Federal Agricultural Mortgage (AGM) 10 May 222022 Q1 Earnings call transcript

Good afternoon, and thank you for joining us for our First Quarter 2022 Earnings Conference Call. I’m Jalpa Nazareth, Director of Investor Relations and Finance Strategy here at Farmer Mac.

As we begin, please note that the information provided during this call may contain forward-looking statements about the Company’s business strategies and prospects, which are based on management’s current expectations and assumptions. These statements are not a guarantee of future performance and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer Mac’s 2021 annual report and subsequent SEC filings for a full discussion of the Company’s risk factors. will discussing we measures. non-GAAP call, today’s also certain be financial On posted website, and measures portion Form most release non-GAAP of of XX-Q Farmer be earnings Disclosures these the the can Investors reconciliations Financial under farmermac.com the found section. in and on Information Mac’s recent

greater Ramesh, and Financial strategic discuss will us business first who Joining President and management performance. Officer, objectives; management detail Brad Officer, financial the afternoon members team this Executive from Brad? time, and and over quarter Chief our Nordholm, Aparna our highlights Select will are At Chief Nordholm. for Brad call I’ll period. our us who provide to on will financial CEO, of President turn the also our be question-and-answer and this joining

good everyone. able report a pleased that and us I’m XXXX. Jalpa, quarter first really afternoon, happy you’re today. I’m very to join to Thanks successful

real is Farm this or grew to AgVantage primarily estate XXst. as are our products upon to roughly discussing, loan improving portfolio business line XX-day outstanding agricultural XX% X%. liquidity rural generated and and same with comprises performance all XXXX. the plus liens our Our first be of loans and approximately March million to stable are in this results USDA and growth. is core lending relative quarter, Ranch last and We’ve programs. the also resulted securities, future solid strong a $X provided a business capacity approximately which we billion financial consistent serving due of our continued of year. gross volume remained build our strong in in purchase And we’ll be foundation to by $XX.X and and ratios as & most to asset of Agricultural This importantly, volume $XXX earnings, billion America first all business, substandard period The outstanding Finance quarter lenders delinquencies We guaranteed secured total working on for credit

to Reserve dynamics in in to institutional payments. Farm pleased most large ability wholesale an the seasonally credit new opportunities of securities number program Bank during Net macroeconomic tightening Ranch our partner its of semiannual because historically overall Federal are strong were provided of the resulted as to business January with have invaluable support At loans volume despite investment environment pandemic, space. Farm low return purchase was onset annual and the dates. relationships the the loan by Xst in the That’s terms and our of payment increased Ranch for resulted our and grade our quarter, the financing see the spreads as We of limited, volume strong payment competition. levels that & and liquidity AgVantage first have &

During Farm rising well and the by back categories a increase, including of in first increase likely in conflict inflation, the We Ukraine. markets driving as of a the the a rate trend. as labor increases, factors, vary And the these quarter, high towards combination fertilizer, grain, higher prices level. historically with increases is to funds commodity of future expenses sector’s experienced energy the disruption expectations all caused nearly are federal will operation ratio expense and impacts operating believe type. by

USDA incomes room cash record leave for do is year. net for profits prices food and commodity The XXXX. forecasting farm this firm, However,

offset rising commodity data to are payments with While increase suggesting receipts that to expected price recent are should changes production these possible. even stronger cash expenses are and government forecast incomes fall,

prepayment loan levels also our financings USDA Farm could speeds. Ranch that in anticipate lower in result it of our new could of and & products, terms portfolio future of In we purchases lower lower portfolio, some while result -- in

pipeline of business we characterized continue through significant this be that Our to uncertainty. we remains is line this by will environment as strong. navigate And adaptive in

planned demand of in long-term and was expenditures. rural maintenance million of line and $XXX this growth $XX competitive, environment, a quarter loan a a to for Finance large nearly to resulting growth capital but contributing infrastructure financing fueled increasing solar Infrastructure by was Rural solutions our interest business product. million primarily grew Our purchase this This due for quarter line Also, businesses commitment project. or to rate X%,

opportunity and said us. prior a is calls, business it’s important opportunity for on I’ve development energy America, As an both, renewable economic for rural

for opportunity business is Mac Farmer securitization our Another program.

