Good day, and welcome to the Farmer Mac fourth quarter 2019 investor conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Brad Nordholm, Chief Executive Officer. Please go ahead.
Thank you, operator, and good afternoon everyone? I'm Brad Nordholm, and I'm very pleased to welcome you to our 2019 fourth quarter and year-end investor conference call. We have a number of positive developments to discuss today. Before I begin, I need to ask Steve Mullery, our General Counsel, to comment on some of the forward-looking statements that management may make today, as well as Farmer Mac's use of non-GAAP financial measures.
Thanks, Brad. Some of the statements made on this conference call may be forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance, and we may not be obligated to update these statements after this call. We caution you that forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from the results expressed or implied by the forward-looking statements. In evaluating Farmer Mac, you should consider these risks and uncertainties, as well as those described in our 2019 annual report on Form 10-K filed with the SEC this afternoon. In analyzing its financial information, Farmer Mac sometimes uses measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States, also known as non-GAAP measures.
Disclosures and reconciliations of Farmer Mac's non-GAAP measures can be found in the most recent Form 10-K and earnings release posted on Farmer Mac's website, farmermac.com, under the financial information portion of the investor section. A recording of this call will be available on our website for two weeks, starting later today.
Thanks, Steve. Good afternoon to everyone? Thanks very much for joining us. Today, I'm going to provide a high-level overview of our 2019 results. I'm going to turn the call over to Zack, our Chief Business Officer, who will discuss customer and market developments. To Jackson, our Chief Economist, who will give you an update on current agriculture environment and related credit conditions. Finally, I'll turn the call to Aparna, who joined us as our Chief Financial Officer in early January of this year. She'll spend some time introducing herself, share her initial observations about Farmer Mac, and review our financial results. Well, it's a pretty lousy day in the markets today, but I'm happy to report that Farmer Mac had an excellent year in 2019 on all fronts.
Our outstanding business volume grew $1.4 billion during the year to a record $21.1 billion, while core earnings increased 12% from 2018 to a record of $93.7 million. Our growth and strong financial performance in 2019 can be largely attributed to closely aligning our business development efforts with our multi-year strategic plan that we worked on throughout the back half of 2019. As you saw in our press release earlier this afternoon, we announced a $0.10 per share increase in our quarterly common stock dividend to $0.80 per share. This reflects our board's decision to maintain our common dividend payout target as a percentage of our annual core earnings at approximately 35%.
In deciding to increase Farmer Mac's common stock dividend and maintain our payout target, the Board comprehensively considered our strong capital position and the consistency of an outlook for our earnings, along with the size of our balance sheet and the need for capital to fund significant growth objectives identified in our strategic plan. We also want to make sure, in thinking about dividend declarations, that we're meeting all of our regulatory capital requirements and our capital metrics established by our board. These actions are consistent with Farmer Mac's goal of providing a competitive return to our common shareholders' investments through the payment of a cash dividend and a payout ratio of core earnings that's approximately in line with those of other financial institutions.
To better execute upon our mission of financing rural America, our long-term strategic plan's objectives emphasize innovation in how we acquire and retain customers, as well as how we develop new products. Zack Carpenter, our Chief Business Officer, and Brian Brinch, our Senior Vice President of Rural Infrastructure, have taken the lead in these efforts over the last year, and they've made significant progress towards our goal of becoming a more efficient organization and in building and maintaining strong relationships with our customers. Our farm and ranch and rural utility businesses are foundational. They're absolutely core to what we do, not only to our business model, but also to our ability to provide financing to rural America. It's where the greatest need is.
By executing on our strategic plan with an increased emphasis on customer value and profitable volume growth, we believe are well positioned to expand our business volume and market share, and ultimately expand our bottom line. With the support of our Board and our new Board Chair, LaJuana Wilcher, we believe our unified commitment to Farmer Mac's strategic plan, in conjunction with the organization's talented and committed employee base, are enabling us to take Farmer Mac to the next level. Now I'd like to turn to Zack to give you an update on customer and market developments.
Thanks, Brad. As Brad mentioned, 2019 was a significant year as we focused on enhancing our foundation so that we'd be in a better position to achieve our strategic vision and deliver a competitive financing solution to the broader agriculture and rural credit markets. In our rural utilities line of business, outstanding business volume nearly doubled in 2019 compared to 2018, primarily due to the purchase of a portfolio of participations from CoBank of seasoned rural utility loans in the amount of $546 million. This purchase not only represented an enhanced relationship with CoBank, the largest institution in the Farm Credit System, but also elevated our ability to provide capital to a mature financial market.
