Federal Agricultural Mortgage Corp
NYSE:AGM
Earnings Call Analysis
Q3-2023 Analysis
Federal Agricultural Mortgage Corp
In a noteworthy third quarter, an agricultural finance giant recorded core earnings of $45.2 million, marking a considerable 35% increase over the previous year's same period. This impressive performance reflects solid strategies in asset liability management and accessing capital markets, reinforcing the company's long-term growth prospects. With $2.3 billion in gross new business volume, total outstanding business reached $27.7 billion. This growth was powered by new AgVantage securities, especially in the Rural Utilities and farm and ranch segments, signifying a robust and expanding market presence.
The company's agricultural finance line alone burgeoned over $400 million in the quarter, propelled by the successful issuance of AgVantage securities and longer-term commitments. The increase is also credited to the rising activity in corporate AgFinance, showcasing the company's deliberate efforts to diversify strategically. This is particularly relevant for a company that prides itself on continuity and the capacity to drive growth across its diverse business segment platforms, bearing testament to a solid strategic foundation.
In an environment where borrowers lean towards variable rate products, the company has observed significant shifts in the agricultural mortgage market. The proactive approach towards renewable energy and rural utilities, including broadband and telecommunications, is reflected in the company's portfolio growth. This foresight in shifting borrower sentiments underscores the company's adaptability in a dynamic market.
With credit markets tightening, the company's value proposition shines, demonstrating an ability to fulfill its mission in rural America. The company's firm commitment to regular issuance in the securitization market signifies a strategic priority that aligns with both borrower and investor interests. This focus on building a trusted secondary market positions them to effectively provide for rural America's credit needs.
The company maintains an effective spread of 120 basis points, leveraging low-cost excess capital and adept debt funding strategies. As the interest rate landscape shifts, the company's proactive equity capital allocation and the insulation from market volatility are indicative of a disciplined approach. This robustness is further accentuated by their capacity to navigate changing market dynamics, managing interest rate risk and maintaining credit spread advantages. Positioned to capitalize on quality investments, they plan to reengage the farm securitization market in the first half of 2024.
Despite a 24% year-over-year increase in operating expenses, primarily due to technology investments for systems enhancements, the company has managed to maintain an operating efficiency that's below its strategic target. These investments are aligned with the company's mission to support portfolio growth and product diversification. Credit strength is palpable as they report a decrease in 90-day delinquencies and maintain a strong core capital, which stood $581 million above statutory requirements this quarter. This foundational capital strength punctuates their long-term strategic vision, which continues to excel in executing a patient and prudent growth strategy.
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Good afternoon, and welcome to the Farmer Mac Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 Jalpa Nazareth, Senior Director, Investor Relations and Finance Strategy. Please go ahead.
Good afternoon, and thank you for joining us for our third quarter 2023 earnings conference call. I'm Jalpa Nazareth, Senior 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 2022 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 is our President and Chief Executive Officer, Brad Nordholm, who will discuss third quarter 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 report another record quarter for earnings, our sixth consecutive quarterly record. Our capital base remains strong, which, along with our disciplined asset liability management and uninterrupted access to the capital markets enables our long-term strategic growth objectives, while also providing a buffer against market volatility and changing credit market conditions. These results once again demonstrated the resiliency of our business model and the success of the strategic initiatives designed to grow our company profitably while -- and this is very important to us, while fulfilling our mission to rural America and also generating shareholder returns across changing market cycles. In the third quarter, we recorded core earnings of $45.2 million, reflecting a 35% increase over the same period last year. We achieved gross new business volume of $2.3 billion during the quarter, resulting in total outstanding business volume of $27.7 billion as of September 30, 2023. Volume growth this quarter was driven by new AgVantage securities with existing counterparties in the wholesale financing space. Specifically, we added a $500 million AgVantage security in Rural Utilities segment and several AgVantage securities in the farm and ranch segment, which more than offset maturing securities by a net $225 million. The overall growth in wholesale financing over the last six months primarily reflects many of our institutional counterparties, utilizing our wholesale financing facilities that offer their counterparties at competitive cost of funds. Also, these counterparties are layering in longer-term nonrepayable advantage securities to manage their asset liability maturity profile given the current level of interest rates and the pricing of the securities as competitive instruments given their other market options. We entered the fourth quarter with a strong pipeline of existing and new large financial institution counterparties, and we believe this renewed interest in wholesale financing, which drives the AgVantage product, will continue well into 2024. Also contributing to our overall volume growth this quarter is an effective business development activity across more diverse business segment platforms. The agricultural finance line of business grew over $400 million in the third quarter, predominantly due to the previously mentioned AgVantage securities growth, increases in longer-term standby purchase commitments, and incremental loan purchase volume in corporate and finance. Activity has been picking up in the Corporate AgFinance segment, reflecting our commitment to build a strong reputation in the marketplace with really a first-class team of people. While volume tends to be lumpy on a quarter-to-quarter basis, opportunities in this segment are generally more accretive from a net effective spread standpoint. We remain focused on this segment, which is a key component of our diversification strategy, central to our mission and impactful for earnings