, the first thing I thought about was, "Well, gosh, what about credit?" Long history in banking, prior to going to the Fed. You know, I had to look twice when I opened up and did my own due diligence, and found that, you know, is it really possible to have an entity with, you know, this kind of a credit profile?
You know, on average, we have about two basis points of credit losses on an annualized basis. And a lot of that had been driven by the fact that the vast majority of our portfolio was concentrated in farm and ranch loans. Marc talked about the collateral and the credit considerations that we look at, and you can really see, you know. And I won't read all of this out to you, but as you compare and contrast us to our peers and to other lending institutions, perhaps with a different product profile, you know, it's you'd be hard-pressed to find another entity with a credit profile like this. Now, this is a real opportunity for us because we've also grown our earnings very consistently. We've grown our capital base very consistently, and that has allowed us.
The solid foundation of credit has really allowed us to now incrementally take on additional risk and go into newer lines of business like telecom, like Renewable Energy , like corporate ag finance, that perhaps don't have the same credit profile as a farm and ranch loan, but that are still very central to our mission, where we can actually play in these markets by taking on incremental risk. And we can really do this because we've built credibility in terms of how we manage our credit, both on a portfolio basis, but also on a loan-by-loan basis, depending upon the line of business. You know, so just moving on, from here, let me, you know, let me sort of pivot to, you know, so where are we really headed?...
You know, I talked about the last five years and the run-up that we saw in terms of growth, the building out of our new business lines, the incredible profitability that we've enjoyed. You know, just in 2023, our net income, our Core Earnings grew by over 35%. We've had an excellent first quarter. You know, and I can, I can throw out a lot of different metrics at you, but you know, this really comes down to math, right? You know, as you grow bigger and bigger, you know, as you look ahead, you know, the number that we, you know, have to sustain to grow at, you know, has been remarkably consistent.
So as we look out over the next two, three, four years, you know, and we think about our strategic plan and our business plan, you know, we project, you know, conservatively, and I'm going to say that these are conservative estimates. We do see a lot of tailwinds that could change some of these projections. But, you know, where we really target being is in the 7%-9% CAGR for volume growth. I also think it's very important for you all to take away from this, that not every single dollar of asset volume that's brought onto our balance sheet is equal to another dollar, and you saw that when you look at our segment profitability.
So when we bring on a dollar of Renewable Energy or telecom, that's much more accretive in terms of profitability relative to, say, a wholesale financing strategy. Low risk, low return, you know, it all checks out. So that's really where we're headed, and this diversified product suite really enables us, and it's mission first for us. And you know, if we fulfill our mission and we continue to diversify our product set, you know, we think we can capture a lot more of the addressable market that's out there, not just in agricultural finance, but as we think about renewables and other areas, and the demand that we see in those sectors, I think we're very well positioned to really capture more market share.
You know, so let me just pivot from sort of our revenue strategy to, you know, how is the sausage made, and how do we really fund our balance sheet? You know, if you go back and I've had this question, you know, from, you know, different investors, as they ask us, "You know, how did you weather the financial crisis?" During, you know, 2008 and 2009, you know, our credit, you know, remained very strong. We did have, you know, a little bit of an aggressive posture with respect to our investment portfolio and exposure to certain preferreds, you know, Fannie Mae preferreds, you know, for example. Since then, you know, we've really sort of taken a hard look at our liquidity investment portfolio, and we've held that.
It's about a $6 billion portfolio, and we hold that purely for liquidity reasons, right? So let me just throw out another metric at you. You know, you'd be hard-pressed to find another financial institution that could say, "Hey, we've got 340 days of liquidity." So what does that mean? You know, go back six months when there was the threat of, you know, the government shutting down, and there was, you know, a downgrade, frankly, of, you know, sovereign debt. You know, we, we did not bat an eyelid. You know, we could go ahead and expand into telecom. You know, Zach talked about the fact that just last year, we grew our telecom portfolio.
We were able to fund that telecom portfolio without really, you know, blinking an eye, and that has to do with the fact that, you know, we have taken advantage opportunistically when we could, and we'll continue to do that to bring on, you know, additional debt. But we have this robust liquidity portfolio that affords us the ability to really weather a lot of disruption, market disruption, as well as financial disruption, that, you know, that can be quite uncontrollable, COVID being a case in point. We have a very disciplined approach to asset liability management.
For those of you who follow financials and the banking sector, you know, asset liability management is this discipline, you know, that perhaps not too many people know about, but sort of came to the forefront, you know, with, you know, honestly, the collapse of Silicon Valley Bank, right? You know, when we saw that just a year ago, and I think it was March, you know, of 2023, you know, it was quite baffling, you know, frankly, to our ALM team, because this is rooted in our DNA. You heard that from Brad. You know, rates go up or down, you know, ±100 basis points, you know, Farmer Mac net effective spread, you know, does not change very much. You know, I started my career in commercial banking, and one of my first jobs was to run an ALM book.
I remember distinctly, and again, I, you know, I had to look twice when, you know, the ALM team showed me, you know, what the stress levels are when we shock our our interest rate profiles. You know, I, I was really puzzled. How can you have just almost negligible variance in terms of profitability when rates go up and down? I remember being in banking, and looking at, you know, 20% you know, change in profitability as being something that, you know, was actually considered pretty good.
So, you know, I'll get a little bit more into some of those numbers, but that is the reason, you know, we're able to sustain this very predictable flow of margin that then translates into this forward-looking visibility that Brad talked about as we bring on an asset, and, you know, that asset continues to generate that long-term stream of revenue, and that has to do with how we manage our asset-liability management. Okay, so Net Effective Spread, very similarly, you know, we expect that we'll have about a 7%-8% CAGR as we look out ahead. Very important to note that we don't do cost-plus pricing. You know, when Zach and his team are out there, you know, they're looking at a lot of different dynamics, and, you know, it tends to be pretty fast-paced.
We've got, you know, our portfolio that's optimized on a daily basis in terms of what the cost of funds are and how we fund it. There's a lot of discussion and dialogue with the business development team, with Zach's team, as they're looking, you know, at the market and what the competitive pricing dynamics are. And just given our funding advantages, you know, we can be, you know, price takers where we need to be, we can be price setters where we need to be. And this is something we don't take for granted, but we can really look very thoughtfully at the deals that come in and make sure that they fit within both our credit box, but also within our hurdle rates....
and our funding and our investment portfolio also contribute to the overall net effective spread, and I'll just say one thing about that. You know, if you were paying attention to, you know, the last bar on, you know, the chart where I talked about profitability and net effective spread, you know, and the fact that we had a 37% increase last year in our Core Earnings , a lot of that had to do with the fact that, you know, we had really raised a lot of cash, as well as a lot of capital when we didn't need it, in 2020, when rates were really low, right?