Our Rural Infrastructure team did an outstanding job of enhancing our foundation and infrastructure to become a meaningful player in this market, which can be seen by additional flow purchases of approximately $230 million following the initial CoBank transaction, on top of $80 million of loan purchases from our key partner, the National Rural Utilities Cooperative Finance Corporation, in 2019. In our foundational farm and ranch loan purchases and USDA guarantees lines of business, net volume growth increased 44%, or approximately $800 million in 2019, driven by a record year in loan purchases in our core farm and ranch lines of business, where we had net loans volume increase of 77% from 2018. As a mission-driven organization, it is important that in an ever-changing agriculture and economic environment, we remain adaptive and flexible to meet our customers' needs by providing competitive financing solutions.
With this philosophy in mind, during the second half of 2019, we created a more dynamic and responsive business model that has transformed the way we deliver upon our mission and resulted in improvement in customer satisfaction, volume retention, and penetration in existing and new markets. The success of this strategy was especially apparent in the fourth quarter of last year as we added net new farm and ranch loan purchases of $440 million compared to $168 million in the fourth quarter of 2018. This record quarter growth in farm and ranch loan purchases can be partially attributed to the numerous initiatives our team has implemented focused on enhancing our relationship with our core customer set through providing flexible, competitive, and enhanced financing solutions.
In pursuing these growth initiatives, we remain grounded in appropriate risk profiles as we continue to look to grow our business lines and deploy capital to the industries we serve. We also continue to invest in infrastructure, including people and technology, in order to become more commercial and more efficient. As an example of these efforts would be our scorecard underwriting product, AgXpress, which was launched in 2019. This new platform has been a tremendous success, representing almost one-third of loan applications in 2019, and offers pricing discounts for loans that are easier to process and underwrite, as well as reduces the approval time for a loan to be purchased from our customer. The product's efficiency and structure have allowed our underwriting team to be able to focus on more complex loans, reducing the approval time on these transactions.
Given the success of the AgXpress product in 2019, we'll be expanding this platform in 2020. As I have mentioned on prior calls, enhancing our infrastructure is crucial in order to improve our ability to becoming more commercial organization that is able to provide consistent and reliable capital to both existing and new markets. We are excited to announce the launch of two significant infrastructure enhancements in 2020, a new customer portal and a new streamlined origination platform for AgXpress loans. These two enhancements are the first in a multi-phase implementation program that will create a more robust and more efficient platform for our customers to be able to do business with us, driving incremental capital to the core sectors we serve.
We continue to be excited about the strategic direction of the company and will continue to be focused on becoming a more relationship-oriented institution for our customer base. As a mission-driven organization, we need to be dependable in providing capital through the agricultural and economic cycles, be competitive in providing innovative financial solutions, and be adaptive to all the changing environments. Our recent results are early validation of these initiatives, and we are looking forward to providing more updates on future calls. With that, I'll turn it back to you, Brad.
Great. Well, thanks, Zack. Before I turn to Jackson, I'd like to thank Curt Covington. Curt was formerly our Chief Credit Officer. I'd like to thank him for his hard work and dedication over the last five years. We wish Curt the very best. As you saw in a recent 8-K filing, Curt resigned to work on some family issues, effective February 14. We have engaged a search firm and launched a nationwide search for a new Chief Credit Officer, and we will certainly update you when we have more details. Now Jackson. Jackson has been with us for 15 years in various roles, including most recently as our Chief Economist. He understands just about every area of our organization, and he'll be giving you an update on our current agriculture environment.
Thank you, Brad. An average year for our nation's network of farmers and ranchers brings myriad risks and uncertainties that affect different sectors in different ways. In many respects, 2019 fits that description due to adverse weather conditions, market price volatility, and supply chain disruptions. A less common market condition experienced by the Ag sector in the last few years is global trade headwinds. Relations with China, Canada, and Mexico, the top three Ag export destinations in 2017, were all strained by tariffs and counter-tariffs throughout 2018 and 2019. The presence of retaliatory tariffs on farm-related trade, combined with a strong U.S. dollar, caused a downward pressure in the value of agricultural exports in 2019. The passage of the United States-Mexico-Canada Agreement into law and the trade negotiators from the U.S. and China signed a phase one trade agreement in January 2020.