and continued growth. Activity in our Farm & Ranch segment continues to be moderate to flat as a result of higher interest rate environment, but prepayment rates also remain at historically low levels. The number of loan applications and approvals during the third quarter was relatively steady, reflecting borrowers' adjustment to the new rate environment. The agriculture mortgage market has seen a shift to primarily variable rate product as borrower sentiment generally expects rates to decrease over the next five to ten years. Turning to our Rural Infrastructure line of business. We saw healthy loan purchase volume growth in our Rural Utilities and Renewable Energy segments. New Rural Utility loan purchase volume this quarter was the result of our normal course capital expenditures related to maintaining and upgrading utilities infrastructure as well as investments in broadband infrastructure and our continued focus on telecommunication investment in rural America. Our renewable energy portfolio grew over $100 million during the first nine months of the year, reflecting our robust efforts and investments to grow this portfolio and our pipeline is strong heading into year-end. Renewable energy is both an important economic development opportunity for rural America and a business opportunity for us at Farmer Mac. As I've discussed in previous calls, we plan to invest additional resources that will help us further penetrate the renewable energy market as opportunities arise. In recent months, as the market stabilized following the regional banking crisis earlier this year, we've consistently presented our product offerings as a potential capital efficiency and liquidity conduit for our customers and agricultural finance, and Rural Infrastructure lines of business. We believe that this is because of the relative value of Farmer Mac and what we bring to the agricultural and rural credit markets. We believe that it's even greater when credit is a bit tighter, allowing us to further deliver upon our mission to build a trusted secondary market for credit to rural America. For example, we have helped customers in the farm, F-A-R-M, the farm securitization program to achieve their return objectives by utilizing the conduit that we have created to free up capital and manage their balance sheets more optimally. As we have said on previous calls, securitization is a tremendous opportunity for Farmer Mac. It's highly central to our mission, and we are committed to being a regular issuer in the market for the set of securitization products to align with both our borrower and investor interest. The momentum and excitement that you heard today about our record results would not have been possible without our team's continuing dedication and commitment to our long-term strategic plan and to the alignment across our organization and with our customers to bring even greater efficiencies through agriculture and Rural Infrastructure sectors. Our business approach, combined with a high caliber of talent across the organization is really format to continue delivering consistent positive results. That is why we expanded our long-term incentive compensation program to all of our employees in the organization during the third quarter. This new incentive plan is intended to align all of our employees to the company's long-term performance and significant achievements, and also position each of our employees for their long-term financial success. Our underlying business model, strong capital position, and uninterrupted access to the debt capital markets throughout the various market disruptions, uniquely positions us to partner with our customers to help them achieve the growth of their businesses and manage the risk they face around future capital requirements and liquidity. The foundation of our strategy is our consistent financial and operational execution, coupled with proactive management of our balance sheet and funding sources. This has positioned us well in the changing credit environment and is expected to continue to create more opportunity to enhance shareholder value and fulfill our mission. And so with that, I'd like to turn the call over to Aparna Ramesh, our Chief Financial Officer, to discuss our financial results in more detail. Aparna?
Thank you, Brad. Good afternoon, everyone. Our record third quarter 2023 results highlight our balanced well-measured approach, continued strong credit quality, and resiliency across market cycles. We achieved $2.3 billion of gross new volumes this quarter. Some of the key components included $1 billion of wholesale financing in the agricultural finance line of business, the majority of which was refinancing of existing AgVantage securities. $500 million of wholesale financing in the Rural Infrastructure segment. $204 million of long-term standby purchase commitments. $231 million in new corporate AgFinance loan purchases and unfunded commitments. $205 million in Farm and branch loan purchases. $91 million in new Rural Utilities loan purchases, $44 million of which were telecommunication loans and $17 million in new renewable energy loan purchases. Even after repayments and maturities, we grew approximately $900 million this quarter in our outstanding business volume, and this speaks to the benefit of strategic decisions over the last few years that we have made to diversify our portfolio and create opportunities in all interest rate environments. Core earnings were $45.2 million or $4.13 per share in third quarter 2023, and this reflects a 35% year-over-year increase. This increase was driven by a record net effective spread of $83.4 million in third quarter 2023 compared to $65.6 million in the same period last year. In percentage terms, our net effective spread in third quarter remained at 120 basis points, and this was primarily driven by our low-cost excess capital, debt funding strategies in previous low-rate environments, as well as our ability to redeploy both the excess capital and the lower cost debt into higher earning assets. This phenomenon was further enhanced by the continued trend towards higher spread volume that is evident in our new segments like corporate AgFinance and renewable energy. The capital that we raised opportunistically when rates were at historical lows in 2020 and 2021 has reduced the need for us to raise more expensive term and callable debt in this rising rate environment. We continue to defensively hold approximately $800 million in cash and other short-term instruments in our liquidity portfolio. Not only does this help us whether potential market disruptions are excess and highly liquid capital generates immediate returns in a high nominal rate environment. This benefit is expected to continue to create a downward pressure on our non-GAAP funding costs as the short end of the curve continues to increase with Fed actions and the reinvesting of excess capital generates additional return with an upward repricing of our