Federal Agricultural Mortgage Corporation (NYSE:AGM) Q1 2024 Earnings Call Transcript May 6, 2024
Federal Agricultural Mortgage Corporation beats earnings expectations. Reported EPS is $4.28, expectations were $3.94. AGM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Farmer Mac First Quarter 2024 Earnings Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, May 6th, 2024. I would now like to turn the conference over to Ms. Jalpa Nazareth, Senior Director of Investor Relations and Finance Strategy. Please go ahead, ma’am.
Jalpa Nazareth: Good morning and thank you for joining us for our First Quarter 2024 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 2023 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 our most recent Form 10-Q and earnings release posted on our website, farmermac.com, under the Financial Information portion of the Investors section. Joining us from management this morning is our President and Chief Executive Officer, Brad Nordholm, who will discuss first quarter 2024 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?
Bradford Nordholm: Thank you, Jalpa. Good morning, everyone, and thank you for joining us. Our team has once again delivered excellent results, demonstrating our unwavering commitment to grow Farmer Mac profitably, while fulfilling our mission to rule America and generating strong shareholder returns across changing market cycles. The year is off to a strong start as we recorded core earnings of $43.4 million, reflecting a 12% increase over the same period last year. We provided $1.4 billion in liquidity and lending capacity to lenders serving rural America while maintaining our strong capital base, disciplined asset liability management and uninterrupted access to the capital markets. The overall earnings story continues to be consistent.
The diversification and resiliency of our business model supports our long-term strategic growth objectives, while also providing a buffer against market volatility and changing credit markets. I’d like to highlight two noteworthy transactions that we’ve recently completed. First, the successful execution of our fourth FARM series securitization transaction. Farmer Mac remains committed to developing a vibrant and liquid agriculture mortgage-backed securities market that is central to our core mission to improve credit accessibility in rural America. This initiative is our opportunity to transform the agriculture mortgage market industry with new efficiencies, helping to lower the cost for the end borrowers. We are very pleased by the tremendous support we have seen from our customers and investors for this program and remain committed to being a regular issuer in the market with a set of securitization products, that align our borrower and investor interests.
The second transaction worth noting is the acquisition of a $57 million pool of farm and ranch loans from a single agricultural lender. This acquisition underscores Farmer Mac’s track record of providing agricultural lenders solutions for their capital planning, especially as there is uncertainty about how capital regulation will evolve over the next few years. We have consistently presented our product offerings as a capital efficiency and liquidity tool for our customers in both the agriculture finance and rural infrastructure lines of business. We believe that this is because the relative value Farmer Mac brings to our banking and financial services partners and ultimately the agricultural and rural borrowers is even greater when credit is a bit tighter.
Our funding advantage and our disciplined approach to asset liability management allow us to further deliver upon our mission to build a trusted secondary market for credit to rural America. We believe pool purchases within the agriculture finance and rural infrastructure lines of business can serve as important opportunities for volume generation over the next few years, as financial institutions continue to manage their capital efficiency, loan and deposit growth and liquidity needs. That coupled with our securitization capability enhances our ability to offer low cost liquidity at scale to the rural utilities we serve. It’s worth noting, I think, that the internal operational expertise and ability to execute for securitization overlaps with pool purchases and is really a new competency developed at Farmer Mac within the last few years.
The rural infrastructure finance segments show strong business volume growth in the first quarter 2024 primarily driven by increased investment activity and additional financing for renewable energy projects in response to continued strong demand for renewable electric power generation and storage. The pipeline remains strong in the near future and we have plans to invest additional resources to explore new opportunities. Our agricultural finance line of business grew during the first quarter despite the seasonally large number of payments related to loans that are on the annual payment cycle. The rise in market interest rates that has persisted has had a direct impact on the farm and ranch product interest rate. There generally exists an inverse correlation between farm and ranch new loan purchase volumes and changes in the farm and ranch product interest rates, with higher product interest rates slowing portfolio loan pre-payments.
The net effect of these forces contributed to positive farm and ranch loan purchase portfolio growth in the first quarter of 2024 as new farm and ranch loan purchases outpaced loan pre-payments. We believe our pipeline will continue to grow for the remainder of the year as tightening bank liquidity and the forecasted decline in farm income, relative to prior years is expected to drive more loan volume, including pool purchases. While uncertainty persists about future changes in monetary policy, borrowers are adjusting to higher interest rates and we are offering products that are more tailored to the current rate environment. Our wholesale finance product within the agricultural finance line of business presents strong relative value to our counter parties relative to market interest rates.