Although there still exists some cloudiness around the true potential for trade with China in 2020, these negotiations represent a thawing that could translate to increased demand for U.S. agriculture in the coming years. Looking ahead, the overall farm income picture remains flat in 2020. The USDA estimates cash farm income was elevated in 2019, largely a result of the $14 billion in cash installment payments to farmers through the Market Facilitation Program, or MFP. This program was designed to offset the economic drag on farmers from trade negotiations. After five years of off-peak farm income, many indicators of farm financial stress are increasing to more historical average levels. Composite cash farm income is down from 2014 peaks, but near 20-year historical inflation-adjusted averages.
Absolute farm debt levels are at new highs, but the average sector debt-to-asset leverage ratio is near the 20-year average, and sector debt coverage ratios remain better than historical averages due to persistently low interest rates. Default rates on farmland-secured mortgage loans at commercial banks and Farm Credit System during 2019 were elevated from 2016 lows, but remain well below the 15-year averages. Similarly, Farmer Mac's farm and ranch portfolio 90 days or more default rate was just under 0.8%, up from lows experienced in 2016, but still under our 15-year average. Agricultural loan charge-off rates remain near historical averages as well. Low charge-off rates at Farmer Mac continue to reflect strong borrower and collateral performance, as evidenced by our average farm and ranch loan-to-collateral value ratio of 51%.
It's also important to note that loan credit events are influenced by local market conditions unique to each and every rural business. For example, Farmer Mac's allowance provision increased in 2019, largely the result of a single specific reserve placed on a specialized poultry loan. This is a natural function of short-term economic and agricultural cycles that affect different sectors and regions at different times. Despite some bumps along the way, the road ahead for the farm economy remains filled with opportunity. Interest costs and electricity costs remain low, evidence of the mission delivery of thousands of Ag lenders and rural electric cooperative providers across the country. Furthermore, additional investments in renewable energy, particularly solar, present new opportunities for energy providers and landowners to generate a reliable source of power and off-farm income.
Changing consumer demand gives farm producers and agribusinesses new specialty crops and food products to bring to market. With that, I'll turn it back to you, Brad.
Great. Thanks very much, Jackson. While Farmer Mac remains committed to our historically high standards of credit quality, as we look for ways to further execute on our mission of providing credit to America, there may be circumstances in which we will look at ways to expand our credit envelope and take some additional risk, flexing to market conditions when we can be paid, when we can be compensated for taking that risk. I'd like to turn to Aparna, our new Chief Financial Officer. She joins us with over two decades of financial expertise, most recently with the Federal Reserve Bank of Boston, where she served as Senior Vice President and Chief Financial Officer. We're excited to have her on board in support of our efforts to grow our business and execute on our strategic plan.
With that, I'll turn the call to Aparna so she can introduce herself to you and discuss our financial results in more detail.
Thank you, Brad. I'd like to begin by expressing how happy I am to be here and to be a key contributor to this mission-driven organization. Most of my career has been with organizations that have a strong sense of mission, and my belief is that finance can be a force for good. Given my values and experiences, I was really drawn to Farmer Mac. I've spent the last several weeks, I started here on January 6, and I've immersed myself in getting to know the team, as well as understanding the key business issues. I'm truly impressed by the high caliber of talent across the organization, very excited about Brad's vision for Farmer Mac, and the many opportunities present for us to serve our customers, deliver on our mission, and create long-term value for our shareholders.
I'd like to touch upon some quick highlights from a strong fourth quarter of 2019. As you heard from Zack in his business update, we saw sequential net business volume growth of about $185.6 million, and it was primarily driven by our farm and ranch line of business. Our net effective spread increased 18% year-over-year to $46 million. Our core earnings grew 20% year-over-year to $24.5 million, or $2.27 per diluted share. Turning to our full-year results for 2019, our results were notably strong across the board. In keeping with our historical averages, we had robust new business volumes, stable spreads, and growing profitability. Specifically, our outstanding business volume for the year increased by a net $1.4 billion to leave us at a record $21.1 billion as of December 31, 2019. This encompasses also lines of business that contributed to this growth.
