Good day, and welcome to the Farmer Mac Third Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jolt Panazareth, Director of Investor Relations and Finance Strategy.
Please go ahead.
Good afternoon, and thank you for joining us for our Q3 2022 earnings conference call. I'm Jolta 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 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 Investors section. Joining us from management this afternoon are President and Chief Executive Brad Nordholm, who will discuss Q3 business and financial highlights and strategic objectives and 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. Good afternoon, everyone, and thank you for joining us. I'm very pleased to announce that we've achieved another record quarter With all time high net effective spread and earnings and continued strong credit quality. Our results not only highlight the strength of our core business, our disciplined approach to interest rate risk management and the resilience of the U. S.
Agricultural economy, but also the benefits from the investments in and the strategic management of Our business really in support of our long term success. The diversity of our revenue streams Combined with our credit and asset liability management disciplines have enabled us to deliver a very, very strong quarter. We provided a gross $2,700,000,000 in liquidity and lending capacity to lenders serving rural America during this last quarter, resulting in outstanding business volume of $25,300,000,000 at quarter end. The Agricultural Finance line of business grew $675,000,000 during the Q3, which is predominantly comprised of growth in the Farm and Ranch segment across multiple products, including AgVantage securities, loan purchases and long term standby purchase commitments. The overall growth in the wholesale financing space primarily reflects many of our institutional counterparties Leveraging our continued access to low cost of funds as they seek to add longer term AgVantage securities To manage their asset liability maturity profile given the recent increases in interest rates and the comparative competitiveness Farmer Mac EggVantage pricing relative to other market and Federal Reserve derived options.
Year to date, we've added a net $580,000,000 in new Farm and Ranch Ag Vantage securities compared to a net decline of $20,000,000 in the same period last year. Looking ahead, we believe AgVantage volume will Continue to increase as Farmer Mac's relative value is viewed favorably by longstanding counterparties. This is the quarter for the harvest of many agricultural crops in rural America. Yet farm and ranch loan purchase volume growth This quarter has performed ahead of our expectations. Simply put, borrowers are adjusting to the higher rate environment And they're being opportunistic.
Given the strength in the agricultural markets, we are optimistic about potential increases in loan purchase opportunities given the strong cash position of farmers and ranchers as they complete their harvest. In a reversal from prior years, we also saw new volume in our Farm and Ranch long term standby purchase commitment product with one of our Farm Credit System customers. We see this as a testament to Farmer Mac's product flexibility in providing credit solutions To Farm Credit System Partners and relative value throughout market cycles. Our Corporate Ag Finance segment saw net growth of $67,500,000 during the 3rd quarter, Primarily due to our continued efforts to support loans to larger and more complex agribusinesses focused on businesses span the food supply chain, as we say, outside the farm gate. We expect this relatively new area of business activity to enable Farmer Mac to continue to strengthen and deliver on our mission.
Turning to Rural Infrastructure, this line of business added $510,000,000 of business year to date in renewable, telecommunication and core rural utility sectors as a result of continued strong relationships with Rural Electric Cooperative Lenders. In the wholesale finance space, we successfully refinanced $400,000,000 of outstanding AgVantage volume with rural utility counterparties. And we currently do not have any large rural infrastructure AgVantage maturities expected in the next 3 years. Loan purchase volume in the rural utility sector was consistent with telecommunication loans a strong contributor in 2022. Farmer Mac has acquired $162,000,000 in telecommunication loans year to date, holding a total balance of $243,000,000 as of September 30.
Rural America is a newer area for Farmer Mac. We strive to increase investments and reduce the cost of capital Our renewable energy portfolio ended the quarter at nearly $200,000,000 as of September 30, reflecting $48,000,000 in net growth in the 3rd quarter, the largest quarterly increase to date. The pipeline remains strong in the near term as we As I've said on prior calls, renewable energy is both an important economic development opportunity for rural America and a business opportunity for us at Farmer Mac. During our last earnings call, we discussed the successful execution of our second $300,000,000 securitization transaction in evolving and quite frankly a difficult market. We remain committed to being a regular issuer in the securitization marketplace with a set of securitization products that align with our borrower and investor interest.
