Good day. Welcome to the Farmer Mac first quarter 2019 investor conference call and webcast. 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 touchtone 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 Mr. Brad Nordholm, President and CEO. Please go ahead, sir.
Good morning. I'm Brad Nordholm. I'm very pleased to welcome you to our 2019 first quarter investor conference call. We posted the slide deck to our website. We'll be referring to that throughout today's call. This morning's press release also includes information about where these slides can be found. We have a number of positive developments to discuss today. Before I begin, I need to first ask Steve Mullery, our general counsel, to comment on forward-looking statements that management may make today, as well as to Farmer Mac's use of non-GAAP financial statements. Steve?
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. 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 2018 annual report on Form 10-K and our first quarter of 2019 Form 10-Q filed with the SEC. 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-Q 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. Well, I'm happy to report a very successful first quarter of 2019. Our financial results are strong, as we'll discuss, and we also worked to build stronger foundation for future growth. The objectives outlined in our long-term strategic plan emphasize innovation in how we acquire customers and how we develop new products, and we do that to further our mission. As a part of this, we're presently evaluating all of our lines of business, our products, and how we go to market as a wholesaler to streamline new business opportunities and more efficiently deliver on that mission. Notably, we recently created a new executive-level position here at Farmer Mac, and that person will head up our lines of business. We're calling this our new chief business officer, and he will be starting in about a week. Stay tuned for more information from him.
As I mentioned during our last quarter's call, we entered into a master participation agreement with CoBank in February of 2019, and we subsequently purchased $546 million of seasoned rural utility loan participations. This is Farmer Mac's first direct loan participation purchase with CoBank, also with any other farm credit institution, and it represents important progress in developing on our mission to increase the availability and affordability of credit for rural America. We have good ongoing discussions with CoBank and also with other Farm Credit System banks and with several large Farm Credit System associations, as well as with other market participants in project energy finance. This is all part of building an even stronger foundation for future growth here at Farmer Mac.
You'll note in our SEC filings that on March 14th, 2019, the board of directors modified the terms of Farmer Mac's existing share repurchase program by increasing authorization for the purchase of up to $10 million of Farmer Mac's outstanding Class C common stock and extending the term of that repurchase program through March of 2021. To be clear, Farmer Mac intends to repurchase shares only when it views repurchases as highly accretive and consistent with our strategic objectives. I'd like to now turn to our first quarter 2019 results. As you saw in our press release this morning, Farmer Mac grew its outstanding business volume by $782 million. This exceeds the net growth we achieved in the entire year of 2018.
Our overall credit quality declined modestly this quarter compared to the fourth quarter of 2018, but it remains favorable, and in fact, comparable to the first quarter of 2018. The first quarter is the one when we generally experience the most credit impacts, given that it's a seasonally heavy quarter for a number of payments that are scheduled to be due. Our first quarter total revenues grew by more than $2 million compared to the first quarter of 2018. Despite the fact that our two large transactions this quarter didn't settle until mid-quarter, and we only realized a half-quarter spread on these significant transactions. Core earnings were $22.2 million, up $1.8 million from fourth quarter of 2018, and up about $400,000 from a year ago period.
Farmer Mac continues its measured and thoughtful investment in people, technology, and business infrastructure to improve the capacity and efficiency. We believe these will help us deliver on our long-term goals. We've set meaningful market share goals for ourselves in our strategic plan. In order to achieve these goals over the long run, we're going to be able to need to execute gross payable business volumes that are about double our current levels. Dale Lynch will discuss our financial results in more detail shortly. First, I'd like to turn to Curt Covington, our Chief Credit Officer, to give you an update on the current agriculture environment.
Thanks, Brad. For farmers and ranchers, spring is an important and symbolic season. Most producers by this time have their operating financing in place. It represents a fresh start to a new crop year, a time for tactical planting and marketing decisions that are the first in a series of dominoes that set in motion the prospects for success in 2019. In spite of a well-publicized flood in the Midwest, farmers moved ahead with spring planting decisions that will in large part determine the level of year-end crop inventories and the direction of market prices. For cattle ranchers, the outcome from a tough calving season will become much clearer by the end of spring, setting the stage for this year's and next year's operating results.
