So it’s really just a balancing act for us in terms of managing our capital stack as well as fueling our balance sheet for additional growth.
Unidentified Analyst : Okay. Thank you very much.
Operator: Your next question comes from Brendan McCarthy with Sidoti. Please go ahead.
Brendan McCarthy: Hey, good morning everybody, and thanks for taking my questions. Just wanted to start off looking at the wholesale financing business. I understand the value proposition has really increased for institutional counterparties in the elevated interest rate environment. But just wondering if you can expand on where the benefits have flowed through on the segment level?
Bradford T. Nordholm: Yeah, and I’ll ask Zach to give you some specific color on that. But just generally speaking as you noted the higher interest rate environment and frankly, the absence of Federal Reserve Bank support of liquidity facilities for financial institutions has created more of a comparative competitive advantage for us as we noted in our comments. And that’s driving new opportunity. Some of that opportunities with customers we had in the past and we let go because we didn’t like the pricing. But some of it is new opportunity as well. But Zach, you might just kind of explain where this is all coming from.
Zachary N. Carpenter: Yeah, happy to. Not to reiterate a lot of what Brad said, but I think one of the key drivers is clearly the volatility in the market and a lot of these large corporate institutional counterparties are looking to just diversify all the different funding sources they have. If you’re in the public bond market, you see significant increase in gap and added credit spreads, which we did last year. Farmer Mac and our secured AgVantage facility is a relatively comparative and better advantage to those counterparties. To your question on where you see these benefits in our segment reporting, you’re predominantly going to see them in AgVantage within the Farm & Ranch segment as well as in the rural utility segment.
So those are our two large corporate institutional counterparty line items. You can see the significant growth year-over-year, especially in rural utilities as well as in Farm & Ranch. And so that’s generally where we saw at least in 2023, the growth opportunity and the increase in net effective spread that rolls up into those segments. And then heading into 2024, we anticipate a broader discussion with numerous other counterparties in terms of the benefits we could provide given the aforementioned comments.
Bradford T. Nordholm: Yeah, Brendan, one other thing I’d just like to add to this is that there’s a strategic aspect of this as well, because when we have an AgVantage facility, we are evaluating the underlying collateral that’s being pledged and that underlying collateral are typically loans that as an alternative we’d like to own, that we’d like to purchase. And I think over the last six to nine months, we’ve probably been able to initiate more discussions with some of those AgVantage counterparties about their strategic objectives and whether a sale for them, a purchase by us of some of those underlying loans fits their strategic objectives better. And too early to say that that’s going to yield results. But we’re encouraged that we’re engaged at such a strategic thought level with so many of these counterparties and are optimistic that at some point in the future we will show that we can provide another source of liquidity to them through a different type of facility, a loan purchase rather than an AgVantage facility.
Brendan McCarthy: Great. Great. That’s very helpful. And you know, I know you mentioned a big part of that story has been business development efforts and branding and just kind of marketing efforts as well. Can you specify what exactly has kind of driven that diversification of counterparties?
Bradford T. Nordholm: Well, let me just jump in ahead of Zach. He’s modest, but it is all of those things, but it absolutely begins with having high quality people with relationships and experience that motivates those counterparties to engage in these discussions. And we have hired some absolute, Zach has really hired some absolutely outstanding people over the last couple of years that are enabling us to do that.
Brendan McCarthy: Got it. Got it. And kind of switching gears here to the outlook on prepayment risk. I understand, should we see a potential decline in rates in the back half of the year, obviously I assume prepayments will pick up in the core Farm & Ranch business but can you touch on the prepayment outlook for the other segments, I know prepayment risk is very low in the rural utility segment, but maybe if you can expand on the other business lines?
Bradford T. Nordholm: Yeah, Zach can you just run through all the segments.
Zachary N. Carpenter: Yeah, happy to. You’re spot on. In the rural infrastructure side of the house we don’t anticipate much of any prepayment risk, maybe some modest risk in the telecommunications portfolio. Generally speaking, those are all floating rates. But those are going to turn on a weighted average life of three to four years anyways. But, the rate environment isn’t going to really increase that. In corporate Ag finance, those are just lumpy transactions in general. So the prepayment concept really isn’t conducive in that segment. These are more M&A type transactions where you may get paid off or you could participate in a larger facility. So really when you think about our overall portfolios, our lines of business, really the prepayment component is akin to Farm & Ranch and USDA.
