Good afternoon, and welcome to the Farmer Mac second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need any assistance today, please speak to a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded today. I would now like to turn the conference over to Jalpa Nazareth. Please go ahead.
Good afternoon, and thank you for joining us for our second quarter 2022 earnings conference call. I'm Jalpa Nazareth, Director of Investor Relations and Finance Strategy here at Farmer Mac. As we begin, please note that the information provided during this call may contain forward-looking statements about the company's business strategies and prospects, which are based on management's current expectations and assumptions. These statements are not a guarantee of future performance and are subject to the risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer Mac's 2021 annual report and subsequent SEC filings for a full discussion of the company's risk factors. On today's call, we will also be discussing certain non-GAAP financial measures.
Disclosures and reconciliations of these non-GAAP measures can be found in the most recent Form 10-Q and earnings release posted on Farmer Mac's website, farmermac.com, under the financial information portion of the investor section. Joining us from management this afternoon are our President and Chief Executive Officer, Brad Nordholm, who will discuss second quarter business and financial highlights and strategic objectives. Our Chief Financial Officer, Aparna Ramesh, who will provide greater detail on our financial performance. Select members of our management team will also be joining us for the question and answer period. At this time, I'll turn the call over to President and CEO, Brad Nordholm. Brad?
Thanks, Jalpa, and good afternoon, everyone. I want to thank you for joining us today. We're extremely proud of the accomplishments and the financial results we're going to be sharing with you this afternoon. I think they provide further proof of our continuing successful execution of our strategic plan and also provide further evidence of the value of Farmer Mac's business model throughout agricultural cycles. The diversity of our revenue streams, combined with our credit discipline and strategic balance sheet positioning, enable us to deliver a very strong quarter. More specifically, we generated record core earnings, our highest ever, and our portfolio and credit performance remained strong, with 90-day delinquencies ending the quarter at 8 basis points across our entire portfolio. That's the lowest level in eight years.
Despite ongoing macroeconomic concerns and potential headwinds such as inflation and rising interest rates, the ongoing COVID pandemic and the war in Ukraine, Farmer Mac delivered strong results. Our financial results in the first half of 2022 reflected a variety of factors, and I'm just going to review some of them with you. First, the resilience of the farm economy. Producers have benefited from healthy farm income and liquidity from relatively high commodity prices that have come about because of heightened demand. The revenues that these producers have experienced have risen faster than the cost of their inputs. Another factor, an increase in Farmer Mac's outstanding business volume at higher spreads. In other words, we had volumetric growth and margin growth, and we did this with improved credit quality.
Another factor is Farmer Mac's disciplined approach to interest rate risk management that helps us protect earnings from the effects of interest rate volatility, such as we have experienced during the second quarter. The final factor, I think, worth noting is Farmer Mac's effective funding strategies that result in advantageous execution during the first half of 2022. We provided a gross $1.9 billion liquidity and lending capacity to lenders serving rural America in the second quarter of 2022. This resulted in growth in outstanding business volumes to $24.5 billion as of June 30th, 2022. Our Rural Infrastructure Finance line of business grew $193 million during the second quarter, or 3%, and this is primarily due to loan purchase product.
The growth in the demand for this product was really to fuel planned maintenance and capital expenditures by rural electric cooperatives across the U.S. Also contributing to growth this quarter in the Rural Infrastructure Finance line of business was a $34 million commitment to a large solar project. Our Renewable Energy portfolio ended the quarter at about $150 million, compared to about $87 million at year-end. The pipeline looks strong for the second half of the year. As I have said on prior calls, Renewable Energy is both an important economic development opportunity for rural America and a business opportunity for us. The Agricultural Finance line of business grew approximately $43 million this quarter, primarily due to strong Farm & Ranch loan purchase volume.
This growth is partially offset by scheduled maturities and an early refinance of a large AgVantage security. Net Farm & Ranch loan purchase volume was strong during the second quarter as the rising interest rate environment resulted in demand for intermediate and long-term financing solutions. While we anticipate that lower refinances could result in lower levels of new loan purchase in some of our Farm & Ranch and USDA products, it also could result in lower portfolio prepayment activity.
Our pipeline in this line of business remains strong and we will continue to be flexible as we navigate through this uncertain environment. Let me now turn to our recent securitization transaction. I'm proud to announce that we successfully marketed and priced our second $300 million agricultural mortgage-backed securitization. That happened subsequent to the end of the quarter and is expected to close in just a few days.