our align on able our securitizations in closely that investment volumes last enhancing as outcome was committed these people, monitoring to being focused And believe market plan to remain and thoughtful debt these in As enhancing business we with resulted scorecard to doubling require a infrastructure this to mentioned first our securitized continues we’re We to size the market that AgXpress few efforts appropriate a technology challenged We our And our annual markets. the this the efficiency. as the investments. a regular a eligible loan levels. in $X.X our in from over upgrading million. plan. to to gross year somewhat support call, Farmer for to of for upgrade with us number we’ve of to for help securitization months, dynamic. issued run, we ramp to said, the the volatility achieve asset that million interests. example goals. investor changing during issuances ourselves platform, technology market underwriting near-term, program. and improve long-term new up represent focus the That’s current an the will over meaningful business a will securitization slowdown the last set on our including our goals Mac infrastructure and long achieve quarter, products $X been over building to And for need the solution program, of of growth deliver in a share markets With its in be foundation capacity goals capital strategic products are issuer measured slowly diverse set our in our each is and in earnings market, and on the going achieve we The strong

Another And stakeholders larger at different currently continuity a rebranding efforts, in early of our our which a trusted reputation stages. to on business through over rural Farmer able to passion our initiative, we of for We to insight is our deliver the initiative gain but to build with of strong all order rural positive as continue the market profiles, Mac We continues are secondary currently underway shared are significantly we’re model audiences stakeholders years. hope that we in and nation’s America. America. size better in grown result, results. last and consistent, deeper have and with few reaching as set a recognize our that to culture to from rebranding each credit The key for

With to that the our the Farmer to and in believe plan organization’s of commitment take strategic our support next is talented the conjunction unified Board, Farmer committed we with Mac’s enabling us Mac level. base to employee

detail. to to discuss Aparna? to turn Now, Officer, Aparna, financial more Chief Financial I’d in our results over the our call like

earnings to by partially increase was in acquisition million effective quarter core net $X.XX change $XX.X fourth diluted was increase due after were million Thank or XXXX XXXX you, was basis factors fourth The increase share related for by first per per primarily compared to in and The period common tax per offset compared and $X.X Brad. volume to and $X.XX same contributing increase stock to were $XX.X a a tax diluted Core quarter on tax quarter the operating cash the period year-over-year effective net $X.XX after Net in quarter good servicing was sequential sequential after preferred in net And of partially diluted million tax XXXX and increase XXXX coupon million, and in after everyone. earnings tax or The non-recurrence in in decrease million, an increase the dividends. million last spread. expenses. driven our of quarter to business factors Also of was losses year. spread an share, effective the year-over-year common XXXX. million million, decrease after rights after for share net increase tax afternoon, to the These $X.X year. common new offset X% gain same spread spread. income. or first last $XX and XXXX due net yields for $X.X primarily fourth for effective mortgage increase sale interest $X a $XX.X $X.X of operating a the million These loan loans, $X.X in total expenses year-over-year in allowance quarter approximate $X.X million in improvement were by net million third in

dynamic of continue that strategies side to the in outlined sheet as strong past, asset to from balance the liability liability discipline our maintain Our funding management. remains continued and we we’ve our benefit to we’ve you