Farmer Mac's net effective spread for 2019 was $168.6 million, a 12% increase from $151.2 million in 2018. This was primarily due to the growth that I just mentioned on net new business volume. In percentage terms, our net effective spread was 0.91% for both 2019 and 2018, remarkably consistent. Our core earnings for 2019 grew by 12% to $93.7 million or $8.70 per diluted common share. This is in comparison to $84 million or $7.82 per diluted common share for 2018. The year-over-year increase in core earnings was primarily due to the increase in net effective spread, once again driven by higher business volume, which was partially offset by $2.5 million after-tax increase in the provision for loan losses and a $1.6 million after-tax increase in operating expenses, which is related to the continued investments that we're making in technology, business infrastructure, and compensation and benefits.
Operating expenses increased by 4% in 2019 compared to 2018. This was notably less than our initial expectations of 8%-9% growth. This is primarily due to timing issues as we are in the early stages of modernizing our infrastructure and also hiring some key personnel. We expect these efforts to continue and increase through 2020 as we innovate and grow our business. However, the exact timing of these expenses is uncertain and therefore hard to pinpoint. As of December 31, 2019, the total allowance for losses was $0.6 million, or 16 basis points of the $7.8 billion farm and ranch portfolio. Allowance for losses increased $3.4 million from the prior year-end. This was largely related to a very specific reserve on a single specialized poultry loan. This is what Jackson referenced earlier in his section.
I would like to note that our overall credit quality for the entire portfolio for Farmer Mac continues to remain extremely strong and in line with the long-term historical averages for Farmer Mac and our industry benchmark. Turning attention to capital, we remain very well capitalized, and this puts us in a position of strength as we embark on a multi-year growth plan. Farmer Mac's $815.4 million of core capital as of December 31, 2019, rose by $87.8 million from the prior year-end and exceeded our statutory requirement by $196.7 million or 32%. This increase was due to the issuance of a Series B Preferred Stock in May 2019, but really it was a result of an increase in retained earnings. I'll note that retained earnings continues to be the primary driver of our capital position and allows us to provide long-term value to our shareholders.
As Brad mentioned, our strong earnings and capital position support our dividend increase and target payout ratio of 35% of core earnings. In conclusion, Farmer Mac is in excellent financial condition with solid credit fundamentals, exceptional access to competitive cost funding across various term structures, superior operational efficiency given our low headcount relative to our asset size, strong earnings growth, and robust capital position. We're extremely encouraged by the momentum we're seeing from the success of the strategic initiatives that are currently underway, and we remain very committed to the near-term and long-term opportunities for growth that are identified within our strategic plan. Our goal is to continue to serve our customers efficiently, and we are therefore making the necessary investments in modernizing technology and infrastructure that Zack referenced. This will also enable us to adopt a more data-driven approach towards risk and return.
Such investments, coupled with key talent augmentation, will put us in a strong position to fulfill our mission to deliver low cost and accessible capital across rural America. Once again, I'm very excited to be a part of the leadership team at Farmer Mac and helping the organization achieve its strategic and financial goals. More complete information about Farmer Mac's 2019 performance is in the 10-K we filed this afternoon with the SEC. With that, Brad, I'll turn it back to you.
Thank you, Aparna. Our B oard and our management team are very proud of our 2019 financial results. We believe our performance provides a strong foundation for visibility and growth in the future as we continue to execute on some of our more ambitious objectives. Our experienced and diverse leadership team, as well as our dedicated and talented group of employees, are fully committed to our long-term strategy and have the capability and desire to make it succeed. We continue to focus on our mission to increase the availability and affordability of credit to rural America through an increased focus on customer service and retention, efficient product delivery, and our inherent cost of funding competitive advantage. Our mission provides focus, and our focus enables specialization and expertise in agriculture credit, allowing us to significantly expand our market share, grow our top line, grow our bottom line.
That allows us to deliver long-term value to our shareholders. Put another way, I'm sometimes asked, well, just because you're so focused on agriculture, doesn't that limit your opportunity? I feel that it is exactly the opposite. That focus results in specialization and delivers strong financial results. Put it yet another way, we're very good at what we do. Now operator, I'd like to see if we have any questions from anyone who's on the line today.
Thank you. We will now begin the question- and- answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question we have is from Henry Coffey from Wedbush, p lease go ahead.
Yes. Good afternoon, and congratulations on the dividend increase. Your spreads have been remarkably stable over the last three years. Given the current volatility we're seeing in the interest rate market as of late, with the 10-year down, et cetera, is that going to challenge your capacity to keep spreads within the two or three basis points change that we've seen? Is that kind of more like business as usual, and we should continue to expect the same thing?