When Fed Funds rates were at least a full 500 basis points below where they are today, we went out and we raised, through a series of preferreds, but also did $600 million-$800 million in cash funding. And all of that has actually just, you know, repriced as the Fed has raised nominal interest rates, repriced and generated a very nice return. You know, I'll talk about that with respect to our asset liability management, because a natural question might be: Well, what's the volatility like when rates come down? And I'll get into that in just a moment. Okay, so, you know, as we think about our funding segments, and I talked about our liquidity portfolio, this is just to give you a little bit of comfort.
As you look at this, about $6 billion portfolio, a large chunk of this is concentrated in cash and cash equivalents. You know, it's guaranteed by GSEs and government agencies. You know, why is the investment portfolio really important as you consider us as an investment, and you're thinking about, gosh, the banking industry and some of the other entities, you know, frankly, that we're chasing yield? We don't chase yield in our investment portfolio. It's purely for liquidity reasons, and that has really, you know, proven to be the right strategy for us. And, let me just explain that, you know, in a little bit more detail.
The reason, you know, some banks, you know, found themselves in a little bit of trouble last year through their investment portfolio was not because they took on credit risk in their investment portfolio. They chased yield, and they looked for yield at a time when rates were really low, and they went ahead and extended their investment portfolio. We did just the opposite, right? When rates were really low, we went out there, we raised a lot of capital, we layered on a lot of cash, and we kept all of that short, right? We did not chase yield. Instead, we focused on building out and diversifying our revenue streams. We do not run a trading book. We do not have an investment portfolio for anything but liquidity.
So it creates some asymmetric benefits, but we use that to really manage our overall ability to be there for our customers. So it's all about our mission and our program assets. That is one of the reasons why, you know, our investment portfolio did not take on, you know, the level of losses that you might have seen, you know, with respect to other banking entities. So the benefits from our asset liability management strategies, you know, are evident, you know, as I talk a little bit more about how we actually do this. You know, we have a very, very conservative ALM strategy, and it's not just, you know, managing, you know, our margins, but it's, you know, a mantra, you know, within our asset liability management team, is mitigating volatility first. That's the number one goal.
The second strategy is to opportunistically fund so that we can pick up a few extra basis points, that allow us to generate that return, right? We don't do it in reverse order; we never will. We do not actively trade assets. You know, our investment portfolio, I think I... You know, I, I can't say this enough, it's not speculative at all. And we do use derivatives. So, so you know, Brad, you know, as he was talking about the operating model, you know, and as we fund our assets, you know, let me just boil this down very, very simplistically. Maybe I'll just give you a couple of examples, right?
I'm not gonna sit here and speculate on where rates are headed, but I think it's fair to say that we are maybe at a high water mark in terms of where the rate environment is. You know, as Zach and his team is out there in the market, you know, customers are... In general, you know, agriculture and farmers like longer-term, fixed-rate loans. That is an inherent advantage for us. That's why we were created. You know, you heard about all of that. Well, look, okay, if a borrower says, "You know, I want a 7% loan," let's just say hypothetically, you know, "for a period of 25 years or 30 years." Yeah, sure, no problem. We can fund that.
Let's just say we go ahead, and we match fund that, we lock in that, you know, 100 basis point spread that you saw on our Farm and Ranch portfolio, and we did that through bullets. You know, we could lock that in at, you know, issuing an equivalent matched paper at 6%. We could get that 1%. Now, you're gonna turn around and tell me, "Well, what happens when the Fed starts cutting rates, and the yield curve starts to steepen, and that same borrower comes in and says, 'You know, the market rate now is 5%?'" Well, theoretically, we could be losing 1%, right, on that loan, and we'd be underwater, and our profitability and our margins wouldn't be as consistent.
Well, what we do do is we fund our entire portfolio, not just with bullets, but we fund them with callable instruments. And as a GSE, and we were talking about this earlier in the break, you know, Farmer Mac, along with other GSEs, such as the FHLB, Fannie and Freddie, the Farm Credit Funding Corporation, have the ability to issue callable debt. And this callable debt, unlike deposits, is contractual, and it's callable by us, not by the holder of that paper. And that is a very, very important distinction, especially as we're entering what I would call a period of declining rates. So in this particular example, that 7% paper would not be funded with, you know, a 5.5% bullet, which could be cheaper. We would elect to fund it perhaps with a 6% callable, pay up a little bit, right?
Take down our margins a tiny bit because we do anticipate that rates are going to come down, and that borrower. And we would encourage that borrower. We want to retain that borrower. We want to offer low-cost financing to that borrower. That's central to our mission, encourage that borrower, when rates come down to 5%, to refinance and to refinance with us. We'll call that instrument, and then that allows us to maintain that margin of 99 basis points because now we can issue, reissue debt against that original paper that's now yielding 5%, you know, perhaps at 4%... right? And now we've locked in that 99 basis points. That is how we do this, and that's one example of our disciplined approach to asset liability management.
We are not trying to fund this with cheaper bullets and pick up that extra 50 basis points and find ourselves, you know, frankly, upside down in terms of profitability when the rate environment turns on us. So that's a big distinction between us. The second strategy, and, you know, we can, we can probably save this for Q&A if you're interested. It gets very technical. We do enter, you know, swaps and swap transactions. You know, we have the ability... You know, Zach talked about different product structures. You know, you talk about Renewable Energy and project finance deals at different points on the curve. You know, we can take a fixed-rate asset, and we can synthetically convert that into a floating-rate asset and fund it with floating-rate debt, and that's called maturity transformation.
And that's a strategy that we can really employ, which allows us to widen our margins a little bit. We take on a very tiny amount of repricing risk, and I'm going to say that for a portfolio this size and an entity this size, we have little to no basis risk, you know, within our portfolio. And a lot of this is because we dynamically, constantly are optimizing our portfolio on a daily basis. We have a very, very strong quantitative team that is doing this in conjunction with where markets are and where the competitive dynamics are in terms of the rate environment. Let me quickly pivot to securitization. And, you know, Brad talked about securitization. It was a big bubble on that growth opportunities chart, something that we're incredibly excited about.
It's fundamental to our charter, fundamental to our mission. It's just a huge opportunity for Farmer Mac. It is in addition to a number of the things that we're able to do, and it's yielded a number of benefits for us. You know, we've been in the market about four times. We did our first pilot transaction, you know, just in 2021, in the fall of 2021, when the rate environment was, you know, at its absolute bottom, right? And now here we are, just a few years later, at the absolute peak. And during this period of time, we've been a consistent issuer of securitization, one transaction per year since then.