short-term investment portfolio. While the rise in short-term rates has provided an asymmetric benefit to earnings, we project a limited downside to earnings if rates decline in the future, and this is due to our proactive equity capital allocation strategy where we are laddering and layering duration to minimize volatility. Specifically, we expect to retain some of this benefit over the medium term if rates decline as we have started extending maturities in our investment portfolio. These are all practices that are consistent with our disciplined approach designed to help minimize earnings volatility. Despite some macro headwinds, we continue to see strong access to debt capital markets and a flight to quality investments, which allows us to be very well positioned to fund new asset opportunities as they arrive. As Brad highlighted in his comments, we have spent, and will continue to spend a significant amount of time and resources to enhance our infrastructure and engage with our customers and investors to support a robust and liquid market for a firm securitization product. Securitization has many beneficial aspects of Farmer Mac. It allows us to diversify our funding, enhance and optimize the balance sheet by efficient deployment of capital, and it also enables our growth strategy by targeting new asset opportunities into our conduit.While we're closely monitoring a changing market dynamic, we expect to return to the market in the first half of 2024, with another similar farm securitization transactions as the previous three transactions. As we highlighted last quarter, our fundamental asset liability management approach, where we match fund the duration and convexity of our assets and liabilities in all rate environments remains unchanged as this practice has allowed us to successfully navigate changing market environments and contain earnings volatility. Our business has certain natural hedges that we've described to you before, and we've horned this over time to help insulate us from interest rate volatility. This is a key differentiator for us relative to other financial services entities, especially depository institutions. For example, when interest rates rise, prepayments also tend to decline, but interest on excess cash and capital would likely increase, and we would continue to have strong market access as we do not rely on deposits as a source of funding. And conversely, when interest rates decline, loan purchase volume often increases, but prepayments also tend to increase and interest earned on our liquidity portfolio usually ends. We're able to manage our interest rate risk by exercising callable issuances and maintaining our spreads. And this is the differentiator that I mentioned relative to depository institutions. Although these natural business dynamics are not perfect offsets, they do counter balance to mitigate volatility from changes in short-term interest rates. Our liquidity and capital positions also remain well in excess of all regulatory ratios. And our projections show minimal change in our profitability and limited exposure to movement in interest rates, where the market rates are projected to go up or down. As of September 30, 2023, Farmer Mac had 297 days of liquidity. And this is another important data point as it validates our resiliency against short and medium-term market disruptions. Turning to operating expenses. These increased by 24% year-over-year, and this is primarily due to the expenditures that are associated with a multiyear technology investment in our treasury and cash management systems to enhance our trading, hedging and reporting platforms. This modernization effort is expected to position us to more effectively defend against cyber and fraud threats while also allowing us to scale our portfolio and diversify our product offering. I'll note, this effort is not a like-for-like, but is geared to the future and aligns with our business and funding strategy. We also plan to continue to make investments in strategic focus areas such as renewable energy, and we intend to model our asset infrastructure, including our servicing and loan platform to support our growth and strategic objectives. As a result, we do expect our run rate operating expenses to increase at a pace above 2023 and historical averages, and for this to continue over the next several years. Our operating efficiency was 27% through September 30, and it's well below our strategic plan target of 30%, primarily because revenue growth increased at a significantly higher rate and expenses. We will continue to closely monitor our efficiency ratio and manage it as we have done to stay within a band around 30%. As we make investments in our loan infrastructure and funding platforms and innovate our loan processes to accelerate growth, we may see temporary increases above the 30% level. Our credit profile remains very strong in aggregate despite economic headwinds. We saw a decrease in 90-day delinquencies from the second quarter, which as of September 30, reflects 15 basis points across our entire portfolio. The total allowance for losses decreased sequentially to $18.9 million in the third quarter, and this reflects a $200,000 decrease from second quarter 2023. The modest decrease was primarily attributable to a $3.8 million release from the allowance for the agricultural finance portfolio to reflect the full payoff of a single AgStorage and processing loan in the third quarter. And this was partially offset by a $3.6 million provision to the allowance for the Rural Infrastructure portfolio due to a single telecommunications loan that was downgraded to substandard during the quarter. Turning to capital. Farmer Mac's $1.4 billion of core capital as of September 30, 2023, exceeded our statutory requirement by $581 million or 69%. Core Capital increased sequentially, primarily due to an increase in retained earnings. Our Tier 1 capital ratio as of September 30, 2023, improved to 16%, largely due to strong earnings results and higher retained earnings. Maintaining credit standards that reflect our risk profile, coupled with strong levels of capital is a fundamental part of our long-term strategy. We are anticipating overall stress in credit markets for macro headwinds, and we're proactively monitoring our exposures. However, we expect a strong capital position to allow us to remain resilient and be a source of low-cost liquidity for our customers and borrowers even in difficult times. So in conclusion, our entire trade team delivered strong quarterly results, surpassing the key metrics that we highlight on each call while staying within our credit framework. Notably, we delivered a record 19% return on equity this quarter and stayed well below our efficiency target of 30%. We believe that our balance sheet is well positioned for uncertainty, and we are more optimistic than ever to deliver on our long-term strategic plan objectives. And with that, Brad, let me turn it back to you.