We expect the continued diversification of our products versus the broader market to drive continued growth in this area. As we look forward, we’re encouraged by the momentum we’ve seen since the start of the year. We believe that we’re well-positioned to make continuous progress on our long-term strategic growth initiatives to further our mission efficiently and innovatively as we navigate this backdrop of broader market uncertainty. Our website and investor and marketing materials are beginning to reflect our efforts to use branding, deepen our connection with stakeholders in a compelling and uniform way for the expansion of our mission driven work that helps build a strong and vital rural America. The initiative is intended to highlight our distinctive position as the secondary market partner that fosters greater connections between Wall Street and Main Street America as well as across the entire value chain to fuel growth, innovation and prosperity in America’s rural and agricultural communities.
In no small part, the fuel for that growth also comes from our active creation of more investment opportunities for the capital markets and strong access to capital. So at this time, I’d like to turn the call over to Aparna Ramesh, our Chief Financial Officer. Aparna, can you discuss our financial results in more detail?
Aparna Ramesh: Thank you, Brad. Good morning, everyone. Our first quarter 2024 results highlight our balanced, well-measured approach, continued strong credit quality and resiliency across market cycles. We achieved $1.4 billion of gross new business volume this quarter and this was primarily driven by loan purchases in renewable energy, the previously discussed farm and ranch pool purchase and new advantage securities in our farm and ranch and corporate ag finance segments. After repayments and maturities, we grew about $400 million during the first quarter in our outstanding business volume and this speaks to the benefit of the strategic decisions that Brad enumerated that we’ve undertaken over the last few years to diversify our portfolio and create opportunities in all interest rate environments.
Core earnings were $43.4 million or $3.96 per share in the first quarter of 2024, and this reflects a $1.5 million decrease sequentially and a $4.5 million year-over-year increase. The sequential change in core earnings was primarily due to lower net effective spread and this was driven by some seasonality related to non-accrual loans that were recorded in the first quarter. We often see an increase in non-accrual loans in the first and third quarters of every year and this is related to the annual and semi-annual payment schedule for the majority of our farm and ranch loans. It does tend to reverse with payment flow that occurs in subsequent quarters. We also encountered a modest increase in our floating rate funding costs during the first quarter and this was driven by certain dynamics in the SOFR credit markets that spilled into the fourth quarter of 2023.
The year-over-year increase in core earnings was driven by $4.6 million after tax increase in net effective spread and a $2.1 million after tax decrease in our provision for credit losses, and this was partly offset by higher operating expenses from increased headcount, increased stock compensation expense, and investments in technology projects. In percentage terms, our net effective spread in the first quarter of 2024 was 114 basis points compared to 119 basis points in the fourth quarter of 2023 and consistent with 115 basis points in the same period last year. Over the course of 2023, we achieved record levels of net effective spread as we benefited from the rapid rise in short-term rates and the reinvesting of our excess capital, which generated additional returns with the upward repricing of our short-term investment portfolio.
The capital that we raised opportunistically when rates were at historical lows in 2020 and 2021 positioned us extremely well throughout the rising rate environment and ongoing market uncertainty. As we look ahead, our treasury desk will be opportunistic in taking advantage of favorable market conditions for GSE paper and pre-fund new issuances while refunding maturing debt without taking excess risk. We did just that in the first quarter as we saw a reversal of the unfavorable credit widening that occurred in the fourth quarter of 2023 and we took advantage of tightened levels by pre-funding. We continue to hold approximately $800 million in cash and other short-term instruments in our liquidity portfolio. Not only does this help us weather potential market disruptions, our excess and highly liquid capital generates immediate returns in a high nominal rate environment.
We project a limited downside to earnings if rates decline in the future 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 even if rates decline, as we 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 arise. As Brad highlighted in his comments, we are very pleased with the execution of our fourth FARM series transaction in April.
We received more than three times the demand for this latest offering and this is really a testament to Farmer Mac’s reputation with institutional investors as well as the overall market appetite for the underlying agricultural asset class. Not only was demand strong, but we were successfully able to expand our investor base and also introduced new classes of senior notes to address the cash flow demands of capital markets in this interest rate environment. The consistent FARM series issuances every year for the last four years have not only built a strong foundation of future market liquidity, but also led to improved execution economics and greater efficiencies in servicing for the agricultural mortgage backed securities market. Securitization has many beneficial aspects for Farmer Mac.