The successful execution of this transaction reflects our efforts over the last few months to identify and implement effective operational strategies to support a securitization program and closely monitor the changing market dynamics over this period to make sure that we could execute at just the right time. Securitization is a tremendous opportunity for Farmer Mac. Developing this capital flow to agricultural producers really exemplifies Farmer Mac's core mission to lower costs for the end borrower and to improve credit availability to rural America while creating a well-received new investment opportunity for leading institutional investors. As we have said after our inaugural transaction in the fall, we remain committed to being a regular issuer in the marketplace with a diverse set of securitized products that align with our borrower investor interests.
In the near term, we will slowly increase the number of issuances per year and continue to identify opportunities to improve operational efficiencies and automation in support of the program, make sure that we have a strong foundation for the future. Looking ahead, we'll strive to continue to be a source of stability for our customers by remaining adaptive and flexible to their needs in this changing environment while remaining vigilant about any indicators of potential market contraction. With that, I'd like to turn over to Aparna Ramesh, our Chief Financial Officer, to discuss our financial results in a bit more detail. Aparna.
Thank you, Brad. Good afternoon, everyone. Core earnings for second quarter 2022 were $30.7 million or $2.83 per diluted common share, compared to $25.8 million or $2.37 per diluted common share in the first quarter of 2022, and $30 million or $2.77 per diluted common share for the same period last year. The sequential increase was due to a $2.5 million after-tax increase in net effective spread, an increase in our release of credit losses of $1.2 million after tax, and a $1.1 million after-tax decrease in operating expenses.
The year-over-year increase in core earnings was primarily due to a $3.5 million after-tax increase in net effective spread and an increase in our release of credit losses of $400,000 after tax. These factors were partially offset by $2.5 million after-tax increase in operating expenses and a $900,000 increase in preferred stock dividends. Net effective spread for second quarter 2022 was $60.9 million compared to $57.8 million in first quarter 2022 and $56.6 million in the same period last year. The sequential and year-over-year improvement in net effective spread was driven, as Brad noted, by net new business volume, and this occurred primarily in the Farm & Ranch and rural utility segments. Also contributing to the year-over-year increase was an increase in net coupon yields.
This was related to the acquisition of loan servicing rights in the third quarter of 2021, which shows up in our net effective spread. Our liability side of the balance sheet remains strong as we continue to benefit from the low-cost debt and capital that we had layered into our balance sheet over the past two years while interest rates were at historical lows. We also continue to maintain a very disciplined approach to asset liability management. We carefully analyze the duration and convexity matches, as we've mentioned in previous calls, that help us minimize our interest rate risk as rates rise. Our consistent funding and hedging strategies have also allowed us to maintain our profitability despite an inversion in the yield curve. Operating expenses increased by 19% in second quarter 2022 compared to the same period last year, primarily due to increased headcount.
This included 10 new employees in connection with the strategic acquisition of loan servicing rights that I mentioned that occurred in the third quarter of 2021. Additional factors include increased stock compensation and an increase in spending on software licenses and information technology and other consultants, mainly to support growth and many of our strategic initiatives. We plan to continue to expand our investments in both headcount as well as technology over the next 1-2 years. As we've mentioned before, we are closely monitoring our efficiency ratio, which ended at 30% for second quarter 2022. We'll especially monitor this as we continue to make investments in our infrastructure and funding programs to support both our innovation strategies and also enable us to scale with our growth. Our credit profile continues to be strong.
As of June 30th, 2022, the total allowance for losses was $14.8 million, which reflects a $1.5 million release from March 31st, 2022. This release is comprised of a $1.2 million release on the rural infrastructure portfolio and a $300 thousand release on the agricultural finance portfolio. The $1.2 million release on the rural infrastructure portfolio was primarily driven by forecasted model parameter updates. The $300,000 release in the agricultural finance portfolio resulted from a $1.1 million release driven by forecast model parameter upgrades, rating upgrades, pay downs and payoffs. These were offset by $700 thousand provision that was attributable to a risk rating downgrade on a single agricultural storage and processing loan. Let's turn to capital now.