Thank you, Aparna. We are extremely proud of our third quarter results, and we believe our performance provides yet another example of the dynamic and the during nature of Farmer Mac's business model, which continues to be well positioned to deliver earnings growth and strong profitability for the remainder of 2023 and into 2024. Our high levels of capital enable us to continue to execute our solid long-term strategic plan and remain focused on our mission to increase successful financing for American agriculture and rural infrastructure. We're aligned across our organization and with our customers to bring even greater efficiencies and lower costs in providing financing to lenders for the benefit of their Farm & Ranch agribusiness and World infrastructure customers. And now, 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. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW.
I wanted to start with a question on spreads. So it sounds like spreads could stay closer to this elevated level at least in the medium term. In the past, you've discussed a normalized spread range, I think it's 95% to 105%. Is that still kind of the normalized level we should think about? And if so, how should we think of sort of the trajectory of spreads getting from here to there?
I wish I could provide a perfect answer to that because we have contributions to that positive variance coming from both our treasury operations and how we're funding in this higher interest rate environment, as well as the increasing diversification of our business into lines that have more accretive, higher spreads. So let me first ask Zachary, our Chief Business Officer, to give you a little bit of additional color on spreads on our different commercial lines of business and then Aparna can kind of wrap it up with further comment on treasury.
Yes. Thanks, Brad, and a great question. I think it's been more apparent, especially over the last 12 to 18 months as our business lines have diversified into new areas of growth, as Brad said, a much higher freed spreads than our historical lines of business, especially in this environment where our Farm & Ranch mortgages have slowed down given the interest rates. You're seeing a much more inclusion of volume from our telecommunications, renewable energy and Corporate AgFinance lines of business, which, by their nature, have a larger spread, higher secretive spread than our historical overall portfolio. Those deals are lumpier in nature, larger. But also have tended to grow quicker, especially in this environment where Farmer Mac has been a new and supportable use of capital for these types of transactions. So as we grow in these new areas as well as growing some of our historical segments, I think you see more of a weight to these higher accretive spreads going forward. But I will say, as Brad mentioned, it's very hard to predict. And some of these new lines of business are spotty at times in terms of paydowns and maturities. So just in this environment, we've seen a significant growth in some of those new areas.
So Just to add a little bit to that, it for example, with some decline in rates we saw a pickup in our Harmon rash origination activity. That, as an example, could have a slightly dilutive impact on our spreads. If we are successful accelerating the growth of renewable energy, it could have an accretive impact to our current spreads, which one will accelerate faster is quite difficult to predict. But I think we can confidently say that looking out a couple of years, it is not our expectation that we would revert to a 90, 95 basis point NES that we will be in north of that because of the composition and growing diversification of the portfolio. But Aparna, can you add to that?
Yes, absolutely. And I just want to lay again one other comment around business composition. I think it absolutely has to do with business composition, but I will also say that you and Zack alluded to this. Our rural infrastructure portfolio, if you just go back several years, the spread on that portfolio was significantly lower than it is today, and that's been a huge contributor in addition to the new lines of business. So it's just another example of the fact that we've been able to be a very consistent provider of liquidity and debt financing to our counterparties, and we've been able to do that while not just maintaining but also increasing our spreads. So I just want to add that one comment. And then in terms of treasury, I'll just say that our funding strategy has really come to fruition in the rising rate environment. And I made some of those comments earlier on, which you likely heard both. But I'll just note a couple of things, right? And I think a natural question is, would this sustain? Especially as the Fed pauses or is likely to pause. We have some in-book hedges within our funding strategy, and one of them has to do with callable. So we will actually layer in callable and we continue to do that. And that actually has the effect of being a little bit dilutive to spreads. But we do that deliberately because we do not want to be in a position where if rates dramatically trended downwards, we are caught in a situation where our funding costs outpace our ability to put loans on. So these callable spreads tend to come on at slightly wider margins relative to stable spreads. We have consistently layered that in, but it is a hedging strategy. So that's just one thing that I'll know more to the positive. It's going to help us maintain that spread band of north of about 100 basis points. The second piece that I will just highlight around our funding strategy has to do with how we manage our duration. So as we anticipate being close to or at the peak of the rate cycle, we are very systematically and have very systematically extended some of our investment portfolio while maintaining our interest rate risk profile. And that, again, has the effect of providing a natural hedge if rates were to trend down. So all of this is to say that while we try to manage to a 95 to 105 basis point NES, I think given where we are headed, both from a diversification of lines of business as well as our funding strategies, I think it would be fair to say that we'd be at the upper end of that as we look out into that.