For dairy farmers who are anxiously awaiting for better economic conditions, the change of seasons brings what's known as the dairy flush, a time of year when cows are expected to produce seasonally higher levels of milk coming off a very cold winter and signs of a healthy or perhaps unhealthy cow herd. Nut and fruit producers in the West are well into their 2019 growing season and are thankful for the bountiful rains received over the winter months. The bloom of the fruit orchards reminds us of a natural beauty that's intrinsic in food production. If you've never experienced a full fruit or nut orchard blossom, it is truly a display of nature's many blessings. Amidst all of this, spring provides a lot of new data and decisions on which to evaluate the year ahead. Agricultural lenders are following and supporting these decisions intently.
This spring, it isn't difficult to locate stress in the agricultural economy. After all, we're entering in the sixth year of a slow ag economy since the peak expansion in 2013. Here are some commodity prices to put things into perspective. Corn prices peaked at over $8 a bushel in 2013. Today those corn prices are closer to $3.50 a bushel. Almonds traded at a high of $4.50 a pound in 2014. Today, almond prices are clearing the market closer to $2.50 a pound. Dairy producers sold milk at $24 a hundredweight in 2014. Today, dairy farmers see prices closer to $17 a hundredweight. No doubt, trade disputes are keeping downward pressure on commodity prices, preventing foreign markets from fully off-taking the abundance of U.S. agricultural products. Despite these headwinds, no economic sector is quite as resilient as the agriculture sector. Why is that?
More than most industries in the U.S., farmers and ranchers, it's an intrinsic network of uncertainty, risk, and return. Because of these many uncertainties, farmers and ranchers have learned through generations to be expert risk managers with a high degree of character and business acumen. As an example, USDA estimates that since 2014, U.S. farmers and ranchers have shed nearly $20 billion in farm expenses. Good business managers know the importance of focusing on things they can control, like costs and budgets. Good business managers also know that working capital is the lifeblood of liquidity and the first defense against commodity price volatility. During the most recent farm economy boom, producers spent and saved wisely, creating a relatively durable sector-level balance sheet. USDA estimates that farm working capital peaked in 2012 at $165 billion, or roughly a 2.9 times current liability.
That's a lot of dry powder to withstand an economic correction. It's a large reason why farm loan delinquencies and farm financial stress has been so measured to date. While new application underwriting ratios have tightened in recent quarters, delinquencies in the Farmer Mac portfolio remain below historical averages. A similar story among many agricultural lenders, such as commercial banks and farm credit institutions. Finally, farmers and ranchers have a tremendous level of support from policymakers and risk mitigation programs. Federal crop insurance programs, property and flood insurance, and farm program payments, like those made under the Market Facilitation Program, help to offset dips in income due to factors outside of the farmer's control. Be it weather, policy, or technology disruptions, farmers have become skillful and are nimble at managing the unforeseen and adapting to new conditions and economic environments. Adapting to uncertainty comes in various forms.
From a financing perspective, farm and ranch borrowers continue to adjust to a changing interest rate environment. The higher interest rate environment at the end of 2018 and the beginning of 2019 slowed the refinance rates. However, in the first quarter, more borrowers sought financing for new farm purchases or investments in capital improvement projects, while at the same time, unscheduled loan prepayments slowed to their lowest levels in 15 years. Farmer Mac has spurred innovation as well, the adoption of an agricultural lending space through a new credit evaluation tool we call AgXpress. This tool reduces average loan processing time on qualified credits by 40%, delivering a faster and more consistent credit experience while maintaining our time-tested credit standards. Finally, ag and rural lenders across the country are adapting to a new economic landscape and increasing access to capital both on and off the farm.
For example, the median loan-to-deposit ratio for agricultural banks has increased from a low 62% in 2013 to over 78% in the fourth quarter of 2018. This increase in capital deployment demonstrates the need for and the importance of rural lenders in the face of market and credit uncertainty. In an environment of heightened uncertainty, Farmer Mac has been able to be a reliable presence in the agricultural and rural utility lending space by adhering to a philosophy of consistent, conservative, and pragmatic lending. Farmer Mac does not have a history of chasing up-trending market sectors in good times or running away from down-trending markets in lean times. That consistency tempers credit cycles from wild swings up or down. Farmer Mac takes a pragmatic approach to our business.
We believe that if you plan to be a partner in rural finance during the good times, you better plan to be here during the tough times. Farmers and ranchers in rural America expect it, and they deserve it. Farmer Mac has a long history of serving rural America through all economic conditions. Our phones are on, our doors are open, and our hearts and minds are ready to serve. Brad, I'll return it back to you.