So you might ask, "Why, why do you need to do securitization as a funding strategy when you have this incredible benefit as a GSE to fund on-balance sheet?" Well, you know, there are a few reasons for this, right? We all lived through COVID, 2020. You know, I joined Farmer Mac in January of 2020, and I remember Brad telling me, "You know, our debt is the lifeblood of Farmer Mac." It absolutely is. We don't take our GSE status for granted. You know, I see a number of our board members here, and, you know, I think we had weekly calls about, you know, how are we financing and funding our balance sheet? You know, how is liquidity? You know, what are market disruptions?
You know, when Brad, you know, took the helm as CEO in 2018, the first thing he looked at, he said: "You know, look, there's a lot of opportunities, you know, for us to do a lot," and he went about hiring Zach. The other thing that struck him was, fundamental to our charter is securitization. We should be securitizing and trying to diversify our portfolio of investors beyond just our debt investors. Our debt investors, you know, are very important to us, and they always will be. Financing our balance sheet through debt will always remain our main strategy. But we need a diversification strategy, and we need, we need to bring in an alternative set of investors who cannot otherwise tap into the agricultural market but for us. And so we went about structuring, third-party securitizations. We've never done that before.
So we worked with, you know, large investment banks, and we've just changed our investment bank recently. Through that journey, what we found was the appetite for American agriculture is enormous. We were able to bring on institutional investors, hedge funds, private equities, et cetera, who, you know, came in and wanted to take down, you know, each and every one of the tranches that we offered in all four transactions. Our goal was to build a program out, and we had to dole out, you know, $1 million, $2 million, you know, of our subordinated tranche that Brad described, which was about $23 million. So each of these securitizations have been about $300 million. You know, the A tranche is about 92.5%. It's fully guaranteed by us for P&I.
You know, as you think about securitization, think about it in a few different ways, right? I talked about the diversification of our investor base. Well, that's one big benefit. The second benefit is a long-term source of financing. So when you look at that senior tranche of 92.5%, and that's right over there on that box, the senior guaranteed tranche, think of that as fairly comparable to our debt financing strategy. But now it gives us an ability when there's market disruptions. Oftentimes, you know, issuers cannot go beyond 3 years on the curve. But securitization, when we're funding something that's a long-term fixed-rate loan, allows us to go out much further than that, and so we can really withstand, you know, further market disruption. So that's, that's one way for us to finance our balance sheet.
The B tranche, in many ways, is a substitute for capital. You know, we have tremendous capital benefits. You know, just yesterday, we've issued press releases around our preferred stock and redeeming preferred stock. Well, you know, this is an excellent tool for us because, you know, as we deploy this very effectively, we can get a lot of capital relief because we are subject to some of the Basel regulations. And, you know, we can talk certainly about that a bit more offline. So that's the second benefit that we see from securitization: financing, capital relief, and ability to bring on a different suite of investors. But the most exciting opportunity for us, now that we've done this about four times, and something that we're really embarking on, and Brad alluded to this, is securitization as a product, right?
You know, as we think about our total addressable market, as we think about the different partnership opportunities that have been created by our business development team, you know, our pool purchases that we've, you know, just started to dip the toe on, as you thread the needle across all of that, and you think about this lever that we've now created, this capability, this mousetrap of securitization, you'll layer it on top of all of these other capabilities that we've built. It's going to be very, very powerful in terms of being an accelerant in growing our market share and our assets under management, and we can certainly talk about that more. Okay, so, talked about the four transactions. I'll just highlight a couple of things, which I think are incredibly important because...
Being a consistent issuer in the market, you know, for securitization, is something that only Farmer Mac can do. And the reason for that is we are the only ones who can actually guarantee the P&I on the A tranche. And that's, you know, incredibly important to income investors. In terms of, you know, the B tranche investors, you know, investors who are willing to take on a little bit more risk without that guarantee, you know, what they get is incredible consistency and diversification. You know, Zach talked about, you know, our borrower base, our concentration across commodities, over 100 commodities. You know, we can lend in all 50 states. We're the only ones who can do that because we're the only secondary market, you know, that can actually function as a GSE and offer credit nationwide.
We've really been able to capitalize on that. Investors know that, and every single one of our transactions, regardless of how volatile the market environment has been, and I, and I think it's important to see this, 2021-2024, you know, you all are watching markets very carefully. Markets shut down, they open up. We have not seen any waning through that period in terms of our securitization transactions. We've often had to say no to investors who wanted to take down full tranches.
Something that we've done, you know, which is new, and it's really exciting, you know, and again, it starts to showcase, you know, the benefits of securitization, not just in terms of, you know, financing for us, but certainly in terms of growing our asset base, is, you know, our ability to now tailor our securitization transactions to meet the cash flow needs, you know, of our customers and our borrowers. So if you're an insurance company, you know, you want a wholesale financing product to meet and match your pension liability, then you might decide you want to take on, you know, an investment product that gives you an ability to match the duration of that long-term pension liability.
So if you're a life insurance, insurance fund, for example, you might go into something a little bit longer as we sliced and diced our cash flows. If you're a property and casualty insurance company, you might want to stay inwards of the curve. So, you know, securitization offers us a number of opportunities and benefits in terms of really changing and altering our mix of products, both on and off balance sheet. And this is something that, you know, we're continually testing, you know, the market with, and our most recent transaction had a slightly different flavor to it than the first three ones. Okay, so what are the key takeaways, you know, as we think about, you know, just what the future holds for us? You know, as a CFO, I can't let you all get away without talking about capital, right?
And when you think about capital and you look at this chart, you know, we were $815 million in terms of total capital not so long ago in 2019. Today, you know, we're at about $1.5 billion in terms of capital, right? I mean, you can't have enough capital. You just can't have enough capital. But it's important to use that capital and to deploy that, you know, very efficiently and very effectively. You know, Brad alluded to this in his comments. You know, if you're an entity with a lot of capital, well, maybe your earnings are scrubbed off a little bit. Maybe you don't have the return on equity that you might have if you have, you know, just a ton of capital that you aren't putting to work. Well, that's not true for us, right?
We have grown our capital such that we have, from a regulatory standpoint, over $550 million in terms of surplus. But we've done that while also diversifying our revenue streams, while also maintaining a liquidity profile, as I noted, of greater than 300 days. And we've grown our earnings 37% year-over-year. Our share price has actually grown tremendously over the last 5 years, 14% over a 10-year period, 200% since 2019. And we've done this and also rewarded our shareholders through dividend payouts. But we've been very responsible in terms of calibrating how much of a dividend payout we want to, you know, give back and how much we want to keep so that we can actually continue to grow and be, you know, profitable in these accretive lines of businesses that are also capital consumptive.