Farmer Mac's $1.3 billion of core capital as of June 30, 2022 exceeded our statutory requirement by $506 million or 67%. Core capital modestly increased from year-end, primarily due to an increase in retained earnings. Our Tier 1 capital ratio was 14.7% as of June 30th, and this was unchanged from December 31st, 2021. As Brad mentioned, after quarter end, we successfully priced our second $300 million agricultural mortgage-backed securitization, which is expected to close on August 11th. This deal, much like the first one, was also structured around two tranches: a senior guaranteed tranche and a subordinate unguaranteed tranche, both of which were very well received by the market despite an extremely volatile environment for structured products.
The success of this transaction further demonstrates Farmer Mac's capabilities to diversify long-term sources of funding, and we intend to use this conduit to generate additional revenues. Most importantly, this capability is highly central to our mission. We expect to return to the market soon with another similar securitization as we are committed to making this a more programmatic effort for us in the future to continue to build liquidity for our investors and continue to enhance our mission. In summary, our entire team delivered exceptional quarterly results in a volatile economic environment, and this was done while fulfilling a number of key strategic objectives. We had record core earnings, continued strong credit performance, a 15% return on equity, and an efficiency ratio of 30%, as well as a dividend payout ratio of 35%. With that, Brad, let me turn it back to you.
Great. Thank you, Aparna. So just to sum up, we had a very strong quarter. It's really based on our solid long-term strategic plan that we're executing on, an outstanding and dedicated team here at Farmer Mac, I'm very proud of them, and a proven track record now of very steady, strong financial results, as further evidenced by our core earnings this quarter. We continue to believe that our mission helps focus us during agricultural economic cycles and the resiliency of American agriculture and the Farmer Mac business model are reflected in our financial results. Our capital base is strong and growing, providing plenty of capacity for further growth and creating more opportunities for us to enhance shareholder value. Now with that, operator, I'd like to see if we have any questions from anyone on the line today.
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Gary Gordon, a Private Investor. Please go ahead.
Hi. Thank you. A couple of things, if you don't mind. One, my calculation shows there were zero charge-offs for the quarter. Is that correct?
Hi, Gary. Brad Nordholm here. Yeah. Hey, great to have you on, Gary. Yes, that is correct. Zero for the quarter.
Okay, terrific. Two, you mentioned a few times the operating expense ratio of 30%. I know you've talked in the past about your targets, and I forgot what the number is. What's the sort of target long-term ratio you're aiming for?
Yeah, I think for the last year and a half years we've told you that our goal is to keep it at 30% or below. This quarter, we're at 30%. Year to date, we're slightly above that, Gary, but we're managing to track down the remainder of the year and hopefully get back to approximately 30% for the year, which as I mentioned, we did achieve for the quarter.
Okay, good. On loan growth, or if I just looked at assets, right now and a year ago, it's up about 7%. I'm wondering if that's a useful figure. There's a better figure considering now the more active securitization program, which presumably pull some of those assets off your balance sheet, and then a mix issue of more loans, less securities.
Yeah. Gary Gordon, I'm gonna turn to Zach Carpenter to give you some color on loan growth, what we're experiencing in this very volatile environment right now. Let me begin by just reacting to your statement about the impact of securitization. Over time, we expect that securitization may allow us to lower some pricing on some types of loans that are going into securitizations. That's really not the case yet. Until it becomes programmatic, we're being, we think very prudent, we're being cautious about making that change. The second thing I'd just like to note for disclosure purposes is that the second securitization is actually going to be an on balance sheet versus an off balance sheet.
We really could have gone either way on it, and it's really the rapid increase in interest rate environment that caused us to choose to do this one on balance sheet. The way we report out that asset growth, we're going to gross up for business that we do off balance sheet in providing our metrics to you on how we're growing our assets on balance sheet and off balance sheet, our assets really under management. Relative to that 7%, let me turn to Zach to give you a little bit of color on what we're seeing in the market right now.
I just note as I do turn to Zach, that if you look at Farmer Mac over the last couple years, and you see this reflected in our business segment reporting, we are a more diversified company, and that diversification is benefiting us through these cycles. With that, let me turn to Zach to give you some additional color.
Yeah. Thanks, Brad, and Gary. Brad hit it on the head. I think the diversification of our business model is now showing more than ever. Year-to-date, we're up close to $900 million in net growth. As Brad indicated, it's coming from our loan purchase strategies, which we put a lot of focus on, both in the agricultural finance segment or line of business, as well as rural infrastructure. Our core farm and ranch loan purchase volume did grow again this quarter.