And then actually switching to the dividend. Can you just remind us how you look at the dividend? Is it sort of a payout? And then just given that the returns are sort of above sort of somewhat of a normalized level, could that payout be a little bit lower just as the ROEs remain elevated? Or did you just get philosophically how you're looking at it?
Yes. In terms of the dividend, that's something that we'll look at very seriously as we get into February of 2024. Based on year-end results, we're quite disciplined in revisiting it annually. You have seen what has happened each year for the last x number of years, consecutive increases in dividends. Given these results, it's very reasonable to expect a further increase in the dividend. But I'm not going to provide any guidance on exactly how much that may be today. The factors that have gone into it in the past have been, what is our growth rate and consumption of capital? What is the outlook for earnings? And the past years, that's resulted in dividends that have been just inside of 35% of after-tax earnings. That's not a hard and fast target however. So when we do that evaluation, we will be looking at growth acceleration and potential need for capital. As securitization programs mature, we may find that we have proportionately less increased need for capital. That will also be a consideration. And then just an outlook for the business, so stay tuned. Certainly, we will be strongly considering taking action on dividends in February.
The next question comes from Bill Ryan with Seaport Research Partners.
First one, obviously, we hit on the revenue side a little bit earlier. But thinking about expenses, you're up 21% in the second quarter, 24% in the third quarter. And it sounds like you alluded to on the conference calls, you have the ability to really kind of manage that as revenue makes a directional change, a little faster, a little bit slower. Could you start off by talking maybe about some of the levers that you have to kind of dial back a little bit on the investments subject to revenue growth?
No Bill, I think you hit the nail on the head, right? We make our investments fairly aggressively, but in line with our growth strategy. And as you can see, we target 30% and we're well south of that and probably right in line with historical averages. A couple of the levers that we do have, some things are fairly baked in, such as the fixed investments we've made in our technology platform. But I would just say that we are looking to accelerate the spending on that particular investment, largely because we see ourselves doing pretty well in terms of just how that project is tracking. So we do have a few levers there in terms of how much we want to layer in. And this is something we can do through this year as well as next year. And then we've got some other planned investments and I talked about that with respect to our loan initiation strategy. And so again, I think we can face that as we need to in a way that is both consistent with optimizing our expense profile. And then the final area that we do intend to make investments, which could drive up our overall headcount, which is a little under 180 right now, has to do with some of our plans to expand into the renewable energy segment. And again, that is something that we plan to do. And we think that it will pay off in terms of just the higher NES that you've already seen within last segment, but again, that's also levels. So the way in which we really manage our spending profile is to really look at this quarterly basis. And we track very closely to how our revenue projections are coming in. And we've left enough finances room such that we can dial things back as we need to if we don't think we're going to hit our revenue projections. But as you heard from the revenue story, we have no reason to not believe that.
Kind of a follow-up question. And this came out some money center banks that reported a couple of weeks ago, and they were kind of talking about Basel III and tax equity investments may be receiving an incrementally higher risk weighting than what they are right now which they kind of implied it might impact some of the renewable energy projects going forward that are partly financed through this means. I was curious if you had any thoughts on the matter. And it seems counterintuitive that they go that way ultimately because obviously, renewable energy is so important, but I'm just kind of curious how you're thinking about it.
Yes, we've thought about it a lot. First of all, we have not been making tax equity commitments. We've been making commitments to senior secured project financing for renewable energy projects, so straight debt. The proposal is to increase the capital requirement for tax equity, which again, we're not doing, but many of the big banks are from 100% to 400% and that would have more than a chilling effect on the tax equity market. And that would be too bad. If that happened, it would slow down the investment in new renewable energy projects. But our view on this is that the addressable market as of about two years ago, it was about $8 billion to $10 billion with the IRA Inflation Reduction Act and the additional incentives for renewable energy projects. The expectation is that, that may have as much as doubled. We're starting from a very low base. And we have inherent advantages in our ability to price and structure project finance compared to other banks. It's very difficult for banks to make one-year fixed rate amortizing loan commitments as an example. And so we are starting from a very, very low base. So to take market share as we put effective people in the field and develop the Farmer Mac brand and capability in that market. We don't think it's particularly difficult from where we stand. So even if the market were to contract by, say, 1/4 or 1/3 because of constraints in the tax equity market, we still feel that there's player market for us to build market share in for many years to come, quite frankly.
Okay. One last probably very quick question. Probably a rhetorical question in a way, but what is the status of the farm bill? I mean I'm assuming given what's going on in Congress, it's just kind of going to get extended probably.