And if we see some rate compression in the back half of the year, I think, as Aparna mentioned, we anticipate an increase in loan purchase and we’re kind of setting ourselves up to take advantage of a potential refinance opportunities. And remember, we’ve said this in prior quarters, a lot of our customers or community and regional banks are keeping those loans on the balance sheet to manage through a higher deposit payout environment. That being said, liquidity and capital efficiency is now becoming a more focus in the banking sector which we believe as those loans kind of reprice on their balance sheet, creates an enhanced opportunity for us, especially in Farm & Ranch and USDA to take advantage in a rate decline scenario. So yes, probably more prepayment risk in Farm & Ranch and USDA, but we’re more than confident that we’ll make it up in new volumes.
Aparna Ramesh: If I might just add one point as well, Brendan, we are fairly agnostic in terms of prepayment risk, and this has to do with how we manage our balance sheet from a hedging standpoint. So something that we’ve noted before, we tend to layer in callable such that the fairly duration match as we look ahead and think about prepayment risk. So even if we were to have prepayments, it wouldn’t necessarily affect our margins very substantially. So, everything that Zach highlighted, prepayment risk is low across the segments, but in addition to that from a funding standpoint, we’re extremely well hedged where we could simply call expensive debt and reprice that downward such that we’re maintaining the margins.
Brendan McCarthy: Understood, that’s helpful. And one more question from me, just on the farm economy as a whole. I know you mentioned your ranch [ph] values have moderately declined and farm net income are, appear to be reverting more towards historical averages. But can you just kind of talk on your outlook for the farm economy and how it impacts Farmer Mac?
Bradford T. Nordholm: That’s a big question because the decline in land it actually is pretty isolated. We’ve been doing a lot of work on that recently. Permanent crops in California are one place where there’ve been headlines about the modest decreases, and those tend to be almonds and other permanent crops where there are not multiple sources of water, where there may be some pressure on water availability, as well as the combination with low commodity prices. But we’re not seeing it across the board. And as you know, our loan to current value on just about everything in our portfolio is extremely modest. We will sell up to 50% on the portfolio as it stands. But yes, we’re expected to see softening in farm income. Of course, that’s an aggregate number for the entire sector.
And we are an organization with 17,000 borrowers each one of them with their own situation. But input prices are generally staying sticky and high while commodity prices for major, major crops have been softening. And so, we’re looking at projected net farm incomes for the sector again this next year that will be somewhere in the neighborhood of 20% less than it kind of was at the peak. The first thing that that will do is put a little, it will cause some draw down of liquidity. Farmers have been holding a lot of liquidity and it’ll cause some draw down of that. We think that it may especially if we have slightly lower interest rates later in the year, it’ll start stimulating some additional borrowing activity. As Zach has mentioned Farm & Ranch originations were slow at least through the first three month quarters of 2023, a little bit of pickup in fourth quarter, but that will cause some further pickup in the year.
In terms of other segments of the farm economy, it probably tips them to a bit more borrowing which could benefit us. We will be continuing to apply the very, very disciplined credit standards that we have for many years here at Farmer Mac, so we’re continuing to make prudent credit decisions. So you put it all together and it’s probably a slight positive for Farmer Mac, even if it is a source of concern for our key constituents in rural America.
Brendan McCarthy: Great. Thanks, Brad. That’s all from me. Thanks, everybody.
Operator: Your next question comes from DeForest Hinman with Bumbershoot Holdings. Please go ahead.
DeForest Hinman: Hey, thanks for squeezing me in. You are kind of beating around the bush on the loan growth outlook. There’s a lot of moving parts, but I mean, simplistically, Farm & Ranch loans, high singles growth in 2021, about 10% growth in 2022, 8% growth in 2023. Is it still in that ballpark or is it kind of a mid-single digit growth outlook for 2024 when we look at all these moving pieces? That’s the first question.