We're thrilled to be able to deploy more capital to our key seller network, especially in this volatile rising interest rate environment, but also saw net growth in our AgVantage security product, and tremendous growth in our rural infrastructure line of business as both rural utilities and telecommunication companies needed capital to continue to build their CapEx networks across the network. I'd say a very diversified model and seeing solid loan growth across all of our operating segments.
Gary, in terms of that 7% additional guidance to you, we're really not prepared to give more specific guidance. I think, you know, that's a pretty good estimate of where we are, certainly. One thing I would say is that because there is so much volatility among financial institutions as well as in the agricultural economy, which generally is very positive, I would note, very positive results in the agricultural economy. Oftentimes in this kind of period of volatility, new opportunities emerge. The one thing I would say is that we're gonna be very opportunistic. It's hard to build a business plan around it, but very opportunistic to look for opportunities that could accelerate that growth further.
Okay, great. Now, if you don't mind, one more question. Thinking about the preferred stocks, you've been an active issuer over the last few years. Is there a scenario, let's say, over the next year, where looking at another issuance might make sense?
Yeah. Aparna, you wanna take that one?
Yeah, sure. Gary, I think you know we wouldn't wanna take anything off the table, but let me just help sort of position our capital a little bit more generally. I think we have three sources of capital. We have, obviously, common stock, which is the bulk of our capital retained earnings. Preferred stock has been an excellent tool for us, especially over the last two years when one interest rates were pretty low and Farmer Mac's performance was really good, and it was a sought-after instrument. You know, we were very, very opportunistic. We didn't need the capital, but we certainly have continued plans to grow.
As we continue to diversify into these new segments that, you know, that both Brad and Zach just illustrated, there could be a need for us to find that each dollar of capital consumes a little bit more based on the type of asset that we're bringing on balance sheet. I will note that securitization does offer us an opportunity for capital risk transfer as well. When we look at securitization and we compare that to our preferred stock issuances, it's becoming an increasingly efficient source of capital consumption for us. Now we've got a fourth tool in our toolkit, which is securitization from the standpoint of capital.
Maybe it's a long-winded way of saying if there is an opportunistic reason for us to raise preferred capital, we might do so, but it's really very dependent on benchmark and nominal interest rates. Given all of that, over the next 6-12 months, you know, I think it would be relatively unlikely that we'd want to do a preferred stock issuance, but we wouldn't necessarily wanna take anything off the table.
Okay. Thanks for everybody's time.
Thank you, Gary.
Our next question will come from Sloane Ortel with Invest Vegan. Please go ahead.
Hey, everyone. Congrats on a great quarter. You know, I see the renewed Farm Bill sort of looming out there as a catalyst for you guys. I wonder if you could give us any color on how you see provisions that may or may not, you know, be in there affecting your business and, you know, whatever other commentary you wanna give on the proposed, I guess we're calling it the Inflation Reduction Act now, and how that might affect your your infrastructure line of business.
Yeah, a couple things. There are two big pieces of legislation. One that everyone is reading about every day right now, Inflation Reduction Act. What I can comment on that, Sloane, is that there are provisions in there that are favorable to American agriculture and rural electric cooperatives. We do business, as you know, with rural electric cooperatives. We also do renewable energy projects in rural America, some of which are contracted to or owned by rural electric cooperatives. There's a provision in there, you know, it's not signed into law yet, but there's a provision in there which allows for the monetization of tax benefits by the U.S. Treasury, which simplifies the capital structure for doing renewable energy projects with rural electric cooperatives and other nonprofits.
We view that as favorable to renewable energy. We also see you know ITC ten-year schedule for that. That will be further stimulus to our renewable energy projects and other details in that bill that'll generally be bullish for our renewable energy project line of business. It also gets into American agriculture too, because you know there are opportunities for this to extend into on-farm renewable natural gas, anaerobic digester capture, methane to gas and other projects that have been happening at an accelerating rate. With this legislation should have passed will happen at an even more accelerating rate. I also, as you were beginning to ask your question, was wondering if you were asking about the Farm Bill, which happens every five years here in Washington, D.C.
It's scheduled to happen in 2023, which really would reauthorize and potentially change, potentially expand, potentially reduce different types of programs aimed at stabilizing pricing for major American commodities, agricultural commodities. On that, it's premature to say exactly what that's gonna look like right now. We have a very strong public affairs government relations team here at Farmer Mac, led by a gentleman who worked at USDA, who has been involved in the formulation of policy associated with the Farm Bill in the past, and who is really keeping a close eye on it right now and helping us decide whether there are any things that we'd like to see in that Farm Bill that would be helpful to Farmer Mac.