Well, I think the fact that there is 91 basis points both years is really remarkable. I think generally when we're speaking to investors, we talk about 90 basis points, ±5 basis points is a reasonable range of expectations for you. When you consider how we fund our business and really, the issuance of our liabilities and our interest rate swaps to match specific assets that we're putting on the books, really on a co-terminus basis, it's not surprising, because we're essentially pricing to our cost of funds. Since we understand the risk profile, we have a very good idea of how we're going to land close to that 90 basis points on a risk-adjusted basis.
Great. Thank you very much.
The next question comes from Greg Pendy from Sidoti, p lease go ahead.
Yeah. Hi, I guess I just wanted to jump into the expenses. I know you mentioned you came in around 4% below your initial target in the 7%-8% range. Can you just give us a little bit of color on how to think about 2020? Are there some IT initiatives or hiring that has been pushed out from 2019 into 2020, and kind of just a rough way to think about the year-over-year increase that we should be looking for in 2020 in expenses?
Yeah, I know we've been telling you, Greg, for a couple of quarters now that our operating expenses would be trending up. As Aparna mentioned, it really is a timing issue for us. We have significant IT initiatives underway. Some of the actual payments for those initiatives have been hitting a little slower than we expected, even though we're remarkably on schedule relative to our plan for those upgrades. We thought that at the end of the first quarter of 2020, we might be somewhere in the neighborhood of 110 employees-112 employees. I think we're about 105 right now, with 10 unfilled positions that are posted, approximately 10 unfilled positions that are posted. I think maybe in that metric alone, it's probably the best illustration of why some of this expense pickup has been a bit slower to hit than maybe we have led you to believe.
We are committed to moving ahead with these initiatives. We do have growth objectives. We are filling these 10 positions and probably additional positions as well, as we get further into 2020. Seeing expense growth in that 8%-10%, even 12% range, would not be at all unexpected.
Okay, great. That's helpful. I guess just one final one. Just on the 90-day delinquencies. I know you had a sequential decline. I think in 3Q you mentioned some idiosyncratic type loans. Can you just give us a little bit of color, just from a year-over-year perspective? I think seasonality, it should come down from 3Q to 4Q, if I'm not mistaken. It is a bump from where you were at last year. Just kind of what's driving it maybe from a year-over-year perspective?
Yeah. It is, if you look at 90-day delinquencies, they're up from a year ago, end of 2018. They're pretty close to where we were at the end of 2017. There's some quarterly as well as annual seasonality that's come into play here. Indeed, it does seem to be more, I use the term idiosyncratic, which I know we've used before, situations. In fact, the special reserves that we took during the fourth quarter was one of those situations. It was one loan to a processor that had a unique product with a unique feed and a unique processing process, and does not reflect, for example, a wholesale deterioration in credit quality in any particular region, Upper Midwest, for example, or across any particular crops, for example. As we've said before, we're keeping a very close eye on the situation.
Jackson mentioned that income and liquidity are both down from 2014. Offsetting that on the other hand, while debt levels may be up a bit across the sector, our average loan to values have been remarkably stable, and we have actually seen the debt service coverage ratios, the ability of our customers to cash flow their debt, has actually improved a bit because of these very low interest rates. It continues to be hard to make generalizations about what you might classify systemic or sector-wide deterioration in credit, and we do continue to point to those more idiosyncratic situations. Jackson, you have anything to add to that?
No, I think that's exactly how we think about it. Yep.
Yeah.
Well, that's very helpful. Thanks a lot.
There are no more questions in the queue. This concludes our question- and- answer session. I would like to turn the conference back over to Brad Nordholm for any closing remarks.
No, I'd like to conclude by thanking everyone for listening and participating in this call. We will be having our next regularly scheduled call in May to report on our first quarter results. Look forward to sharing additional information with you at that time. As is always the case, if you have any questions, don't hesitate to get in touch with Jalpa. We know that the timing of this call, late in the day, immediately following the 10-K was a little bit different than sometimes as you've had an opportunity to maybe digest the full 10-K and reflect on this call today. Do give us a call. We'd love to talk. With that, Operator, thank you very much.
The conference has now concluded. Thank you for attending today's presentation, y ou may now disconnect.