Developing this capital flow to agriculture producers exemplifies Farmer Mac's core mission To lower costs for the Enviro and improve credit availability in rural America, while also creating a well received new investment opportunity For leading institutional investors, while agricultural commodity prices have thus far outpaced The significant increase in input costs, the impact on global commodity markets from the Ukraine conflict creates further uncertainty For farmers and ranchers in terms of global production, prices and input costs for the remainder of 2022 and into 2023. We believe our portfolio is sufficiently balanced To withstand the market volatility that could arise should the U. S. Economy move into a recessionary period Soon as many fear as the agriculture, food and infrastructure industries tend not to be directly correlated with the general economy. We believe these sectors are generally well positioned to withstand an economic downturn due to ample consumer demand and government support.
Looking ahead, we'll strive to continue to be a source of stability to our customers by remaining adaptive and flexible to our customer needs in this changing environment. The branding initiative we embarked on earlier this year, which is wrapping up in the next months, Has helped us gain a deeper insight from each of our stakeholders and helped determine how we describe Farmer Mac in more compelling ways. This we hope will continue to build on our strong reputation as the nation's trusted provider of low cost credit to rural America. And now, I'd like to turn the call over to Aparna Ramesh, our Chief Financial Officer, to discuss the financial results in more detail. Aparna?
Thank you, Brad, and good afternoon, everyone. Our record Q3 results highlight our balanced, Well measured approach, excellent credit quality and resiliency throughout market cycles. Net new business volume growth was $847,200,000 in 3rd quarter and it was driven by the healthy growth across all four of our segments. As we've discussed over the last few months, we have seen a slowdown in prepayments in the overall portfolio as borrowers Have less of an incentive to prepay in this higher rate environment. As we look ahead, we believe our strong capital position Really bodes us well as this trend continues and as we look to further our growth objectives.
Turning to core earnings. Our core earnings for Q3 2022 were a record $33,400,000 or $3.07 per diluted common share compared to $30,700,000 or $2.83 per diluted common share in Q2 2022 $27,600,000 or $2.55 per diluted common share for the same period last year. The sequential increase was due to a $3,700,000 tax increase in net effective spread and a $500,000 after tax decrease in operating expenses. The year over year increase in core earnings was primarily due to a $7,700,000 after tax increase in net effective spread And this was partially offset by a $1,800,000 after tax increase in operating expenses. Our net effective spread for Q3 2022 was a record $65,600,000 compared to $3,900,000 in Q2 2022 $55,900,000 in the same period last year.
Both the sequential and year over year improvement in net effective spread was driven by compositional shift in our program assets and generally wider spreads across the board. We have seen upward pressure of pricing on corporate ad finance loans and advantage volume as a result of the higher rate environment. There's another evolving factor that I'd like to describe and this has contributed to net effective spread as well. Over the past few years, we opportunistically raised low cost debt and capital, and the excess capital essentially offsets Our urgency to raise more expensive term and callable debt in a rising rate environment. This will continue to create a downward pressure On our non GAAP funding costs, as the short end of the curve continues to increase with said actions.
Our liability side of the balance sheet remains extremely strong as we continue to benefit from this low cost debt. The extension of debt has also strengthened our overall liquidity profile. We continue to maintain disciplined asset liability management, carefully analyzing our duration and convexity matches to minimize our interest rate risk as rates rise. Our forward looking funding strategies and a prudent approach to hedging have also allowed us to maintain and enhance Despite an inversion in the yield curve. Operating expenses have increased 15% year to date compared to the same period last year.
And this is primarily due to increased headcount, including 10 employees In connection with the strategic acquisition of loan servicing rights in the Q3 of 2021, Increased stock compensation and increased spending on software licenses and information technology as well as the addition of consultants to support growth and strategic initiatives. Operating expenses decreased by 3% sequentially due to the deferral of certain large projects to 2023, voluntary employee turnover and delays in hiring. This improvement reflects our proactive management of expenses as we continue to expand our investments in both headcount and technology over the next 1 to 2 years. We are currently in the process of evaluating a fairly large scale investment to modernize both our treasury infrastructure and our front end loan platform system to mitigate risk, Increased efficiency and enhanced deal flow. In summary, operating efficiency was 29% through September and better than our strategic plan target of 30%.
We're especially pleased with our efficiency ratio given the inflationary headwinds, which are impacting the market As we've always said, we will continue to closely monitor our efficiency ratio and we're committed to holding The run rate efficiency ratio at 30% or lower. However, as we make decisions to invest in infrastructure And funding platforms and scale for further growth, we may see some temporary increases above the 30% level. Turning to credit. Our credit profile continues to be strong despite the economic headwinds. 90 day delinquencies were $44,000,000 or 17 basis points of our entire portfolio compared to $21,000,000 in Q2 2022 and $55,000,000 in the same period last year.