Bradford T. Nordholm: Yeah, I mean, we’re not going to provide a precise forecast, but Zach you want to try to give a little bit more color on that one?
Zachary N. Carpenter: Yeah, I mean, I think the confluence of factors in the market is leading to us being more optimistic in loan purchase activity in Farm & Ranch than we were in 2023. I mean, I noted earlier in a comment on the regional and community banking dynamic, managing capital, liquidity, deposits, that’s having a real impact on those institutions, which as their loan portfolio reprices, we think creates a great opportunity for Farmer Mac. The low prepayment speeds, again, solidifies the portfolio and so we’re able to take advantage of some of these dynamics. We’re not making up any refinancing loss on our portfolio. Limited supply of new land. And farm incomes, as Brad just mentioned in the prior to prior question it’s going to come down, there’s going to be stress in working capital, and I think there’s going to be interest in tapping into that equity.
So, compare year-over-year and stepping into 2024 as we made in our prepared comments, yeah, I think we’re more optimistic that there is a greater chance of enhanced growth in 2024 versus 2023. That being said lots of things can change, be it the farm bill, be it a political year, be it interest rates. So it’s hard to really pinpoint that, but I think we’re stepping into more optimism than we were stepping into 2023.
DeForest Hinman: Okay. That’s helpful. Renewable loan growth, very positive. You had 153% growth in 2022, a 100% growth in 2023. We talked about the outreach on the syndication side, adding some head count. I mean, I don’t think all those initiatives were in place and we grew that loan book to a 100% and it’s over 400 million. I think in the past we talked about the idea of that being $1 billion portfolio at some point. Can you just help us understand how that loan book looks going into 2024 and where could that end up and then maybe even where could that be in 2025, as some of these initiatives gain traction?
Bradford T. Nordholm: Yeah, Zach has done a lot of infrastructure building here with policies. Mark Crady with credit policies, Zach with key hires. So, we saw that pickup in 2023. It really accelerated in the back half of 2023 going into 2024. The pieces are all in place to continue that very strong momentum. So, $1 billion number, it’s very realistic that that could happen sometime in 2025. I think that gives you kind of a slope that you can work on.
DeForest Hinman: Okay. And then I hadn’t heard this from Aparna, but this comment on some of the higher cost preferred, you guys are in the market for a number of years, but I do see that I think the Series C are actually redeemable in 2024. I mean, is that a preferred we’d be looking to remove? And then I think on a bigger picture question, is there any benefit to leaving the preferreds in place as it relates to how the regulators calculate your capital ratios, are we pretty clearly saying, we’d like to remove those preferreds over time, and then as a result of that, it actually improves the dividend capacity to the common holders. So maybe just some more color there and should we be expecting those preferreds to be removed over time with those call provisions?
Aparna Ramesh: Yeah, so I think that’s an excellent question. It’s something that we really think about in entirety. We don’t really distinguish between our sources of capital, but we do make a slight distinction in our own minds as we think about the quality of capital and the quality of capital being organic and retained earnings, because that then allows us to have a base of capital that we can very efficiently deploy for growth, but also in terms of really awarding our shareholders on the here and now. So that’s really the big picture in terms of how we think about our capital. In terms of preferreds, preferreds are an excellent source of capital for us. We have access to the retail — the preferred market. The way we think about a preferred issuances DeForest is, we try to do that opportunistically.
So in 2020 and 2021 we were able to tap the retail preferred market and issue preferreds that were sub 5% and sub 6%. And so we did that. And if we were ever able to do that again, that’s exactly what we would do. These are fixed rate preferreds where we really hold the call option. The Series C that you note, you’re absolutely right, that has an option where we can redeem it. And if we did not, then it would convert to floating. And as you know, in the current rate environment, that would result in additional costs approximately to the tune of about 2 million per year. We haven’t really made a complete decision as yet. But what I would say is just given our various degrees of freedom plus our excellent credit quality, the fact that we’ve got really a very big and growing share of our capital stack coming from retained earnings, it’s highly probable that it is something that we will look at.