You know, I talked about credit and how we've had historically two basis points of credit growth. I think it's really important for us to go eyes wide open into all of this, you know, and I'll just note, as we go into lines of businesses like telecom, like Renewable Energy , like corporate ag finance, we can't go into these lines of businesses that have, you know, bigger loan sizes, $15 million, $20 million, $25 million, relative to farm and ranch loan of $1 million, without a bank of capital that can really be there to not just be defensive, you know, should we have, you know, an unforeseen credit event, but we can also use that to take advantage of opportunities. You know, if it's a $191 million syndicate, why do we have to be there only taking a small chunk?
If we have a bigger capital base, maybe we can take a bigger slice of that. Gives us a tremendous amount of operating flexibility, and all of that means that we can actually grow our balance sheet and be there to fulfill our mission. We have three sources of capital. You know, Core Earnings and retained earnings. Our excellent credit profile has allowed us to continue to grow that bank of capital. That's contributed to that $1.5 billion. We've been very opportunistic in terms of how we've tapped the preferred market. You know, if you're looking at this, you know, 125 preferred, Series G that we did in May 2021, and if you think it's a typo of 4.875%, well, it's not a typo. That's really what we raised that. That's perpetual fixed-rate capital.
That's probably always gonna stay on our books. Today, the Fed funds rate is not the 5%, and this is long-term fixed-rate capital. That's been a big piece of why, you know, our earnings are what they are. But I think what's more interesting and more important is it's gonna allow us to really diversify into these new lines of business and do that, you know, without really having to worry about what the credit markets hold for us in terms of funding. And finally, the third source of capital or capital relief is securitization that I noted. As we sell the B tranche, we get capital relief on our balance sheet. You know, I talked about, you know, the growth strategies that have resulted in AGM, you know, our stock increasing by 200% since 2019.
Compare that to a 90% cumulative growth in the S&P 500. You know, when you think about dividends, so okay, so for those of you who are interested in growth, that's what we have for you. If you're interested in dividends, I mean, you know, we did very well last year. We increased our dividends. We used to increase our dividends by single digits. Last year, we grew 37%, we grew our dividends by 27%. If you look at our dividend yield coming off of a high-water mark, we're at 3.1%. The average dividend for the S&P 500 is 1.4%. We've consecutively increased, as Brad said, our dividend payments, you know, for the last 13 years.
You know, I didn't spend a lot of time talking about, you know, just operating efficiency and being good stewards of our expenses. It's incredibly important to us. You know, a metric—you know, another metric that I, I couldn't believe my eyes when I saw it, when I was looking at Farmer Mac's financials, when I was contemplating joining Farmer Mac, you know, was just the amount of Core Earnings . This is not EBITDA, this is not revenue. This is Core Earnings or net income per employee, clocks in at about $900,000 per employee after tax. And we do that because we pay very close attention to how we manage this book of business, you know, that's a little shy of $30 billion. We can do that with an operating efficiency ratio of less than 30%.
That's incredibly important for us because we, we have 185 talented employees managing $28 billion in assets. Yeah, unheard of when you think about that, when you, when you think about a banking structure. You know, when you think about return on book value or return on common equity, you know, we, we conservatively band it at 14%. But, you know, if you look at this chart and you can see 2019 through to 2023, we've been in the 17%-19% range, and we expect to stay right there. But our hurdle rate is about 14%.
And again, you know, 90% of our net effective spread, our revenues, you know, comes from our disciplined ALM management strategies, and that enables us to continue to grow our capital and that consistent dividend growth. So let me just end, you know, right where Brad began, right? Why invest in Farmer Mac? Well, why not? We're uniquely positioned. We're the only publicly traded government-sponsored enterprise, right? You know, we have a focus on mission, and I really think, you know, what's good for the heart is good for the wallet. What's good for mission is good for profitability, and we've really proven that. You know, I want to reemphasize the fact that we make no trade-offs.
We can be well-capitalized, we can grow, we can be responsible with our credit, we can have liquidity that's greater than 300 days, so that we can weather a lot of market disruptions. Our Asset Liability Management, you know, strategy when we just recently did a stress test on our around our Asset Liability Management, you know, here we are at the peak of a rate environment. If rates go down, you know, 200 basis points or 300 basis points, well, guess how much our profitability moves? It moves to the up, but it moves by about 1%-2%. If rates were to go up 100, 200, 300 basis points, yeah, we may scrub off maybe 0.5 percentage point in terms of our Net Effective Spread, everything else remaining equal.
So extremely consistent, extremely resilient, so all good reasons to invest in us. Focused on growth, we talked about that. New lines of businesses, incredible tailwinds in terms of, you know, just demand in the electric sector, you know, Renewable Energy , telecom, et cetera, and we're continuing to deploy and make a lot of head count investments there. And, and frankly, you know, we have shown you consistent performance, and we've rewarded our shareholders not just through, you know, consistent growth, but through this commitment to being, very careful and calibrated as we think about our dividend payments. So with that, let me just stop there and, turn it back to you, Brad.
Well, thanks, Aparna. That was terrific. At the beginning of my comments earlier today, I've made a couple of pretty strong claims. The first was that in terms of total shareholder return over the last 1, 3, 5 years, we've been top decile. Actually, if you look at the New York Stock Exchange financials, 79 in the index, one of the very, very few financials that has succeeded our total shareholder return over this time period is Blackstone. Blackstone currently trades at 4 times the P/E ratio of Farmer Mac. I claim that we did it with about a quarter of the earnings volatility of the index, as measured by standard deviation over that period of time.
And I hope through what you've seen in charts, but also explanation of our disciplined approach to how we manage spread at Farmer Mac, you understand why that is, and why that's very likely to continue into the future. And for me, as CEO, the most audacious claim that I hope we have illustrated in some ways for you today, is that you can take a very talented team of executives and a very motivated, mission-driven, committed team of employees, who are at Farmer Mac because they believe in what we're doing, because they have specialized expertise in operations and finance and agriculture, in all of our sectors. You can take those people and get them moving in the same direction under very, very clear objectives, and you can deliver. You can execute and deliver. And I just don't see any reason why that shouldn't continue into the future.
So we're gonna move into a Q&A period right now. I'm gonna bring back up to the front, I think we get nice high stools, Zach and Marc and Aparna. And Jalpa is going to be very busy because she has to work to handle mics that are gonna be in the room, but also she's got people online who are gonna be lobbing in questions, and she'll figure out how to balance and prioritize those to the extent that there are questions. But we really want to just take the time we have left, and we'll try to break the formal Q&A in about 20 minutes, at about 12:30 P.M. today, so you can get on to your day or linger with us afterwards and have informal conversations. We have actually more directors who have now joined us.