Additionally, management dynamic the of hold the segments insight risk. We a the rising and and was for construct quarter, contributing transparency the and backed components this more rate interest funding environment our analyze key earnings to and matches, the our in we net This new as shareholders core Since carefully Last to continue fourth reporting profitability. contributor assumes to also pricing, segment allocates to that we securitization XXXX. match operating provides more funds effective the of to in us of results our interest in especially We’ve million stakeholders our liquidity introduced of ALM offer into well that each a a very clearer or various convexity strategies execution portfolio’s duration funds it The pricing rate quarter hedging minimize benefits benefits $XXX.X allocates of how October with to disciplined we contribute allow other process the successful enterprise liability the as FTP accurately funded methodology. much portfolio us transfer our of funding allows to a investment approach, FTP or and purposes. the allocate segments. expense primarily cost to operating into strategies spread. believe to asset ultimately implemented practices from agricultural funding they This segment. the results both mortgage transfer

this we spent year ways as market perspective are hope While approach market resetting measured execute identifying to transactions short-term, more months few in the return credit the a last securitization potentially recognizing more the mentioned, and efficiently are outlook. with Brad we current we transaction, read market that these taking another to dynamics to just have and

market, First quarter quarter. the volatility challenging macro spreads XXXX environment the that has interest for and throughout that are contributed evolving the extremely to rate as widening securitization increasing was rate is

and sources program, building will committed our more delivering still to funding to even however, believe robust mission Farmer opportunity of are, Mac a liquidity We an provide effectively. securitization fulfill low-cost which with diversified we

current the in transactions. therefore energy make neutral for not initiative XX% compared technology over acquisition now strengthening consultants drive spreads software increased and reflected headcount, of first will long-term strategic to focus and and Ranch we loan continue remaining & as risk technology The increased to to licenses quarter mentioned period momentum. this of primarily initiatives, expenses create compensation, support Farm the and Operating technology investments The our the Brad and and information increased to issuing us And the telecom. increased timing to business new to spending renewable headcount areas and with platforms and this technology in and relevant enter remaining to additional offset XX for our first quarter to on third other staff should and brought XXXX. our shareholders additional mitigate expected by primarily volume scale our into XXXX new And be servicing across due we be such uncertainty the in was Our to of our is XXXX, third increase face loan We revenue XXXX. continue terms the rights by into volatility value are revenue strategy. especially strategic infrastructure, that add including in that and which talent are other higher that enhance growth be quarter multiyear service. servicing in we some we and were accretive and on this in to earlier. will plan and not servicing through platform modernize as party employees structure segment loans in hires our a expenses in support connection with where in be for a will ensure these support paying hedging to organization, in we XXXX, will and growth And of in both strategies of the and and opportunistic

XX at to ratio, next we’ll Over March efficiency as continue ended XX%. monitor the months, before which to our we’ve done closely XX XX, XXXX,

Going annual range revenue efficiency growth. operating and to expect our increase commensurately an XX% we stay consistent averages forward, noted But within below we with a we expect level. historical previously, expenses that with as operating to is

strong. to credit Our continues be profile

March offset securitization new successful Texas incurred by struck of allowance of for single As losses in partially upgrade February freeze XXXX. that was $XX.X result was a XX, and as loan primarily decrease on risk million, that the was attributable to a XXXX, year-end total from to a a payable rating of borrower’s This volume. the was of modest loan large the related this XXXX, a decrease arctic

March Mac’s $XXX of modestly billion Core Farmer primarily in exceeded now. XX, or $X.X year-end, of increase XXXX, requirement XX%. retained capital to increased million capital earnings. due core to our an as statutory capital Turning from by

X in early Funds XX% the rise from supply earnings XXXX. the Federal locked in levels rising improved ratio Subsequent levels have to situation borrowers, materially. before Tier or costs that the the of outpaced than of raised in year. call, Despite flattening Fed our February to rising target XX, withstand fixed in us higher two inflation Our continued XX.X% Interest changed began increase a March. quickly Low positioned the rates its not credit the years, the and and rates over since capital beginning anticipated outlook rates the remains exacerbated more in of disruptions pushed interest has strong, our unemployment Ukraine rate And environment. by Reserve in by late costs. for funding input rate to chain as hikes to rate and seen We even extremely either XXXXs. occur commodity are past to low input given that that has quality the increase has experienced prices well predicted are to December we

mentioned commensurately and as volatile thoughtfully we environment growth this with navigate our expense before managing growth opportunities. We’re and as revenue rate

of I’ll overall ahead the however, back about the very and opportunities well us. are excited Brad, with it future We for to turn And positioned you. that,