Our credit underwriting and policies have remained consistent And the sequential increase is consistent with the seasonal pattern of Farmer Mac's 90 day delinquencies that were observed at the end of the Q3 due to the July 1 payment date. As of September 30, 2022, The total allowance for losses was $15,200,000 which reflects a $500,000 provision during Q3. The $400,000 provision to the rural infrastructure portfolio was primarily driven by net new loan volume. The $100,000 provision in the agricultural finance portfolio was related to the deterioration of the single agricultural Storage and processing loan. Now turning to capital.
Farmer Mac's $1,300,000,000 of core capital As of September 30, 2022 exceeded our statutory requirement by $514,000,000 or 66%. Core capital increased from year end, primarily due to an increase in retained earnings. Our Tier 1 capital ratio Improved to 14.9% as of September 30, 2022 from 14.8% as of year end 2021. And This is largely due to strong earnings results and capital release that we update through our second securitization transaction. And this was partially offset by growth in program assets.
Maintaining consistent credit standards And strong levels of capital is a very fundamental part of our long term strategy to support continued growth, deliver low cost and ensure the steady execution of our business model. After the successful execution of our second Farm Series securitization transaction in August. We are encouraged by the demand for agricultural backed securitized product opportunities because these align very well with our mission and foster continued success. The Farm 2022-one transaction was structured around 2 tranches, a senior guaranteed tranche and a subotinid unguaranteed tranche, both of which were very well received by the market despite a volatile environment for structured products. The success of this transaction further demonstrates Farmer Mac's capability to diversify long term funding sources And we intend to use this conduit to perhaps generate additional revenue.
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 in the future to continue to build liquidity for our investors. In summary, our entire team delivered exceptional quarterly results, While fulfilling several key strategic objectives, achieving record core earnings, ensuring continued strong credit performance and resulting in a minimum 15% return on equity and an efficiency ratio at or below 30%, coupled with a dividend payout ratio of 35%. And with that, Brad, I'll turn it back to
you. Thanks, Aparna. We are extremely proud of our 3rd quarter results And believe our performance provides yet another example of the dynamic and enduring nature of Farmer Mac's business model, which continues to be well positioned for earnings growth going forward. We have a solid long term strategic plan That we're executing on consistently and a proven track record of strong financial results as evidenced by record core earnings This quarter, we continue to deliver on our mission throughout agricultural economic cycles as reflected by our financial results Over the last few years, our capital base is strong and growing, providing plenty of capacity for future growth and creating more opportunities for us to enhance shareholder value. I also want to take a moment to recognize That our company earned 4 culture excellence awards issued by EnerGage, a research company that conducts the National Top Workplaces Recognition Program.
The 4 categories for which Farmer Mac was recognized were innovation, Employee appreciation, compensation and benefits and leadership. These recognitions are important to me and to our company, especially in the context of our solid financial performance. It's important that we deliver results in fulfilling our mission, while also providing a remarkable customer and employee experience. I thank our employees for their honest and enthusiastic participation in this survey and their dedication to Farmer Mac and our vitally important And with that, operator, I'd like to see if we have any questions from anyone on the line today.
Thank you. We will now begin the question and answer Today's first question comes from Marla Baker with Sidoti. Please go ahead.
Thank you. So a couple of questions Following the strong results this quarter, earlier in the year, you had been a little bit more cautious, I think, regarding prospects of Business volume growth, you talked about that you expected prepayments to decline Given the rising interest rate environment, but it seems like there's an appetite now for new Loan growth, and it's not just the payment side of the equation. Can you Give us a little bit more color there. And you touched upon it in your prepared remarks about farmers getting used to Perhaps higher expenses, higher interest rates. Can you talk a little bit about what you think has changed?
Hi, Marla. Brad here. I'd be happy to. And I'm also going to turn to Zach Carpenter, our Chief Business Officer, to give you Some additional color on this topic, but your observation is correct. Earlier in the year, we were cautious.