That changes every day. But this morning, Congressman Scott from Georgia is the ranking minority member of the Health Agricultural Committee, came out with an indication that it was his opinion that the bamboo should be extended a year before the new bill is acted on. He then joins the two majority of minority Senate leaders, Savino and the majority, the ranking or majority house leader, GT Thompson out of Pennsylvania with that view. So it's pretty clear that we're going to probably see an extension, maybe it really needs to be done, really needs to be done by the end of the year. There's a scenario under which the extension is for less than a year and it puts pressure on them to act on it during the first half of 2024. We'll see, obviously, Congress has a very, very ambitious and politically well scheduled in front of it between now and the new year and then into 2024. So our base expectation is that we have a one-year extension.
The next question comes from Brendan McCarthy with Sidoti.
Just wondering if you can quickly comment on the telecom loan downgrade that led to the $3.6 million provision. I guess was that your mostly anticipated? Or was that more of a surprise? And is that like an outsized figure that is typical?
No. I would ask Marc Crady, our Chief Credit Officer, to jump in here. But look, we have thousands of loans. And for us to have loans that occasionally are downgraded to a point where they require special allowances is not at all unusual. We're putting a spotlight on this one because it sticks out because it happens to be the only one. So that's important to keep in mind. But I'll let Marc give you a little bit of color. Obviously, we're not going to name names, but a little bit of color on the nature of the credit softness that resulted in the downgrade in the allowance.
Yes. Thanks, Brad. Yes, the downgrade was not a surprise. As Brad mentioned, our telecom portfolio seasons, we're expecting additional downgrades in the future. This was the only one we downgraded this quarter in telecom, though I will note. The borrower is a large telecommunications business. The company had weaker-than-expected operating results in the quarter, increasing leverage. There's some large debt maturities that are coming in 2025 and some other kind of secular challenges in the telecom industry. So I wouldn't say it's sort of out of the ordinary or it was unexpected. And I guess, we'll expect in the future.
So probably fair to say that just kind of given the shift towards some of the higher spread businesses in Rural Infrastructure Finance. Is it fair to say just maybe we might expect a higher degree of provision for losses over the next one to two years?
I won't predict that we will have higher provisions for losses in the next couple of years, but I think we will have more credit stories that we'll be working on and incorporate the business, telco. Don't know about renewable energy. And compared to Farm & Ranch and our electric cooperative business in the past, there'll be incrementally more of those, but we are absolutely confident that we're getting compensated for the risk and that we have the ability to manage these risks. So yes, in the allowance that it may occasionally show up, but you're also going to see it in the profitability.
Yes. And Brendan, I would love to say that we've got a very robust capital position well in excess of our regulatory requirements. So overall, the balance sheet is very well positioned to handle any stress.
Absolutely. Yes, that makes sense. And then one more question from me just. I know last quarter, we talked about some changes to the AgXpress, your underwriting standards, I believe it was, loosen the loan-to-value provisions a bit. But just wondering if there was a noticeable increase in volume kind of directly attributable to that change from last quarter?
Yes. I think we can pretty well quantify the percentage increase in the number of overall applications that now qualify for AgXpress. But Zach, can you offer some color on that?
Yes. Great question, and we're very excited about that product enhancements. Unfortunately, I think the biggest headwind in that space is the higher interest rates, right? So regardless of product, I think that's just been sticker shock over the last 12 to 18 months, which really slowed down or basically stopped the refinancing market in this space. So that being said, I think what's the positive story here is the percentage of new loan applications coming through our platform is much higher in the AgXpress space than it ever has been in the past, meeting this product is being much more competitive and much more of a positive reaction in the market. So as a total compensation of all loan applications is shifting more towards AgXpress. And we believe as borrowers get more accustomed to this higher rate environment and see new purchase opportunities and/or start to refinance over the next couple of years that this product will drive increased interest and even a higher concentration or composition in our total applications.
It's nice to add something today that it's now approaching 70% by number of applications?
60% to 70% on the month, yes.
Yes. And keep in mind, that was four years ago.
That's right.
The next question comes from Gary Gordon, a Private Investor.
Two questions. One is the large percentage of your new business that's wholesale. Is this sort of a one-off? Or does this say something about the stresses on the banking system?
Yes, Gary, this actually is a really positive story that I'm going to ask Zack share with you. But in addition to exactly what's going on right now and driving the growth, I want to just go back and also link this to earlier discussion about NES and talk for just a moment about what has been an evolution of pricing philosophy airtime America over the last four to five years. Going back four or five years ago, we kind of calculated what's the minimum return we need, and that was our price. And today, we pay attention to that, but we also pay attention to where is the market and what alternatives do customers have? And what does it take for us to capture market share? And is that market share profitable? And what you saw over the last couple of years is our deliberate decision not to chase business that wasn't profitable, and a lot of that was the wholesale business. And now we're seeing an absolute reversal of that. And so we're being opportunistic. So I really want to emphasize that thinking about pricing, not as a minimum of what do we need here at Farmer Mac, but what is their compensation for the risk and in the marketplace, and what can we take from the marketplace while fulfilling our mission is driving much more of what we do now.