But we'll try to, to the extent there are questions, we'll try to. Oh, Todd, I didn't mention you. Thank you. We'll try to get to the questions we have. Hopefully, there are some, and further clarify for you what this Farmer Mac is all about and why this business model is so powerful. Charlie? Oh, let's-
If you, if you're forecasting that you're gonna grow your book by 7%-9%, and I just compounded the numbers, so let's say the $28 billion goes to something. It goes up by around 50% in a 5-year period. And I'm assuming that that's roughly $45 billion, and I'm assuming the margins, the spreads get to. They get richer. I'm assuming they get richer. How much richer could they get? And what does that bring down to sort of a, how much more expense structure do you need to get there? So what type of, I hate to ask the question, but what type of earnings power would you envision that realizing in the 5-year timeframe? I'm sorry if that's-
No, that's a great question.
I'm sorry for that.
I mean, we have told you that kind of base case, yeah, 7-9. That's kind of base case, and we've-
So take 8%-
Hopefully, also-
If you, if you take 8%, Brad, and just compound it, that's the big one.
Yeah. So you think about how we manage it. Aparna didn't spend a lot of time on operating efficiency, but if we're disciplined in how we manage NES, recognizing that a little bit of a headwind is that as interest rates come down, that treasury earnings comes down a little bit. But as we grow further, the diversification of our business into a more accretive lines tends to be an offset to that. And if you consider that, you consider a management to an operating efficiency of about 30%, where we have been, and you consider maintenance of capital at about the levels we have on a per asset basis, everything should kind of move proportionally. I'll turn to Aparna to see if she wants to be bolder and make-
Sure
... a projection about how those relationships could break in the future towards greater efficiency or not, but it should move together.
Yeah, I mean, the only thing I'll add is, you know, if you think about our efficiency ratio, you know, we keep signaling that we want to be, you know, 30% or lower. And we often surprise ourselves thinking, you know, in a particular quarter, we could be over 30%. But we do a pretty good job of managing, you know, our base of expenses. We keep a real close eye on that. But a large part of that has to do with the fact that we also surpass our own revenue expectations, right? And so when you look at that and you look at sort of, you know, the pace of growth in terms of volume, you know, we've been at about 25%-27% in terms of operating efficiencies.
We've got some opportunities now as we think about, you know, just our capital management streams and being much more disciplined in terms of, you know, how much capital we want to raise, given that we've got now new levels of capital. You know, I, I would, I would actually try to be a little bit bolder, Brad, and say that, you know, I think, you know, it's not just on top line, but I think in terms of our Net Effective Spread, but our Core Earnings as well, you know, we've set ourselves up for a little bit of an accelerant.
The earnings should grow faster than that.
Yeah, I don't think it'll be linear. I think you'll see a little bit of an exponential. I'm not gonna say it's not gonna be quite a hockey stick, but you're gonna see, you know, a little bit of a nonlinear to the positive.
I just want to ask one last question, but I have to leave, so I, I apologize. How does the government screw this thing up?
A couple points I'd like to make before turning it to Todd is that you say, "Oh, we have five presidential appointees in the boardroom." They have never arrived with an agenda, ever. I've never had a call from Capitol Hill, "Could you do this?" Ever. This is very different than Fannie and Freddie of 25 years ago. But Todd, maybe you can help kind of elaborate on that and legislatively and other ways, what could screw it up?
Look, I think the one thing that I'd say about Washington is agricultural policy has got a unique place in Congress. It's not partisan; it's regional. And with that, there's a tremendous amount of support, whether it's House, Senate, Dems, Republicans, for agricultural policy. And so, you know, uniquely, what I was mentioning about a farm bill is it happens on a five-year cadence and a five-year cycle. Now, granted, this current farm bill is extended by one year, but Congress is in the process of doing that. It's one of the few pieces of legislation outside of appropriations that is done on that type of cycle. So there's just a tremendous amount of support for agriculture, and I think that's the piece I'd leave you with. I mean, of course, you know, you know...
I would say that Congress has gotten the key things done that it needs to get done. I mean, if you think about the debt ceiling bill, they got it done. Appropriations got done. It might take a little bit longer than it traditionally has, and it's getting a little bit more difficult to do those things, but Congress is focused on delivering. And so I'd say in terms of a farm bill, my expectation is because of the support for American agriculture that you'll see a farm bill.
... I think Bose had a question.
Hi. Good morning. I really appreciated the overview of the segments that you guys gave and the case studies for each. And you kind of touched upon it briefly in your 2026 volume targets, but just how do you see the makeup of the portfolio shifting over the next couple of years? You know, what segments do you think could increase, decrease, and what would be the drivers behind that? Thank you.
Yeah, a great question. What we did want to highlight was the diversity of the model, right? And so, I think when you think about the business drivers there, there's a couple key ones that stand out, right? Renewable energy, tremendous growth. I mean, with the electrification needs for data centers, low power generation costs for Renewable Energy , there's definitely significant upside there, and we see tremendous opportunities to continue to potentially double our portfolio on an ongoing basis. Flip over to the other side, farm and ranch. Well, we're talking about automation, right? We're talking about disrupting the ag lending cycle. It's been operating as it had for 50, 80 years. Our goal is to dramatically shrink that time and make it more automated. You know, can a farmer get a market loan from the secondary market on his phone?
Yeah, they actually can. And you think about the under-leveraged asset class of the farmland space, plus all the institutional demand coming in. We think a big portion of our growth objectives is going to be in the automation, and leveraging the capital markets and the secondary market for farmland growth. And then you kind of layer on our other portfolios, right? Wholesale finance is there. There's a different market there because we're supporting financial institutions that also want to originate loans. Telecommunication has strong broadband opportunities to bridge the rural divide. So we wanted to highlight that every single portfolio that we have has tailwinds over the foreseeable future to drive that. Now, I would say when you look at the ends, farm and ranch and Renewable Energy , probably have a more significant growth opportunity than the others.
About, about spreads and what the potential, sort of walking through the impact of lower rates on the spreads, should we really look at the investment portfolio as the main area? And also just talk about the asset side. Could there be some offsets with the diversification you discussed?
Do you want to-
Yeah. Yeah.
