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Operator
Good afternoon and welcome to the Farmer Mac third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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.
Jalpa Nazareth
Good afternoon, and thank you for joining us for our third quarter 2023 earnings conference call. I'm Jelfa Nazareth, Senior Director of Investor Relations and Finance Strategy here at FarmerMac. 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 PharmaMax 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 FarmerMac's website, FarmerMac.com, under the financial information portion of the investor section. Joining us for 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?
Jelfa Nazareth
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 rule 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 advantage securities with existing counterparties in the wholesale financing space. Specifically, we added a $500 million advantage security in rural utility segment, and several advantage 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 a competitive cost of funds. Also, these counterparties are layering in longer-term non-payable advantage securities to manage their asset liability maturity profile given the current level of interest rates and the pricing of these 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 and wholesale financing, which drives the egg vanity 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 egg vanity securities growth increases in longer-term standby purchase commitments, and incremental loan purchase volume in corporate egg finance. Activity has been picking up in the corporate egg finance 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 and 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 borrower's 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 10 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 Apple 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 in agricultural finance and rural infrastructure lines of business. We believe that this is because of the relative value of PharmaMac 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 content that we have created to free up capital and manage their balance sheets more optimally. As we've said on previous calls, securitization is a tremendous opportunity for PharmaMAC, is highly central to our mission, and we are committed to being a regular issue in the market for the set of securitization products that align with both our borrower and investor interests. 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 the agriculture and rural infrastructure sectors. Our business approach, combined with a high caliber of talent across the organization, is really paramount to continuing 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 risks 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 a balance sheet and funding sources. This has positioned us well in 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 a partner, Ramesh, our Chief Financial Officer, to discuss our financial results in more detail. Aparna.
Jalpa
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 volume 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 Advantage securities. $500 million of wholesale financing in the rural infrastructure segment. $204 million of long-term standby purchase commitments. $231 million in new corporate ag finance loan purchases and unfunded commitments. $205 million in farm and ranch loan purchases, $91 million in new rural utilities loan purchases, 44 million of which was 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 volumes. 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. Poor earnings were $45.2 million of $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 ag finance 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 terms 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 weather potential market disruptions, our 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 arise. 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 our farm securitization product. Securitization has many beneficial aspects for PharmaMac. It allows us to diversify our funding, enhance and optimize a 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 transaction as the previous three transactions. As we highlighted last quarter, a 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 honed these 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 ebbs. 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 counterbalance 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 30th, 2023, PharmaMac 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 multi-year 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 offerings. I'll note this effort is not a like for like, but is geared to the future and aligned 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 modern our asset infrastructure, including our servicing and loan platforms, 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 30th, and it's well below our strategic plan target of 30%, primarily because revenue growth increased at a significantly higher rate than 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 30th 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 ag storage 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, PharmaMax $1.4 billion of core capital as of September 30th, 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 from 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 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.
Jelfa Nazareth
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 enduring nature of PharmaMax 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 the accessibility of 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 and ranch agribusiness and rural infrastructure customers. And now, operator, I'd like to see if we have any questions from anyone on the line today.
Operator
We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW. Please go ahead.
Bose George
Everyone, good afternoon. I wanted to start with a question on spreads. So it sounds like spreads could stay closer to this, you know, 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, you know, how should we think of sort of the trajectory of, you know, spreads getting from here to there?
Jelfa Nazareth
Bose, 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 Zach Carpenter, 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.
Zach Carpenter
Yeah, 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, are at much higher accretive spreads than our historical lines of business, especially in this environment where our farm and ranch mortgages have slowed down given the interest rates. You're seeing much more inclusion of volume from our telecommunications, renewable energy, and corporate agri-finance lines of business, which by their nature have a larger spread, higher accretive spread than our historical overall portfolio. Those deals are lumpier in nature and larger. but also have tended to grow quicker, especially in this environment where PharmaMac 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.
Jelfa Nazareth
Just to add a little bit to that, if, for example, with some decline of rates, we saw a pickup in our farm and ranch 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 north of that because of the composition of and growing diversification of the portfolio. But Aparna, can you add to that?