Yes, Gary, Zack here. Great question. We're very excited about the potential outlook in this space. And going back in history, about three years ago, we had a couple of counterparties and we've had them for a long time. What we didn't have was the right people and the right mindset in place to really go out and get our brand in the market to see what opportunities are available. And I think over the last two to three years, we've felt that personnel and helping that talent to really get out there and understand and make sure our brand is resonating. I think the second thing is why strong opportunities now targets the market. So layer in the strong individual brand that we have internally to get out there and call them the right people. We're also better. We're a strong relative value in the market. There are very few opportunities to provide wholesale financing on agricultural loans. And in a market where bond yields and rates are volatile on a daily basis, and we have a secured product that's very strong relative value to these counterparties. So I think it's a combination of how we built the team, how we're out there communicating with these counterparties, and how we're relative value to other potential opportunities that are out there.And I think Aparna mentioned it earlier and Brad mentioned it now from the pricing, we believe in this market, we are a strong relative value and these bonds that are put in place are generally medium to long term, not prepayable loan. So it really is sticky revenue for us. And if the market shifts, which it did a couple of years ago, we were very thoughtful in terms of putting additional capital out there that might not be appropriate from a revenue or return perspective. So we're excited about the opportunity. We're a strong relative value in this market, and we think 2024 will be hopefully positive for us.
Okay. Aparna also mentioned today the core capital ratio was 16%. Where is that sort of in the normal range or where you feel comfortable? How should we think about that 16% number?
Yes. I mean, I think 16% is probably a great place to be for a couple of reasons. One, we actually appointed three reasons. And it gives us a ton of flexibility. And one of the reasons is that we just raised a lot of low-cost capital that we have no intention of falling because it's sub 5.5% preferred, that potential capital is incredibly accretive for us. So that would probably stick around. The second driver has to do with our securitization program that affords us the ability to get a long Tier 1 capital release and having done three transactions so far. That's been a huge driver of that. But I think the third factor that I think we're the most proud of, has to do with just that the organic growth in our capital base that comes from strong retained earnings while maintaining our credit profile. And it's all those reasons that you just heard, Gary, from Brad and from Zack just around our revenue accretion. And that's really driving a big component of why we're at 16%. So that's certainly outpaced what we had anticipated, but it's a really good problem to have. And as we look out ahead, just linking this with some of the other questions, it gives us a lot of degrees of freedom. One to fulfill our mission, but two, to really grow and expand into these new lines of business that tend to be very capital consumptive. And we can do that without really having to force ourselves to go out into the market and raise expensive capital. I wouldn't want to be in the market now raising capital. So I don't think we have a targeted band. But as we see expensive sources of safe preferred fine due, we might make some decisions relative to that, our retained earnings on securitization, but we just have to see levels right now that we can play with it. So a really great place to be.
The next question comes from DeForest Hinman, Retail Investor.
It's good to see new sell-side farm on the call. 35% earnings growth, very impressive, spreads higher, pretty unique results given the current environment. So very strong results. Question on hiring activity, open positions you're looking to hire and how many people have you hired so far this year?
Our correct net account is somewhere in the 183, 184 range, something like that. I think we started the year on 159, or 160 something like that. So simple math, 24 on 160, maybe about 14%, 15% net increase in headcount. The base salary increase would not be 14%, 15% because you don't have to have two CEOs, at least not yet, and two CFOs and the tandem physicians that are filling gaps throughout the organization as we expand. It's something we keep a very close eye on. And it comes back to the efficiency ratio. We do view our compensation expense. It is a very large portion of the expense obviously. There's some variability to it that adjust with performance in our short-term incentive plan and now our long-term incentive plan results. But we view base salaries and people expenses is really a fixed expense here. So we're very cautious about adding new people. What we do add with them when they can drive additional revenue. So for example, we've recently added some positions and some leadership, frankly, around our renewable energy business development. Underwriting, we expanded our servicing portfolio midyear. We added a couple of positions associated with that. So we're being mindful of the overall expense, but also the profile of the people we're adding and making sure that we're adding people who are revenue generators as well as those who are administering other important parts of the organization.
Okay. And I did want to ask about the energy portfolio as well. We did see a little bit -- it's a multipart question, a little bit of a slowdown in sequential growth in that business. We've been seeing a lot of headlines in the news about offshore projects getting stalled or looking for changes in tax subsidies and other things. Are you seeing that within the land-based projects, the rural projects, whether they be sole or wind? Any color you could provide there would be helpful.
Keep in mind, our focus is our land-based projects. The massive offshore wind projects are many years out, if at all. We're looking at the more immediate opportunity, solar wind and rural areas. Also a convergence of energy and agriculture and refi digesters, methane gas capture systems, which are quite interesting. But I would describe it right now as we're building the infrastructure to accelerate the growth rather than having the infrastructure in place and you've seen a trend down. Zach, do you have some color there?