It allows us to diversify our funding, enhance and optimize the balance sheet by efficient deployment of capital and also enables our growth strategy by targeting new asset opportunities into our conduit. Turning to liquidity and capital, both remain extremely well in excess of all regulatory requirements and our projections show minimal change in our profitability coupled with limited exposure to movement in interest rates, whether the market rates go up or down. As of March 31st, 2024, Farmer Mac had 295 days of liquidity, and this is another important data point that validates our resiliency against short and medium-term market disruptions. Operating expenses increased by 8% sequentially and 15% year-over-year, and this is primarily due to the expenditures that are associated with headcount and increased stock compensation expenses as well as investments in technology projects.
Expenditures associated with a multi-year technology investment in our treasury and cash management systems to enhance our trading, hedging, and reporting platforms partly contributed to the year-over-year increase in expenses. This modernization effort is expected to position us to more effectively defend against cyber and fraud threats, but also allow us to scale our portfolio and continually diversify our product offerings, such that they’re in alignment with the growth strategy and our business and funding opportunities. We also plan to continue to make investments in strategic focus areas such as renewable energy and continue to modernize our infrastructure, including our servicing and loan platforms to support our growth and strategic objectives.
All of this has resulted in an operating efficiency ratio that is at 30% for the first quarter of 2024 and I’ll note that it’s well in line with our long-term strategic plan target. We’ll continue to closely monitor our efficiency ratio and manage it as we’ve done such that we expect to remain at or below a long run average of 30%. As noted, some of the increase in efficiency ratio this quarter was related to stock incentive compensation which is seasonal with most awards granted during the first quarter of each year. As we make investments in our loan infrastructure and funding platforms and innovate our loan processes to accelerate growth, we may see some temporary increases that would result in the efficiency ratio rising above the 30% level.
Our credit profile and our performance there remain stable, highlighted by continued strength across our agricultural and rural infrastructure portfolios. We posted another quarter without any charge-off and benefited from a $1.9 million release from our total allowance and this was largely a result of one rural infrastructure loan that improved its outlook during the first quarter. 90-day delinquencies as of March 31st, 2024, reflect 27 basis points across our entire portfolio and this is in line with the same period last year. We generally observe higher delinquency levels at the end of the first quarter and third quarter due to the annual and semi-annual payment terms, for most of our farm and ranch loans, and the impact that I noted previously from the non-accrual loans are associated with an annual payment cycle.
Let me now turn to capital. Farmer Mac’s $1.5 billion of core capital as of March 31st, 2024, exceeded our statutory requirement by $612 million or 70%. Core capital increased sequentially and this was primarily due to an increase in retained earnings. Our Tier 1 capital ratio as of March 31st, 2024 improved to 15.5% from 15.4% at year-end, largely due to higher retained earnings as I mentioned previously. Maintaining credit standards that reflect our risk profile, coupled with these strong levels of capital is a fundamental part of our long-term strategy for growth. We expect our long-term capital position and our strong capital position to allow us to be resilient and continue to be a source of low cost liquidity for our customers and borrowers, even as they evidenced difficult times.
In conclusion, our entire team delivered strong quarterly results, maintaining the key metrics that we highlight on each call while staying within our credit framework. Notably, we delivered 17% return on equity this quarter and stayed well in line with our efficiency target of 30%. We believe that our balance sheet is well-positioned for uncertainty and we’re more optimistic than ever to deliver on our long-term strategic plan objectives. And with that, Brad, let me turn it back to you.
Bradford Nordholm: Thank you very much, Aparna. Before we turn to questions-and-answers, I want to let everyone know that we will be hosting our first ever Investor Day event on Thursday, May 16th, beginning at 10:00 A.M. Eastern time. Our results and consistent performance through our market cycles have resulted in a very strong momentum in the markets and we want to use this event as an opportunity to further educate the broader investment community on our organization, our core mission to increase the accessibility of financing for American agriculture and rural infrastructure. We will provide a link to access the live webcast and it will be available at our website. But if you’re interested in participating in person, it will be a New York City based event and please reach out to our Investor Relations team as we still have some space available. And now, operator, I’d like to see if we have any questions from anyone on the line today.
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