Jalpa
Yeah, absolutely. And I just want to layer in one other comment around business composition. I think it absolutely has to do with business composition. But I will also say that, you know, and Zach alluded to this, in a 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 spread. So I just want to add that one comment. And then in terms of Treasury, you know, I'll just say that our funding strategy has really come to fruition in this 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, you know, will this sustain, especially as the Fed pauses or is likely to pause? You know, we have some inbuilt hedges within our funding strategy, and one of them has to do with callables. So we will actually layer in callables, 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 were caught in a situation where our funding costs outpaced our ability to put loans on. So these callable spreads tend to come on at slightly wider margins relative to, say, bullet spreads. So we have consistently layered that in, but it is a hedging strategy. So that's just one thing that I'll note. 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 both 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 up into the horizon.
Bose George
Okay, great. That's very helpful. Thank you. 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 going, are sort of above, you know, sort of somewhat of a normalized level, you know, could that payout be a little bit lower just as the ROEs remain elevated or just philosophically how you're looking at it?
Jelfa Nazareth
Yeah. 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 really am 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. You know, 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 general outlook for the business. So stay tuned.
Gary
Certainly we will be strongly considering taking action on dividends in February.
Operator
The next question comes from Bill Ryan with Seaport Research Partners. Please go ahead.
Bill Ryan
Good afternoon. Thanks for taking my questions. 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. It sounds like you alluded to on the conference call that 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?
Jelfa Nazareth
Sure. Arna, go ahead.
Jalpa
Yeah. Hi, Bill. You know, 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, you know, we target 30% and, you know, we're well south of that and, you know, probably right in line with historical averages. A couple of the levers that we do have, you know, some things are fairly baked in, such as the fixed investments we've made in our technology platform. But I'll 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 origination strategies. And so, again, you know, I think we can pace 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 that segment. But again, that's also a leverage. So the way in which we really manage our spending profile is to really look at this, you know, quarterly basis. And we track very closely to how our revenue projections are coming in. And we've left enough and ample room such that, you know, we can dial things back if 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 to be the case.
Bill Ryan
Okay, thank you for that answer. And kind of a follow-up question, and this is Came out some money center banks that reported a couple 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 was just kind of curious how you're thinking about it.
Jelfa Nazareth
Yeah. 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 secure 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 is as of about two years ago, was about $8 to $10 billion. With the IRA, the 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 20-year fixed rate advertising loan commitments is 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 PharmaMac 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, a quarter or a third because of constraints in the tax equity market, we still feel that there's plenty of market for us to build market share in for many years to come, quite frankly.
Bill Ryan
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?
Jelfa Nazareth
It changes every day, but this morning – Congressman Scott from Georgia, who's the ranking minority member of the House Agricultural Committee, came out with an indication that it was his opinion that the farm bill should be extended a year before the new bill is acted upon. He then joins the two majority and minority Senate leaders, Stavanaugh and the majority, the ranking, or majority, House Leader G.T. 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. You know, 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 wrought schedule 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.
Bill Ryan
Okay. Thanks for taking my questions.
Operator
The next question comes from Brendan McCarthy with Sudoti. Please go ahead.
Brendan McCarthy
Great. Good afternoon, everybody, and thanks for taking my question. Just wondering if you can quickly comment on the telecom loan downgrade that led to the $3.6 million provision. I guess was that mostly anticipated, or was that more of a surprise, and is that like an outsized figure that is typical?
Gary
No, I would ask Mark Grady, our chief credit officer, to jump in here.
Jelfa Nazareth
But look, you know, for us to have, you know, we have thousands of loans. And for us to have, you know, loans that occasionally are downgraded to the point where they require special allowances is not at all unusual. You know, we're putting a spotlight on this one because it sticks out because it happens to be the only one. So, you know, that's important to keep in mind. But I'll let Mark 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.
Mark
Yeah. Yeah, thanks, Brad. Yeah, the downgrade was not a surprise. As Brad mentioned, as 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 unexpected and I guess what we all expect in the future.
Brad
Okay.