Good. Thank you, Curt. Dale, you want to go through the financial results?
Sure. Thanks, Brad. Turning to the first quarter of 2019 results, as you can see on slide five, our outstanding business volume increased by a net $782 million to $20.5 billion as of March 31st, 2019. This increase was driven by net growth of $483 million in our rural utilities and $349 million in the institutional credit lines of business. This net growth was offset in part by net decreases of $31 million and $18 million respectively in the USDA guaranteed securities and the farm and ranch lines of business. The net growth in our rural utilities line of business was primarily due to the large purchase of a large pool of loan participations. As we mentioned on last quarter's call, Farmer Mac entered into a master participation agreement with CoBank, under which we purchased a portfolio of participations in seasoned rural utilities loans in the amount of $546 million.
This transaction settled on February 19 and thus contributed less than a half a quarter's worth of net effective spread this period. Within the institutional credit line of business, we experienced net business volume growth in AgVantage securities purchased from large counterparties of $334 million and net growth purchased from smaller financial fund counterparties of $15 million. The net growth from our large counterparties was driven by the purchase of a new $325 million AgVantage security in the rural utilities industry. Because our purchase of the security settled on February 15, it contributed approximately half a quarter's worth of net effective spread this period.
Looking at farm and ranch, our farm and ranch line of business experienced a net decrease of $18 million, which is comprised of a $41 million net decrease in loans under purchase commitment, which is our credit protection product, partially offset by a $23 million net increase in our outstanding loan purchase volume. Based on our analysis of bank and FCS call report data, there was a decline in the growth rate of the overall agricultural mortgage market in 2018. Nevertheless, we believe that our net growth of 7.9% in our farm and ranch loan purchases over the 12 months ended March 31st, 2019, does compare favorably to the 4.7% net growth of the overall market for the 12 months ended year-end 2018.
Our gross purchase volume slowed during first quarter 2019, our prepayments in the quarter were among the lowest we've ever experienced, leaving our net growth at favorable rates. Turning to our USDA Guarantees line of business, we experienced a net decrease of $31 million in first quarter 2019 as compared to net growth of $40 million in the year ago quarter. This decrease reflects the impact of the government shutdown during January and decreased loan approvals in general by the USDA. Turning to our financials on slide six. Farmer Mac's net effective spread for the first quarter of 2019 was $39 million, a 5% increase from the $37 million in first quarter 2018. The improvement was primarily due to growth in outstanding business volume, which increased net effective spread by about $2 million.
In percentage terms, net effective spread for the first quarter was 0.89%, which decreased two basis points as compared to the first quarter last year. This is primarily due to an increase in our LIBOR-based funding costs. Turning to core earnings. Slide seven shows our core earnings for first quarter of 2019 were $22.2 million, or $2.06 per diluted common share, as compared to $21.8 million, or $2.03 per share in first quarter 2018. The $400,000 year-over-year increase in core earnings is primarily due to $1.3 million after tax increase in net effective spread. Again, that was driven by a growth in business volume. This increase was offset in part by a $1 million after-tax increase in operating expenses.
The increase in operating expenses is primarily due to increased headcount and continued investment in technology and business infrastructure in order to increase capacity and efficiency, which Brad referred to in his opening comments. Farmer Mac continues to expand its investments in human capital, technology, and business infrastructure to increase its capacity and efficiency as it seeks to accommodate its growth opportunities and achieve its long-term strategic objectives. Specifically, Farmer Mac believes that aggregate operating expenses, compensation employee benefits, general and administrative expenses, and regulatory change will increase in aggregate by approximately 8% to 9% in 2019 relative to 2018. This is the same guidance we provided last quarter as well. This level of cost increase will be dependent upon the execution of various growth and strategic initiatives. Turning to credit. Overall credit quality as of March 31st, 2019 declined only modestly as compared to year-end 2018.
Our 90-day delinquencies in substandard assets each increased both in dollars and as a percentage of the Farm Ranch portfolio as compared to year-end 2018. However, Farmer Mac's 90-day delinquency rate and substandard rate each remained favorable and below Farmer Mac's historical averages. We had a release from a loss allowance in the amount of $400,000 this quarter as a decline in Farm Ranch outstanding business volume and a migration of $25 million in loans to the individually evaluated specific reserve served to reduce the total allowance this period. In first quarter 2018, we also had a release from our loan loss allowance in the amount of $400,000. Regarding delinquencies, 90-day delinquencies increased to $52 million, or 0.73% of the Farm and Ranch portfolio in first quarter 2019, compared to $27 million or 0.37% as of year-end 2018, and $48 million or 0.69% in the year ago quarter.