Yes. Good question. I would highlight that our pipeline in the renewable net space remains very strong. I think to your prior question in terms of head count, we wanted to get more infrastructure in there to meet the demand that we see in the market. So that does impact getting the loans through the process underwritten and closed. That being said, just in this space, these loans take a long time to work through the process. There's a lot of loan documentation, legal documentation that needs to get done for these loans to finally close and then start construction and/or get to a point where the construction is completing their operating. So they take a lot longer time to move through that process than some of our other lines of business. So frankly, what we saw in this quarter was we're in through that process, and we have, like I said, a very strong pipeline, and we feel that as though get to the point of ready to close and fund that, we'll be providing a helpful financing to support our counterparties in the mission.
And then just on some of the mechanics of the growth. I think on the last call, we talked about some of the larger syndicates that we're lending in the energy space, European banks and Japanese banks. Have we come to some agreements with getting put in those syndicates so we could be seeing additional growth in the fourth quarter and heading into 2024? Or is that more of a 2024, 2025 goal or milestone?
Yes, it's a great question. Our primary focus is on those counterparties that support the large broad syndicated transactions. Yes, I do want to emphasize, as Brad said, we needed to get some leadership and infrastructure around this team to support the growth that we saw in the market. So our primary focus was to get the right expertise in-house now to pivot to focus more on working with those counterparties. We believe to support the foundation of this business. We do want to look at those larger syndicated deals that have an appropriate risk-adjusted return to meet our needs. They are larger generally, and we want to rely on the strength of those counterparties that are in the market constantly. So I would reaffirm that our outreach strategy and the partners we're working with will be those organizations that lead to our syndicated deals.
I mean, do you have any time line you share with us all?
I'll just refer back to the pipeline is very large and very strong. And so we feel confident that over the next few quarters and into the next couple of years that we'll see increased growth opportunities.
The next question comes from Charles Oat with Cary Street Partners.
This question is for Aparna. I think the answer may give you a chance to brag a little bit. Two months ago, a very credible sell-side shop who specializes in financial services initiated on Farmer Mac with a very informative in-depth report. What caught my attention is that the third leg of their thesis specifically mentioned what they consider to be an exceptional treasury and finance operation. Never in my career have I ever seen something like that specifically broken out. I certainly agree. I'm sure everybody else does. But for instance, if you like the Morgan bank, presumably, it has assumed that they have a top shelf treasury and finance operation. But this report focused on what you're doing, but it didn't really say why. It's just that it's really, really good. Do you know what they're referring to? You're better, they say, but better than what? Better than who? And what are you doing and what I summer back 2.0 to merit those congratulations. So please --
Thank you. I won't drag, but maybe I'll just stick to some of the facts that really appreciate your question. I'll just say that what we did isn't unusual. I think what we did was just consistent. And it's consistent and disciplined execution from a funding standpoint and from an asset liability management standpoint. And when you do that and you also play not for the short term but play for the long term, sometimes you can actually outpace your peers. And so I'll point to a couple of specific things. when REITs were very low, we went out and raised fairly advantageous capital. And we've talked about that. But a little bit, we realized at that point in time how advantageous it would be. We also were careful during the period of stress, which, again, is a very intuitive thing to do to shore up our liquidity profile. And so we make sure that we had an abundance of cash if ever there were a market disruption, then we'd be well positioned. Again, we raised a lot of that during a period when rates were valuable. The first thing we did was we extended our debt really looking at the rate cycle and say not just relatively speaking, but on absolute terms, rates are pretty well. So to us, these were very intuitive decisions, and we were also paying very close attention to what the Fed was signaling and where the trends were headed in terms of inflation. And so we did all of these things with the expectation that when you're at the bottom of recycle, there's only one way for rates to go, and that's up. And so as this has played out and inflation has indeed been a huge factor. I think the only thing we didn't anticipate was how fast and how much the Fed was going to raise rates. And that's really, I think, what caught a lot of other players unaware. They probably didn't fully appreciate what the side signing in terms of raising rates very quickly. But because we've made those moves that I talked about, we just found ourselves extremely well positioned, and we didn't have to actually go out and raise either expensive debt or expensive capital. And I think that's really played out to our advantage. And we're able to then diversify into some of these new lines of business but of really taking on a lot of additional cost. So I'll just stop there, but I do appreciate your question, and I hope Zack provides you with a little bit of color around how this all seems to be.
Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Brad Nordholm for any closing remarks.
Thank you, operator. Thank you all for joining us today. It's been a real pleasure to have you on and actually listen to and do our best to address your very thoughtful questions. So thank you very much for those. We are extremely proud of what we've done here at Farmer Mac, and we're extremely proud and confident of how we're positioned as we look ahead to 2024. We look forward to sharing very strong results with you in future quarters. There's nothing that we see on the horizon that is causing us a huge anxiety other than, obviously, the huge terminal, the Middle East and maybe to some extent, the U.S. Treasuries funding schedule for the remainder of '24 and going back to '23 and going into '24. We're keeping a very close eye on that. But in terms of our business in the markets which we operate, things are very solid right now. And as I say, we are very confident, very optimistic about 2024. So thank you for joining us, and please get back to Jalpa with any questions. We look forward to speaking with you again in three months, if not sooner. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.