Brendan McCarthy
Got it. That's helpful. So, you know, probably fair to say that, you know, just kind of given the shift towards, you know, some of the higher spread businesses in rural infrastructure finance, would you, you know, is it fair to say just maybe we might expect, you know, a higher degree of provision for losses over the next, you know, one to two years?
Jelfa Nazareth
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 in corporate agribusiness, telco, don't know about renewable energy. And compared to farm and ranch and 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... Yeah, in the allowance, it may occasionally show up, but you're also going to see it in the profitability.
spk13
Great.
Jalpa
Okay, that's helpful. Yeah, and Brendan, I would also say that we've got a very robust capital position, well in excess of our regulatory requirements. So overall, a balance sheet is very well positioned to handle any stress.
Brendan McCarthy
Absolutely. Yeah, that makes sense. Absolutely. One more question for me. I know last quarter we talked about some changes to the AgExpress underwriting standards, I believe it was, loosening the loan-to-value provisions a bit, but just wondering if there was a noticeable increase in volume directly attributable to that change from last quarter.
Jelfa Nazareth
I think we can pretty well quantify the percentage increase in the number of overall applications that now qualify for AgExpress, but Jack, can you offer some color on that?
Zach Carpenter
Yeah, great question. And we're very excited about that product enhancement. You know, 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 AgExpress space than it ever has been in the past, meaning this product is being much more competitive and much more of a positive reaction in the market. So as a total composition of all loan applications, it's shifting more towards AgExpress, 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.
Jelfa Nazareth
Zach, did I say something the other day that it's now approaching 70% by number of applications?
Brad
60 to 70% depending on the month, yeah.
Jelfa Nazareth
Yeah, and keep in mind that was zero four years ago.
Brad
Right.
Brendan McCarthy
Wow, okay, great. That's helpful. Thank you. That's all from me.
Operator
The next question comes from Gary Gordon, a private investor. Please go ahead.
Gary Gordon
Okay, thank you. Hello to everybody. Two questions. One is the large percentage of your new business that's wholesale. What is that? Is this sort of a one-off, or does this say something about the stresses on the banking system?
Jelfa Nazareth
Yeah, Gary, this actually is a really positive story that I'm going to have Zach share with you. So, 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 here at Farmer Mac 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's 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 was 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 in the marketplace and what can we take from the marketplace while fulfilling our mission is driving much more of what we do now.
Zach Carpenter
Yeah, Gary, Zach Karpner, great question, and we're very excited about the potential outlook in this space. And, you know, going back in history, you know, pre-three years ago, we had, you know, 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 developed that personnel and health and that talent to really get out there and understand it and make sure our brand is resonating. I think the second thing is why strong opportunities now? Part of it's the market. So layer in the strong individual brand that we have internally to get out there and call on the right people. We're also a strong relative value in the market. There's 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 secure product, that's a 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 of relative value to other potential opportunities that are out there. And I think a part I mentioned earlier, and Brad mentioned it now in terms of pricing, you know, we believe in this market we are of strong relative value, and these bonds that are put in place are generally medium to long-term, not prepayable bonds. So it really is sticky revenue for us. And if the market shifts, which it did a couple years ago, we are 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 opportunities. We're a strong relative value in this market, and we think 2024 will be hopefully positive for us.
Gary Gordon
Okay, thanks. Aparna also mentioned she said the core capital ratio is 16%. Where is that sort of in the normal range or where you feel comfortable? How should we think about that 16% number?
Jalpa
Yeah, I mean, I think 16 is probably a great place to be for a couple of reasons. One, you know, we – well, actually, I'll point to three reasons. And it gives us a ton of flexibility and flexibility. One of the reasons is that we just raised a lot of low-cost capital that we have no intention of calling because it's, you know, sub-five, sub-five and a half preferred. That's perpetual capital. It's incredibly accretive for us. So that will probably stick around. The second driver has to do with our securitization program that affords us the ability to get a lot of tier one 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 the organic growth in our capital base that comes from strong retained earnings while maintaining our credit profile. And it's all of those reasons that, you know, you just heard, Gary, from Brad and from Zach, just around our revenue accretion. And that's really driving a big component of why we're at 15%. 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, you know, in the market now raising capital. So I don't think we have a targeted band, but as we see expensive sources of, say, preferreds coming due, we might make some decisions relative to that, our retained earnings and securitization, but we just have a few levers right now that we can play with, and it's a really great place to be.