Yeah, no, that's an excellent question, and I, you know, Bose, I alluded to the fact that, you know, we are constantly stressing our balance sheet, and thinking about our net effective spread, you know, if rates were to go, you know, up or down. And let me just offer this, you know, perhaps as, you know, a form of guidance, right? All things remaining equal, if we were to see a decrease of 100-300 basis points, which is not out of the question in terms of a decrease in Fed funds rates and a general steepening of the yield curve, and when we model this, we do this at all points on the curve, we expect at a portfolio level, right, our net effective spread to actually go up with a decrease in the rate environment.
So I want to be very explicit about that. There are a couple of reasons for that. You know, one is, you know, Zach alluded to this, right? As you think about the two areas of growth from the asset standpoint, we're putting a lot of, you know, our backs into Renewable Energy and telecom, and these are NES accretive businesses. A lot of them tend to be floating-rate loans. We can fund that with, you know, little to no margin compression. So we expect to see, you know, just that mix shift towards, you know, NES, you know, NES accretive loans.
From an investment portfolio standpoint, you know, I think we've capitalized, and we didn't intend to capitalize on it, but we've capitalized pretty substantially on the fact that we raised all this money in 2020, you know, at very low rates. And they've really repriced very effectively, but we've started to layer in duration into the investment portfolio such that, you know, at this... you know, even in this inverted yield curve environment, you know, we're locking in, you know, north of 4.5 for a period of 3-5 years.
So the investment portfolio on a quarter-by-quarter basis, you might see a little bit of volatility, but we're factoring all of that into the first set of metrics that I gave you, which is if you take that entire portfolio, shock it for all of these dynamics, and rates go down, if the Fed is expected to cut rates as it was, you know, by about 150 basis points over the next 15-18 months, we will see an increase in our Net Effective Spread. And if rates go up, you know, we might see a slight scrubbing off of our Net Effective Spread, but it's going to be very, very marginal.
And the only reason we might see a scrubbing off is because we've got a tiny amount of, you know, I would say, basis risk within, you know, our SOFR portfolio, which has to do with the fact that there's term SOFR versus daily SOFR, and there's a little bit of a lag. But that's the power of our, you know, of our asset liability management strategy.
Zach, I think a second component, though, of Bose's question was, what about credit spreads in the different segments of business? Even if we're running a matched book and not subject to interest rate volatility in a decreasing or increasing rate, we are subject to basis risk or credit spread risk in the lines of business. Where do you see that?
Yeah, I mean, first and foremost, we're a market-priced market. We buy market-priced assets, right? So we're never going to be below or above the market. We're going to really follow what that is. And if you look at where we're investing our resources and people and support, and Marc and I touched on this, Renewable Energy , telecommunications, and corporate ag finance. The net effective spread on those transactions are very accretive to our overall portfolio. You saw it on the profitability chart that Aparna went over. We anticipate being able to take advantage of that growth, even though the investment in those resources creates more compensation, more G&A to cover it. But that incremental profitability and those higher returns more than compensates us for that.
And then at the other end of the space, farm and ranch, and you saw the farm and ranch segment at about 100 basis points net effective spread. So you, you have to understand there's numerous products in there. We have a large wholesale finance portfolio, which got highlighted as a fairly low net effective spread, but very accretive from a return perspective. When you look at our core farm and ranch loan purchase portfolio and our USDA portfolio, those are healthy-
... margins. Those are healthy net effective spreads. So when Aparna said when, you know, rates come down to 100-300 basis points, we're actually going to make money, I think we're actually making money on the asset side of it as well. Not only from the fact that credit spreads would probably widen in that scenario, but the fact that we're going to have more volume as farmers and ranchers try to refinance their transactions that they've been holding on for the last 2-3 years at 7%-8%. So I think the dynamic of volume and rate is very beneficial if rates come down.
That's excellent point.
Good afternoon. Thanks for taking my question. It relates to the Farm Bill. I know on the first quarter conference call, we talked about it a little bit, but a couple of items were brought up about increasing the acreage that can be financed in farm and ranch. I believe it's capped at 2,000 now. Second part was maybe bypassing co-ops in the utilities business. Could you talk about how that might accelerate, you know, in terms of the total addressable market and what the growth rate might look like? And the 7%-9% guidance that you provided, I assume that is the Farm Bill as it is today.
7%-9% assumes that there are no additional kind of gets from the farm bill. But it's interesting, there are four specific asks that we have for the Farm Bill. I want to be extremely cautious about expectations. Todd said, "This is just getting started," when G.T. Thompson, the Chair of the House Ag Committee, releases on-
Tomorrow
... tomorrow. And when this starts, that's the beginning of the sausage-making process. But the good news is that in both the House and Senate versions, we have two or three of our four asks in both, and we have some ability to potentially get a little bit more, and we have a significant risk that we lose some of that during the process. So I would be very hesitant to project what exactly we end up with at the end of the day. The three of the four asks really don't expand our market. They expand and improve the efficiency with which we can get to the market. In one case, we're actually expanding the market, and that's probably the most difficult, quite frankly, for us to get. Todd, do you have...?
Yeah, I would just say in terms of what Brad was saying, you know, with the items, the House and the Senate Agricultural Committees have posted summary documents, title-by-title summaries of what's potentially in. The devil's always in the details in terms of what, when the legislative text comes out, so that's what we'll be looking for tomorrow, is specifically what potentially is in the House bill. Now, I always use the analogy of where we're at in the process is there's a long way to go. We just call it. I always use a World Cup qualifier for the soccer fans out there. But, you know, we, we've finally entered the World Cup. We're in the group stages right now.
We're in pool play, and once you start moving through the process of committee, floor, conference, those things, it's the knockout stage on each one of those. So there's an opportunity, for us to be able to include things, that we would like to see within our legislative. There's also a chance that potentially those things could be taken out. So it's a, it's a long game, and we're just at the beginning of that.
But to go, you know, answer your question another way, obviously, because we're pursuing this and, you know, Todd didn't spend a lot of time talking about the fact we've been, and Todd has been laying the groundwork for this, not for months, for years. It's a long process. For years, and we're in there now. We're playing in the World Cup. So the fact that we have been pursuing it suggests, and you should conclude, that anything we get out of it is potentially accretive.
Question for Aparna. If I understand your financials right, I see about $5.6 billion of callable debt against just under $27 billion in total. And so how do you decide what's the right amount that needs to be callable? Because, like, in theory, there are no prepayment penalties on your borrowers, right? So in theory, they could all prepay quickly or-
Well-
Nothing.
Well, not so, because we have a fixed-rate book and a floating-rate book. So we would issue callable debt really only against our fixed-rate book, and then we are only really subject to risk of not having callables on the component of our book that is an open prepay asset. So if you think about, you know, project finance or you think about, you know, our rural utilities loan purchase, you know, very classic G&T purchases that we keep on our books, those do have yield maintenance against them. There we might, you know, we might actually try to use a swap or a derivative strategy to pick up, you know, a few basis points opportunistically without taking on any basis risk.