We're not feeling exuberant about business volumes right now, but they are a bit stronger than we did expect, maybe 6 months ago or so. And while the prediction of much lower prepayments rates has certainly been borne out, It's the growth really across all lines of business that has been Well, it's required a lot of hard work, let me just say that. But, it also, I think, as I said, exceeded Our expectations of 6 months ago. And one point I'd like to make just before turning it to Zach is that, over the last year, you've seen us Be much more deliberate in how we break out our segments of our line of business within Farmer Mac, How we originate, underwrite, administer, how we set up credit policies and credit administration For our different lines of business has really become clarified along those segment lines. And In addition to providing more insight for you into how those lines of businesses are doing, I think for us, it also is a very Good reminder of the benefits of the diversification that we have developed and really built into The business here at Farmer Mac over the last few years.
But with that, let me turn to Zach to give you some good day to day color on what's going on.
Thanks, Brad and Marla. Great question. I think really Brad is accurate in terms of volume growth, Especially over the last couple of quarters and really the diversified nature of Farmer Mac. The rapid increase in interest Earlier this year did cause us to take a more cautious tone. But now with our business model focused more in a diversified approach, we're able to leverage some of that new focus, especially in telecom and renewable energy as well as our relative as Brad noted in AgVantage Securities and having many different areas of opportunity and growth in this volatile market did create an opportunity for us to grow in all operating segments and lines of business this quarter.
That being said, the environment does remain volatile. The interest rates continue to especially in the short term, sector. So it is, prudent for us to remain cautious as we go forward. However, In a much more diversified business model, we have a lot more opportunity to continue appropriate growth, even in this volatile environment. And we're optimistic that With the numerous products and the segments that we have, we're able to take advantage even in this environment.
Okay. Thank you. That makes sense. I have one other question and it's about the securitizations. You launched that program last year, did another one in this past Q3.
Are you thinking now that this could be something more regular than an annual program? Could we see Multiple, issuances within a year?
The short answer is yes. I think if we look beyond 2023 to 2024, We are planning to be able to issue as frequently as quarterly. Now whether we do that will depend on market conditions. But building this program takes A combination of educating the market, our investor base and improving or not But changing our in house systems for how quickly we can aggregate data that's needed It's been one of the things that has paced our issuances to date. But Aparna, do you want to shed some light on How they might increase and what it will take for them to increase?
Yes, absolutely, Brad. I think you covered it really well. There are two factors, Paula, one and Zach and Brad both alluded to this, obviously with the rising rate environment, we've got to make sure that we've got a consistent deal Coming in, especially in the products that we think makes sense to securitize the Farm and Ranch in particular. A number of borrowers have already locked in lower interest rates. So that's certainly one factor.
And then the second factor is, I would say the operational readiness that we are able to exit is both in terms of being able to predict that deal flow and then shortening the amount of time Between what we would see as the coupon on the pool of securitized loans versus what the nominal rate environment is, I think that's a really important factor for us as well to consider as we think about the pace of issuances. That said, I think we were extremely by a second transaction, which was really a true test of the program because it was in the face of some really challenging and volatile market conditions especially for fixed income products. And given the response that we did receive from the market, we are encouraged and we do think That we'll be in a position to do another transaction. As things stabilize and as things normalize a little bit with the rate environment, we think, If not over the next 12 months, but certainly between the 12 to 24 month horizon, we could get to a point where we are doing more than 2 to 3
Okay. Thank you.
And our next question today comes from Gary Gordon, a Private Investor. Please go ahead.
Okay. Thank you. A couple of questions, if you don't mind, 1st, I ask this every quarter, as far as again, I can calculate there were no charge offs in the quarter. Is that correct?
That is correct.
Okay, terrific. I would personally highlight this. It's a terrific result. 2 questions on the hedging or in the interest spread. Obviously, this is apparently one of the worst Bond markets ever in U.
S. History, did this change your need for hedging? Or are there any necessary steps you had to take in Face of the drastic change in rates?
Gary, I'm going to have Aparna elaborate on what we're doing, but I'm just going to say out of the gate that the discipline that we've used over and over and over again, and I know we say this Probably too much, but the discipline we use really doesn't change much in an up or down environment.
Yes, exactly, Gary. I think you can see this Maybe if you just look at our NES and see how it's changed quarter over quarter, you'll see a slight uptick in our NES and a lot of this comes from the fact that We have been extremely proactive when rates were low in It's really extending our debt terms as well as raising capital when we didn't need it. So that is something that's really paying off for us. So it makes us or puts us in a position to be more opportunistic as we go out into the market. Now one thing that we are doing and speaking of hedging, And we've mentioned this before, when rates go down, we like to have a bank of callable debt that we can draw upon, so we manage our Interest rate risk when rates go back down.