Gary
Okay, thank you very much.
Operator
The next question comes from DeForest Hinman, retail investor. Please go ahead.
DeForest Hinman
Hey, thanks for taking my questions. It's good to see a new sell-side firm 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 we hired so far this year?
Gary
Our current head count is somewhere in the 183, 184 range, something like that.
Jelfa Nazareth
I think we started the year at 159, 160, something like that. So simple math, 24, 160, maybe about 14, 15% on net increase in head count. The base salary increase would not be 14, 15% because... You don't have to have two CEOs, at least not yet, or two CFOs. These tend to be positions 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, you know, it is a very large portion of the expense, obviously. There's some variability to it that adjusts with performance in our short-term incentive plan and now our long-term incentive plan results. But we view, you know, base salaries and people expenses as really a fixed expense here. So we're very cautious about adding new people, but 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 mid-year. We added a couple positions associated with that. So we're being mindful of the overall expense, but also the profile that people were 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.
DeForest Hinman
Okay, thank you. And I did want to ask about the energy portfolio as well. We did see a little bit – this is a multi-part question – a little bit of 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 solar or wind, any color you could provide there would be helpful.
Jelfa Nazareth
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, convergence of energy and agriculture in the anaerobic digesters, methane gas capture systems, which are quite interesting. But Zach, I would describe it right now as we're more building the infrastructure to accelerate the growth rather than having the infrastructure in place and seeing a turndown. Zach, do you have some color there?
Zach Carpenter
Yeah, good question. I would highlight this, that our pipeline and I think to your prior question in terms of headcount, 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 process. 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 start construction and or get to a point where the construction is complete and they're 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 working through that process and we have, like I said, a very strong pipeline and we feel that as those get to the point of ready to close and fund that we'll be providing helpful financing to support our counterparties in the mission.
DeForest Hinman
Okay, that's very helpful. 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 were 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 you know, additional growth, you know, fourth quarter, you know, heading into 2024, or is that more of a 2024, 2025 goal or milestone?
Zach Carpenter
Yeah, that's a great question. Our primary focus is on those counterparties that support the large, broad syndicated transactions. I do want to emphasize, as Brad said, 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 those large syndicated deals.
DeForest Hinman
I mean, do you have any timelines you can share with us, though?
Zach Carpenter
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.
DeForest Hinman
Okay, that's all my questions. Keep up the good work.
Operator
Very good results. The next question comes from Chip Oat with Cary Street Partners. Please go ahead.
Chip Oat
Great. Good afternoon. This question is for Aparna. 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 back 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 is 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, better than when, better than who. And what are you doing in what I call Farmer Mac 2.0 to merit those congratulations?
Brad
So please, bye. Thank you.
Jalpa
Well, I won't brag, 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 rates were very low, we went out and raised fairly advantageous capital. And we've talked about that. But little did we realize at that point in time how advantageous it would be. We also were careful during a period of stress, which again is a very intuitive thing to do, to shore up our liquidity profile. And so we made 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 very low. The third thing we did was we extended our debt, really looking at the rate cycle and saying not just relatively speaking, but on absolute terms, rates are pretty low. 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 the rate cycle, 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, you know, unawares. They probably didn't fully appreciate what the Fed was signaling in terms of raising rates very quickly. But because we 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 playing out to our advantage. And we're able to then diversify into some of these new lines of business without really taking on a lot of additional cost. So, I'll just stop there, but I do appreciate, you know, your question, and I hope that provides you with a little bit of color around how this all came to be.
Gary
Okay. Was there a follow-up, Mr. ? No.
Chip Oat
No follow-up. Thank you.
Operator
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.
Jelfa Nazareth
Thank you, Operator, and 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 huge anxiety other than obviously the huge turmoil in the Middle East and maybe to some extent the U.S. Treasury's funding schedule for the remainder of 23 and going into 24. We're keeping a very close eye on that. But in terms of our business and 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 Jalpo with any questions. We look forward to speaking with you again in three months, if not sooner.
Gary
Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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