But where the callable strategy really comes into play predominantly is on our open prepay assets, and the largest component of that is our farm and ranch portfolio, most of which tends to be longer-term, fixed-rate, open prepay loans. So the example that I provided, and the reason we have only about $6 billion, is we've got kind of a 50/50 mix, usually in terms of fixed and floating-rate assets. And of that fixed rate, 50% fixed rate, not all of it is open prepay. That's why that $6 billion of callables kind of protects us pretty well, you know, when we go into a falling rate environment.
And by the way, I mean, that mix of floating to fixed has obviously started to go up a little bit more because our borrowers are savvy and, you know, we have a product which is a five-year variable rate product that's become much more popular, and Zach and team have sort of resuscitated that from the last few years. So that's really how we think about it, but we do a lot of dynamic sort of hedging at a portfolio level.
Thank you.
Hopefully, that helps.
Jalpa, did you say we have someone online? I'm just concerned about that we make sure we respect them, too.... Okay, good.
Okay, I have a number that fascinated me is 10% of farmland value is mortgaged. Only 10%. I mean, I know in the residential market, it's 30%.
Actually, let me clarify that. 27% of farms are encumbered. If you apply about a 40% loan-to-value to that, that gets you to 10%. So there are two cuts to get to the 10%.
So, okay, so, two questions about that. One, I mean, 10 seems awfully low. There's the 73% that are not borrowing. Are there any trends or opportunities where that 10% becomes 14% down the road?
Yeah.
And then, 2, you never have any losses, so I presume within your, the 10%, you're going at the prime market. Do you have any feel for what the prime market is versus what we call the subprime market, where at the moment, you're not accepting the credit?
Yeah, Zach, maybe you can talk about generational shifts and other things that could accelerate that. And Mark, maybe you can talk about, give a little bit... show a little bit about what we're thinking about in terms of loan-to-values.
Yeah.
Yeah, so we mentioned this in our case study, or our discussion of farm and ranch. As generational transitions are starting to occur, I mean, the farmers that have owned this land, a lot of them came from-
... the financial crisis, right? And that amount of leverage, and seeing what happened and transpired there, has just completely shifted their mindset, but more important, the lending mindset, right? And part of the reason Farmer Mac was created, and changes in the Farm Credit System, the lending landscape occurred, so that would never happen again. And so those two components created this scenario where there's no leverage or don't want any leverage on their farmland because that's their most valuable asset, that's their equity. So as this transition shifts, right, to their sons or daughters, or selling it to new investors, or selling it to institutional investors, there's a different view of leveraging that asset, right?
Because I think these, especially institutional investors, understand the components of, "I want to leverage my equity in this investment to really get my return." That being said, there's also a focus that we have on young, beginning, small, and disadvantaged farmers, right? The ones that potentially don't have the best options or alternatives to financing that we can further support. Does that shift the credit box? Maybe modestly, but we're also working with other partners to help manage that risk appropriately. But again, that's a big focus for us, and I'd say a relatively untapped market that we haven't looked at. And the last is, I mentioned this, institutional investors. They love this asset class, which can be seen by our securitizations. If they could buy as much of this asset as they could, they would.
Fortunately, there's not a lot of farm supply, but they are raising a significant amount of funds and leveraging other originators in the market to get interest in that asset, and they want to use leverage. And their leverage profile is much more in the 35%-40% range. So it's these small changes around the edges that will start ticking that up, and we're trying to put all those pieces together to really open that market share for the secondary market.
Yeah. Boy, farmland is good collateral. And, and by charter, we're limited to an 80% loan-to-value. So in my mind, I don't think there is any second subprime opportunity for us. And when I think about ways we can grow and be a little more aggressive, it's in terms of process. We talked about how we can be more efficient in terms of appraisals, you know, down the road, and also our underwriting process we can make more efficient. So I, I kind of view it that way. We just have really good collateral.
Yeah.
So, a question we got online: Given crop prices are down, farmer optimism is low, is this a good or bad environment for farm lending? Does this create greater demand, or are farmers reining in borrowings in such times?
Good. Zach?
It's definitely increasing demand. Well, you know, net farm cash income is still above the five-year average. It's come down significantly over the last two years. And what does that mean? Well, a borrower needs to leverage some of that equity. We just talked about low LTVs, leverage the equity in the land to support that reduction in commodity prices, right? Input prices and financing costs still remain high, so that squeezes that profit. How can they support their liquidity? We've talked about this in our case study, and their working capital, and it's leveraging the equity in their land, gonna get that liquidity to see them through this cycle. And that's what we've seen through the cycles, right?
We've seen 2019, 2018, 2019, there were some stress times there, and the borrowers leveraged the equity in their land to rightsize their working capital. And then commodity prices increased the post-COVID, and then they used more of the equity in their land for acquisitive acquisitions. Right? When farm land, farm land comes up for opportunities, they want to acquire it, and leverage the equity in their land. So, you know, Mark, maybe a good segue to you. We don't see a lot of incremental stress in this environment. Is it different than it was the last two years? Yes, but the borrowers have been in historically good shape and have a lot of equity to kind of support them through this cycle.
Yeah. Yeah. I mean, you've seen our, you know, very long-term credit statistics, and we've been through lots of farm cycles before at Farmer Mac, and so we're not concerned about it-
Yeah
... is the short answer.
Yeah, I'd like maybe the last word on that, and then we will, we'll break on the formal part of this meeting. But, the question was about kind of sentiment and income in rural America. And income is going to be down compared to the record highs of 2 and 3 years ago. And that's something we pay a lot of attention to. It does not, overall aggregate income projection does not influence individual credit scores, that we do not see that as, portending, future stress. We look at every borrower based on their own merits and their own liquidity....
I would point out that headlines in agriculture, you seldom hear the article or read the article about, you know, the farmer or farm family that's doing really well and has made a record income and been able to buy 2 new million-dollar combines in the last 2 years. You do hear the stories about a family that might be struggling with water resources in the West, or with drought in the Midwest, or with a virus that is wiping out a livestock herd, or generational transfers, or mental illness. That's the predominance of the stories that we read in mainstream media, but that is not all of what's going on in rural America. As we tried to illustrate in the film, there's a lot of very positive things going on in rural America, and farmers are not reacting to one income projection adjustment.