We've identified a few. We're not really at liberty to talk about those yet, but a few that, you know, have a fighting chance of finding their way into law in the next couple of years.
That's awesome. Well, if you guys keep up the clip you've kept up for a while, you're well on your way to getting a fruit basket from us come Christmas time. Thank you all.
Well, thank you.
Again, if you have a question, you may press star, then one to join the queue. Our next question will come from Carl Hosman, a private investor. Please go ahead.
Well, ladies and gentlemen, I am a private investor out here in Seattle, and, all I can say is God bless America and, your company and team. I've been, part of this, your company since well before the dividend. Your earnings look like you will be continuing to increase your dividend, increases your price. I guess the only thing that I find very, sad about the whole thing is not enough people know about Farmer Mac, and the volume is so low on the stock that, you know, someone can come on and drop the stock two points by selling 600 shares or something. I know I've talked to you in the past about this, but, I don't know that there's ever any, solution to that other than becoming more well-known. I have no question.
That's more or less a comment.
Carl, we actually agree with your comments. A couple things. You may recall that really in 2019, 2020, we had a very large investor, C-class stock, a financial institution that over an extended period of time because of their regulatory situation had to sell that position. We're glad that's behind us because that was a situation, just as you described, where you know an investor could sell stock, and it just had a dampening effect, and we're now past that. We view that as a positive thing. We also have been working to increase market awareness of Farmer Mac.
It's interesting, Carl, that the two times we've been marketing the securitizations for Farmer Mac have coincided with two times when our stock has significantly outperformed other indices for the same one- to two-week period of time. We view securitization as another small but important way of expanding institutional investor awareness of who we are. We didn't set out to do securitizations to educate the market on Farmer Mac, but it is a good byproduct of that. The final point I would make is that we have really embarked on a branding initiative here at Farmer Mac. I think we may have mentioned that in one of the prior calls to think about how we describe and explain Farmer Mac in a more compelling way and uniform way to all of our important stakeholders.
That'll play out over the next 6-12 months. You know, this isn't a big advertising campaign. It's just a more concise and compelling way of explaining who we are to multiple stakeholders. We hope that that too will be another small thing that'll help bring more attention to Farmer Mac.
Okay, thank you very much. I was gonna say one other comment, and that is another educational process maybe to the, you know, I happen to deal with RBC. I don't know how many different people have tried to lose my money, so I'm now doing it myself through E*TRADE. Many of them, if you were to collateralize your stocks, they are not giving Farmer Mac the typical 60%-65% ratio on borrowing if you wanted to. Again, talking with Jalpa, thank you very much. The same thing is happening now that I think in some cases you might only be 30% of the value of a person's portfolio.
I was wondering, for your own sake and other shareholders, if there's some way around educating, you know, the financial institutions. Why would they, you know, you are a awfully firm and solid company nowadays and have been, and yet they don't seem to give you credit for it.
Carl, this is Jalpa. Maybe we can connect after this call, and we can find a way to connect with who you're working with and 'cause we agree we should reach and get in touch with these folks.
Yes. I don't typically need it, but the point is other people would come across the same problem because this has happened at RBC. It was PaineWebber. It was done. It doesn't matter. They are not giving you the same status as many other companies that really are not near as good quality as Farmer Mac. That's more of an eye-opener for yourselves, I guess. Anyways, thank you, and keep it up. Appreciate all your work.
Thank you, Carl.
Thanks, Carl.
With no remaining questions, we will conclude our question and answer session. I would now like to turn the conference back over to Brad Nordholm for any closing remarks.
Great. Thank you, operator. Thank you all for joining us today. We really appreciate it. We're very proud of the story. We're proud of the results that we're able to deliver to you this quarter. We remain very, very optimistic about Farmer Mac, our business model, our positioning in this agricultural economy, and our ability to serve rural America and fulfill our mission. You know, it's a time when we're feeling very, very good about what we're doing here. We appreciate your interest. As always, if you have follow-up questions or requests, get in touch with Jalpa, and she will make sure that the right people here at Farmer Mac are engaged with you in answering your questions. Thank you.
The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.