Farmer Mac's 90-day delinquencies have historically fluctuated from quarter to quarter, both in dollars and as a % of the Farm Ranch portfolio, with higher levels generally observed at the end of the first and third quarters, and lower levels generally observed at the end of the second and fourth quarters of each year. This is a result of the January and July payment terms for most of our Farm and Ranch loans. As of first quarter 2019, Farmer Mac's substandard assets are $247 million or 3.4% of the portfolio, compared to $233 million or 3.2% of the Farm Ranch portfolio at year-end 2018 and $221 million or 3.2% in the year ago quarter. Farmer Mac's 90-day delinquencies and substandard rates during first quarter 2019 each remained well below Farmer Mac's historical averages of 1% and 4%, respectively. Turning to capital on slide nine.
Farmer Mac's $742 million of core capital as of March 31st, 2019 exceeded our statutory minimum requirement of $573 million by $169 million, or roughly 29%. This compares to core capital of $728 million, or $183 million of capital above the minimum as of year-end 2018. Our Tier 1 ratio was 13.2% this quarter, compared to 13.4% as of year-end. A modest decline was due to growth in business volume in first quarter. The increase in dollars of our core capital this period was due to an increase in retained earnings. More complete information for Farmer Mac's first quarter 2019 is in the 10-Q we filed with the SEC today. With that, I'll turn it back to you, Brad.
Thank you, Dale. We're all very proud of our recent successes. From the recent significant size transactions in the renewable utility industry totaling about $870 million in gross new business in the first quarter alone, to our new dividend policy, our share buyback program, and the recent addition in key personnel. I believe that we're really delivering results. Our returns to our common stockholders continue to lead those of other financial institutions, and our credit quality remains very favorable. As I did on last quarter's call, I want to close with just a few observations. I've now just completed my first six months as President and CEO, and I'd like to note the following. First of all, Farmer Mac is in very strong financial condition with excellent credit quality, exceptional access to competitively cost funding, strong earnings, disciplined cost management, and a strong capital base.
Second point is that we have an extremely dedicated group of employees. They're smart, they're capable, they're mission-driven, and they're eager. With some of the changes that are currently underway, some of the personnel changes that are being made, we're seeing further excitement and passion and creativity to do even more. Third is that our suite of products have inherent competitive advantages, and those advantages are attributable to our competitively cost funding and our efficient delivery. I just note that we're currently running about a $20 billion balance sheet and about $5 billion of annual originations, and we're doing that with about 100 employees. Because we have the plan and the commitment to improve how we utilize technology, we have the potential for further improvement in that operating efficiency.
I believe that we have an opportunity to drive organic growth at rates well ahead of the general agricultural credit markets. We can increase market share, and by doing that, we better fulfill our mission of serving rural America. This is an exciting time for Farmer Mac. It's an exciting time for me. Now, operator, I'd like to see if we have any questions from any on the line today.
Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone telephone. If you're using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question is from Mr. Scott Valentin of Compass Point. Please go ahead.
Thanks, operator. Good morning, everyone. Thanks for taking my question. Dale, just with regard to the spread, I know it's in the range. You talk about historically, but it did drop linked quarter, and I didn't know if it was either due to the timing of the participations or whether it was-- I think you mentioned LIBOR is going, driving part of that, but LIBOR curve has kind of come down a little bit. I didn't know if there's some offsetting, maybe some positive impacts going forward given changes in LIBOR, the LIBOR futures curve.
Scott, I think the biggest single impact really is our financing costs relative to LIBOR for what we call sort of our basis risk assets. Assets that we have to refinance the funding for on a regular basis. As you know, all financials are seeing this pressure. The swap curve relative to the sovereign curve has been under pressure, in particular the last four months, probably it's been at the most unfavorable it's been in three or four years. We make some adjustments to that. We can optimize it and mute the impact. Over half of that two basis point change sequentially was due to the LIBOR impact.