Thank We Aparna. to experienced XXXX. strong you, a start

rural strong this increased of and believe capital line last and bring shareholders over few its new years, we performance recognition we’re We And we well and are if delivering believe from And on to like will help significantly us agricultural returns well questions has all positioned have to on initiatives. deliver profile Mac any consistent now, today. of our Farmer I’d to over we anyone name as of we see America. the rest XXXX. financial communities the operator, to to the

ahead. question will [Operator Backer the first Instructions] come And Sidoti. Please Marla from go with

Yes.

How of increased impacting general for how remarks, grain expectation crisis? you could So, your of will impact you that terms overall economic situation more credit the on a having color you political situation. and give you mentioned bit of on road? your In impact see that you volumes there to quality current see us little is the the portfolio, business but any your an in down down filter -- into the prepared that

saying that generally And quality. impact inputs with goods dealing extremely volatility, and bit combination so comment American the how significant of record business a events, I’m operating. for while originations. agricultural let are seeing these and I’m including to prices, Crady earnings global to quite going as outlook the we’re agriculture ask going Marla, price prices rates changes on I in And much credit remains unnerving, also on production. the and American conditions in Not having by only rates XXXX. to and and volatile we’re of levels are ask to interest me impact obviously, Zach the the a interest comment overall Yes. But Marc Carpenter increases that rising this condition agricultural little said, commodity on the into an American anticipated but is begin environment we of generally in are outlook, -- with which thanks question. which positive agriculture agriculture, in

approaching natural if bushel. sheets, over bushel, we’re at $XX corn we’re you $X.XX. seeing at So, time, we’re look commodity But $X gas wheat the same the a at seeing a seeing

oil seeing We’re a global at over barrel. $XXX

XX we’re that to nominal So, agriculture it of has about of we frankly But really for but also that’s years, -- a real effect the let and as rising well commodity of seen, as cost me prices is turn both inputs, agricultural it on add basis. a seeing as level commodity him haven’t credit. to credit, and and on ebbs for we’ll Zach? demand some be between may it let demand prices how and trends operating And that in inventories carefully longer-term for relates for into of color distinguish a commodity seeing flows which Zach function translate short-term land.

and Brad, great Thanks, Yes. Marla, question.

very summed say, creates, the It’s have of I nicely. these into market, lot coming all you think components would Brad numerous a -- pause. I it it when up

prices So, of the record to farmer. the with continuing are economics grain help

So, real interest That to seen continuing many estate transactions. years. in said, execute we rates our farmers seeing the in on we fastest increase products are for being have

the interest strong though that position. in to you’ve quick sticker what’s to at in a in time. back making debt creates come relatively a are So, From to our significant all with a in rates. perspective, compared pretty and little And you look very appropriate increase pause, had agri a the drop-off shock going the ‘XX. in business had historical the we’ve just And do space cheap, XQ increase rates. is transactions, those that again, and coupled terms severity market. sure uncertainties even the Overall that market transactions food When of still goes trying and on in happening in in in uncertainty you volume of get understand borrowers a

remarks said strong market, flexible our a had to uneasy be sellers looking we’re and rates As Brad XQ quarter lenders we ‘XX. and they we’re in And and the in borrowers that in purchases navigate competitive support in as Farm the time. mentioned the this their assessing and Aparna Ranch loan the and & and

services. in again, with uncertainty being the So, from economic environment customers support a ag and products assessing the assessing market, and space commodity to able a and very strong the our

quality you could credit right anything the Marc, seeing now? to relative numbers add in actually what and we’re

Yes.