So we are doing some of that and perhaps scrubbing off a little bit of The NES that we could get if we just left it alone, but we think that's prudent. And it's really that dynamic of managing and toggling and keeping our interest risk within a band that allows us to be in a position where our NES remains very, very consistent. And the only other point I'll make is, We're very well positioned as a result of this, both in a rising rate environment. You're certainly seeing that Even though there's a little bit of an inversion in the yield curve. We continue to benefit from that because we've got a bank of really equity that continues to price as Fed actions continue on.
Hey, good. Thanks. And last Aparna, you mentioned or gave three reasons why The NES net effective spread was higher than normal. I know quarter to quarter there's some random error, but you to a little less hedging because of your high capital ratio, better mix, more farm and ranch. And then, I believe you said more wider spreads available in the market.
Those factors, Are they sort of likely to keep this spread? Does this 103 Now more in the reasonable range or the high end of the range and you've got some volatility or there are prospects For a higher spread as these factors grow?
Yes. I think that there are a couple of You're exactly right in the three factors. And I would actually break them down a little bit further. One is just business composition and the work that Zach and his team are doing And really the pricing benefits that we're seeing on the loan side of the business and how positional shifts are playing up. That's a very significant part of this 1 and 3.
The other piece that I would say that we're really managing and hedging around is A relatively short term benefit that we'd like to see extend out a bit, which has a function based on the nominal rate demand, Right. As the Fed continues to raise rates and we see the short end of the curve go up and we have a bank of investable assets, Those are certainly putting upward pressure on the NES that we are seeing and that is a piece that will continue to hedge. So it minimizes volatility. But those are the 2 significant dynamics that are really playing out. And then I'll just caveat that we try not to peg it to A single point, 1% or 1.10%, but we try to stay within a band.
And you've always heard from us that Something that's more within the 90 to 100 basis point range, give or take. So that's really again where we think is a good place for us to Please go through as well.
Is that based on what you're seeing in the market today and kind of the current mix, do you have anything to add to that In terms of how it looks?
No, I think Aparna was right. I mean, we've seen this time and again in volatile markets, credit spreads are going to widen for certain types of Credits, we've seen that in ACVantage and we were able to be a relative value player versus the bond market out there. And so As credit reprices, we're able to take advantage on the loan side. Now that being said, even in a more Our less volatile interest rate environment, some of these new products and lines of business we are entering and have a higher Net effective spread component than we've had in prior years. They are small, but they are growing.
So over time, they will be more a meaningful part. But in the short term, as they grow, they will contribute modestly to some of the growth.
Renewable Energy Project Finance, for example. Correct.
Yes. Okay.
Thanks a lot.
And ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the conference back over to Brad Nordholm for any closing remarks.
Yes. Thank you very much Rocco. I mentioned a little while ago that We had recently received 4 awards for cultural excellence and how much I appreciated our employees and their contribution to that. I'm sometimes asked by investors, well, Isn't there inherent tension being a mission driven organization with a clear Mission, social purpose, if you will, of increasing the availability of credit for rural America. Isn't there an inherent tension between that And I think that these this recent award, just to point to it for a moment, Helps provide some context that when you have great people and you have a very, very clear mission, a very clear purpose, Which by the way is very motivating to those people.
And when you have a very disciplined approach Your financial objectives, for example, around NES and around efficiency ratios. We can consistently deliver 15% plus return on equity. We can consistently be a top quartile or even decile Financial performer, we can have recognition for our employees and for Farmer Mac is a great place to work And we can everyday measure quantify our progress in fulfilling our mission by showing this steady forward Rate of growth in our business. And so I really would love to challenge anyone back about Whether that is an inherent tension, because while it takes work to manage that, it's not just something that we're working to manage. This is actually a strength that we are trying to harness even more, because when you get to this all line mission, The people, the financial construct, the disciplines, the consistency of all those things, it can become a very Powerful engines.
So when we talk about the resiliency of the Farmer Mac business model, this really is what we're talking about. And I'm going to spend more time talking about this in the future because I believe it is a clear source of differentiation from Farmer Mac from many other in the public markets, in fact, most. And every time we get questions about whether there's tension or whether our Results can be sustained. I think this is a very important part of the answer. So I look forward to talking more with you about that.
Thank you, operator. Thank you, everyone.
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.