It started to come back a bit, we think that our outlook here for the next period of time, next number of months, say two to four months, in that window, we're a little bit optimistic that we're going to see some of these pressures ameliorating, less treasury issuance, et cetera. We need repos to kind of normalize. When we see repos normalize here a little bit, that'll come off. Look, strategically, we're kind of in that spread range that we've been talking about for quite a bit. We're kind of locked between 89 and 91-ish. That's where we've been. Other than some dramatic move in business mix, it feels pretty stable in that range.
Okay. That's helpful. Appreciate it. Then, Brad, you mentioned long-term market share goals requires a doubling of volume. Is there a kind of timeframe associated? I know you're making investments now to adding staff and improving processes. Is that a goal to double volumes the next, call it, couple of years? Or is it a matter of quarters, do you think?
If you look out at strategic plans, Scott, we have kind of framework reference of five years and 15 years. You see growth rates in the nine, 10, 11% range ramping up a little bit in out years. That's a general reference to a general higher level of volume attainment, a doubling that would be achieved in that period of time.
Okay, thanks. Regarding the pipeline, obviously a very good quarter for originations, and you had a good quarter. Two questions regarding that. One, on the pipeline, how does that look relative, say, same time last year? Is it in line? Is it much higher? Two, you point out prepayments slowed quite a bit. Do you think that's durable or is that transitory?
On your last point, prepayments have been historically at the lowest end of the range for a long time now, but they continue to grind a little bit tighter each year. We're looking at ± CPRs around five right now. I'd say two years ago, we were at CPRs of maybe seven and a half, eight and a half. We've ground a bit tighter, but still seven and a half and eight and a half are pretty low. As far as pipeline, do you want to?
Sure. Scott, as relates to the pipeline, we can kind of break apart and comment on some of the different lines of business we have. Curt talked about some of the factors going on in the countryside right now that are impacting this. I think our near-term outlook for farm and ranch is pretty flat as it has been the last year. There are fewer refinances for the reasons Dale mentioned, some of those related to interest rates and changes or lack of changes in interest rates. Farm and ranch, fairly flat. I think our rural utility outlook, with exception of potential new area project finance, is also fairly flat. Our institutional business, where we have an opportunity for more innovation around structured product and with various types of AgVantage businesses, the pipeline there is actually deeper than it's ever been.
Thanks for that. I'll ask one more follow-up question. On credit, you mentioned though it's still below historical levels. It crept up. I know there's some seasonality involved, so it's tough to tease out seasonality from any real deterioration. Just wondering on credit, two things. One, how important is NAFTA USMCA, getting that executed and getting that passed for the farm economy? If it does pass, do you see material benefits to credit quality? Two, are you making any changes in kind of targeting asset classes or agricultural products based on what you see in the agricultural economy, maybe less dairy and more fruit and nut, as an example?
I'll let Curt elaborate on this, I think as it relates to targeting sectors, we really look at everything that is coming in through import and farm and ranch and our institutional business. We evaluate those credit opportunities based on our current assessment of market conditions and what that means for cash flow. Curt?
I would just say in terms of it as it relates to our pipeline, also relates to the segments we've looked at. We talk around here a lot that we still see really good deals in tough industries. In the last year, and even in the first quarter of 2019, just as an example, dairy has probably been under the most pressure of any commodity out there as it relates to trade issues. In that regard, there's still principally a number of really good operators and deals that we've had an opportunity to purchase or be a part of, and they are very solid credit. I guess to finish this is to say, yeah, all these trade issues are a drag. They are a drag on the farm economy. I don't think anybody can argue that.
Some of them might just be emotional more than it is economic, it is definitely a drag. If these trade issues, the new NAFTA gets signed off and we reengage China, it's going to be, I think, in many respects, a boom for the dairy sector and for many of the fruit and vegetable sectors, and also for the grain sector and hog sector for that matter.
Thanks very much for that caller.
Thanks, Scott.
Excuse me, sir. As a reminder, if you wish to register for a question, please press star and one on your telephone. Once again, if you have a question, please press star, then one on your telephone. Gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Nordholm for any closing remarks.
Well, I'd like to conclude by just thanking everyone for listening and participating in our call this morning. We will be having our next regularly scheduled call to discuss second quarter results in August of 2019, and look forward to sharing additional information with you at that time. As is always the case, if you have questions that you'd like to discuss with us, don't hesitate to be in touch. With that, thank you very much and good day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.