by fairly strong credit incomes off saying as current strong last quality start by year. evidenced the that is me farm over Let

mentioned, has Going have forward, high, costs be volatility strong as incomes very but we been expect to in continue been very input high, to XXXX. farm

credit that But perspective an optimistic quality high And be some sectors farmers level performance. there and producers, the operators, mean expect some performance. won’t of the some some quality overall we generally continued experience ranchers in That speaking, of credit portfolio, so, in distress. some doesn’t to continue from it strong that in terms may commodity we’re

comprehensive one a lot you lot obviously, factors Okay. financing which transactions. comprehensive or uncertainty follow-on, Thank then, that sectors you for a seeing, that a for and of of we’re is impact just for answers. general answer, lot of those And noted, demand the and

this it terms don’t, playing or Given perhaps way? you to how gains, you sit how of some capital that in share where have do out see and that see certain market other access you you institutions for providing playing opportunity out do

portfolio in business, different our they’re and lines opportunities, of Marla. our I are think, corners and There of

impacts is the on levels. fact, and have of concentration, very experiencing some that drawing of farmers rapid putting happening That some that rapid credit pressure in banks is lines is unexpected asset agricultural including credit in that prices resulting commodity one capital. farm now, heavily. banks, in in And cases their run-up are quite in run-ups operating the right example, For on that is

So activity AgVantage the that. one driver, of the very of the at drivers one, because of the of end quarter not only was but increase in the just

into opportunity. it think So about interesting to how translates new

mortgages. which in publish do the it bit full yield distracting the fact, actually curve, long-term end financing real from one rate With have the as very is we a variable and of sheets the the is fixed we advantages, our long core But, offerings competitive of of steepening rate rate the And curve, well. ability. across curve at our short-term

there, be alluding see example may may a kind and the that we some to. opportunity of pick-up you’re of So, that second

meaning Third that just asset loans, extremely our we much we minute, numerous thing pretty this talked activity day liability conditions. of are match in I’d occasions market hour, about this capital our management. debt we all our before, time, current, is real that disciplined mentioned We’ve this on business how but price to

that first reflected sheet. we when immediately in in saw rapid so, interest run-up the was our rates, rate And

our us. us. of it into was the competitors a Some catch up, But like bit an of begins That advantage a to translating they disadvantage little market bit. as for a then more

three some are those ways So, this you’re unprecedented demand amidst that product to. we volatility that per increasing specific see referring could

investor. ahead. The next from [ph] go will question come Gary Please Gordon,

a Thanks due you’ve QX. I existing maintain A to that variety any lot. risks on rate in your to anything the or adjustments Okay. the stability dramatic in done hedges Obviously, interest obviously first, appreciate my hedges the portfolio. rates, portfolio? your to cause needed Did shifts be interest couple limit questions. market to of to got taking about a

volatility to we’ve of been that prove talking management. asset having are of about kind the that you one the liability is going of Gary, what benefits to is our years, and of we the discipline for

why so, think And that But is little to let on Aparna just color me is. a exactly turn no. the I answer to you short give

-- One, our hold Gary. management. at liability actually look asset our much we don’t We as volatility when derivatives to income absolutely, you there’s our see play can the some on manage net of balance really for But positive profile. this hope more to speculative Yes, sheet you reasons, out know. you essentially,

that back the to Marla really to pivoting to comes said. what we which first had, how And actually, Brad So, responding even question price.

risk, don’t do our tremendous we really able interest rate and that take derivative we’re some managing underlying basis because have We on activities. advantages any through to or risk

take funds, offset match also can interest that position completely to eliminate us to we our rate. we Difficulty] so, allow and [Technical can almost actually a issue And

So, at really when last it. essentially environment, benefit, it’s coming years two all especially this positions together, you we’re favor. of in we’ve complicated, rising We taken that on add slightly looking that the really maybe some a out the in that in of the have rate are our

lot but unpack short that of there, we sheet is, answer continues and in be to fund terms our for to maybe a manage probably portfolio. through the balance it an to how advantage there’s So, our us

Okay. Thanks.

spreads is Second widen in one volatile typically out. markets,

You your more can discuss own funding minute a costs spreads maybe versus available treasuries and investment? important, new then for

Sure.