They're extremely savvy. They're making decisions for a year or two, three years from now, based on their individual circumstances. We highly respect that, and we spend a lot of time thinking about it because, again, that is the expertise of Farmer Mac, and that is our focus. And it's yet another reason why we'll remain mission-focused, but we'll why we will also turn in great numbers going forward. So I'd like to conclude with that. Thank you. Go ahead.
Sure. I think Kate and then Brandon.
This one we're a part of it, kind of, together, so we talked about-
So, are we letting people go, or are we...?
So you talked about rebranding a little bit. I'm curious, kind of, where you think—like, what you think the optimal outcome for rebranding is, and then maybe, Aparna, you mentioned about the efficiency ratio, and I'm curious if there's an opportunity to, like, really lean into this rebranding and maybe either push that number up towards the 30 number or maybe just keep it at the current-
Lisa
... level rather than, you know, derive the leverage that you were talking about.
Yeah.
Do you-
Yeah, go ahead.
Do you want me to start, or you want Lisa? I mean,
No, please.
Look, I mean, I think the one thing to think about branding is, there's various elements to the branding element. So we talked a little bit about just,
... in my world, in this policy sphere, of thinking about Farmer Mac in terms of all the authorities that we have, so totally fulfilling our mission. So we do have our farm and ranch product. We do have the utilities authority. We do have the ability to do ag, corporate ag finance, and so it's those pieces of how we think about how we message and look to folks, of being able to communicate and talk about those things that are important in the political sphere. Obviously, for Zach and his team, there's a part of the rebranding for Aparna. I'd say also from a thinking about how we talk about Farmer Mac, when I came into this role, we always talk about it from the finance side of things.
We don't talk about it from the investor side, so there's a lot of investors that invest in Farmer Mac because there's a positive return in it. That's a part of a story in my space that we don't talk about enough, and so part of the rebranding initiative is to make sure that we're fully encapsulating how Farmer Mac fits into that financial ecosystem and why it's an essential function.
Yeah.
To answer your question, go back to your question, I... There's something I was interested in doing because we have a very diverse group of stakeholders, Capitol Hill, very diverse set of equity, debt, preferred, securitization investors, our employees, various regulators. And being able to tell who we are in a cohesive way is something that we just felt we could do better. And so I'm gonna put Lisa on the spot. Lisa Meyer is head of our whole marketing and communications area. She joined us about six months ago with 25+ years of Wall Street marketing communications experience, and let her give you her perspective.
Thank you, and I love the question. I'll just echo what Todd and Brad said, really the rebranding is to create awareness across all of our offerings, from Wall Street to Main Street and everything in between. The way that we were positioning ourselves in market, it wasn't quite clear to those who were being introduced to us for the first time, and even those who have been looking at us over the years. So what the rebranding does is it lifts us up, and it's more inclusive, and it's stronger across all those constituent base to create awareness, not only in newer markets, but strengthen and broaden the awareness with our legacy markets. So that's...
If I were to give it a high-level goal, there's a lot of work that, you know, underlies all that, but that's the overall goal.
I think you had a question about our efficiency ratio-
Well, yeah
... with respect to-
If the rebranding were to really pick up, do you feel that there would be an expense structure associated with that rebranding?
Yeah, I mean, you know, I think it's just a redeployment of, you know, our existing dollars. I'm gonna say that it's gonna be a rounding error, to be honest, in terms of it's not gonna... You know, the only thing that could really move our efficiency ratio are some of the large-scale investments that we're making in terms of modernizing our infrastructure. But, I think our rebranding efforts, you know, you might see one or two additional headcount, to drive that within Lisa's team. But, you know, but I think it's more the intentionality that goes with, with the effort rather than, you know, the dollars and cents that really accompany it, that-
Yeah
... you know, would affect our efficiency ratio.
Yeah. That's exactly right. We're scrappy, less than 200 employees. When Lisa came on, we did make a commitment to some... a couple of additional people in that area, but you're not gonna see multimillion-dollar national television campaigns. That's not what it is about. Social media and our very targeted markets provide so much more opportunity to be effective with fewer dollars.
... Hey, good afternoon, and thanks for putting on the event today. Just had a quick question on net effective spread. I know the Treasury segment had a really strong 2023, and this is a bit of a technical question, but just wondering if you can go into detail on how exactly, spread revenue is derived across the different lines of business. I know you mentioned it's based off market rates on the asset side, but-
Yeah.
Just wondering if you could provide some detail.
Yeah, absolutely. I'm gonna sort of try to simplify it because, you know, it gets complicated fast, right? But, you know, let me just be clear. You know, we use essentially a funds transfer pricing mechanism where we allocate and strip out the effect of rate volatility so that Zach and his team, as they're, you know, thinking about the market, aren't worried about managing an interest rate risk dynamic. We leave that to the Treasury and the ALM team. That said, we fund and we manage profitability as an enterprise. So what does that mean? When we fund our $29 billion of debt holdings, we will look for opportunities to fund on points on the curve that we can then pass on those benefits, you know, to our customers.
So one example of this is, you know, I think there's been a good partnership, you know, between Zach's team and the Treasury team in terms of looking at new product structures where we can have, you know, some lockout options, et cetera, callables that could get layered in, that, you know, could yield, additional spread that would allow us to capture a little bit more market share when we think about competitive pricing. That said, you know, we do that on a deal-by-deal basis, and we capture profitability that way, and our margins, you know, sort of play out, because we match fund the duration and the convexity of our asset side of the balance sheet with the liability side of the balance sheet.
I gave you an example of, you know, using callables, you know, when rates are really high, and then calling that, and then refinancing that, and then retaining a lot of that volume, and maintaining the margin as well. You know, I think the second part of your question related to, well, how do you look at every individual segment? You know, in that particular case, we have a mechanism by which, you know, we can say you strip out the interest rate risk, that's inherent, right? You know, if that Treasury went up and down, you know, relative to 2022, it went up about 37%. We don't pass on those profits. We don't think of it as profits. We think of that as interest rate risk management.
We don't pass that on to the segments because that can create some inherent pricing volatility. So, we manage, sort of that dynamic of, you know, constant repricing and exposure to nominal interest rates through our interest rate management processes, and we'll use hedging instruments to really mitigate the impact, you know, if the rate environment goes up and down. But we don't factor that piece into our pricing. What we factor in is sort of the dynamic process of funding an asset relative to what the competitive landscape is and how we can actually fund it based on what our debt holders are willing to pay for us.
Good. We are going to adjourn with that question, but that is the adjournment of the formal session. Again, I'd really encourage you to stick around, have some lunch if you haven't had some lunch. Management and a number of board members are going to be here, at least for a while. We'd love to just have a chance to say hi and hear what additional questions you might have. So thank you very much.