Let to when me GSEs, question on are end costs. maybe other and between part say that that X the that or typically, the where Funding that. seeing somewhere by we the points Credit to curve, of your our we XX we mean on I But Farm first we long been of of competitors top Corp of basis definitely in our look terms are widening relative at our I And will funding take of a funding.

But we’ve So, everyone seen seeing as as I dynamics relative same credit happening. other not across is the are issuers. credit widening also we But, out, that standpoint, years spreads relative the think we widening a a seeing GSEs. the in much other seeing two to past are relative board to what’s from maybe to maybe GSE,

anything seeing very different. not We’re

been really very whether been on and this. capital specifically or whether this this but it’s relates opportunistic, through it years, as us we’ve it’s preferred issuances over to through And extending know Gary, again. I’ll you stack reiterate last the far -- funding. debt our our two As

treasury done very, the team good our job extending of think a I very liabilities. has really

there the the of be very opportunistic end Now, terms at want fund go we we in when can curve. and of long out to

to the on a have really bit at down, of settles amount we not do debt abundant have of volatility bias all until we an the but curve. little a that So, funding points

we and fully really can opportunistically. profile our debt manage our interest rate So, profile

Okay, on margin. good. last the One question interest net

expense, revenue, had was same operating through it You margin? year. net run the estimate to basis business, XX basis last points obviously, is benefit The this it impact there to the a of it operating interest expenses how of servicing said the much as year, an or way

on being & actually portfolio of still the into back days you is Obviously, that. the of to able really to servicing business. can it. Ranch back early We Yes. third about give terms likely It’s come of to Farm a in be a funneled sense

some at again, So, payments Farm our -- & shifting with dynamics volume and incremental additional we dynamic, look Ranch. if you fee so going have on and QX, on

So, about there’s between XX probably points wouldn’t of that anywhere think volume. of on probably on a much on basis way our should volume, incremental bit net wash. time, XX over a little of I you a a too incremental have that’s really And But the you points. it. benefit seen see, XX basis of to to pickup one-third mean

operating Nice. last And one question on expenses.

ultimately, XX%? ratio, that? you next, I one or You big let’s it think X do -- this to said But a get XX% day efficiency and which there’s want How should move. we your efficiency three-year the say, plan for Is below X to to ratio is XX% about quarters. today you’ve hope got fairly plans is a spending back

Yes.

others want and to might Let Brad or sure this. add to me in, jump I’m

a quarter, previous quarter of when that you you first compensation run of this elevated One typically job of prepayment. we’ve revenue, just we’ve additional see line and likely the that back year or year. year in that going when QX historical more at first last headcount averages we and What year not will talked seasonality activity because highly towards is think be additionally level. quarter and typically, before. of And The to last that ratio about would tends that north unusual, to have technology XX%. it’s this with the in at and over you dynamic go really terms the But pickup, think, fact, year a keeping be loan reason, to Difficulty] playing not something see that of will managing see fairly of is then, rate up, pops tends continued we good of that down. investment loan a in I done, efficiency out normalizing But really look in really out the about to QX keep [Technical in -- rest XXXX, why you seen do compensation

efficiency of going also we and ratio come And efficiency swings. seasonality the point making it’s servicing go business. that big remaining dynamic our will the rest tendency here sense That that then, that the So, does has a second move, the would of I to One can is some just see huge that higher quarters. pretty goes because ratio that is slightly our say acquisition in have up. relative is that compensation. But, obviously not be down, around to

back is But trend to play denominator to really question of that additional spread as on volume some All earlier with that of those the spreads we will out continue start to help So, respect pickup. to and seeing that your efficiency that to likely that persist. service ratio.

that feel annualized can at optimistic our efficiency on ratio XX% we basis. so, pretty under manage an that we And

Gary, if XX%. to you XX% to were just and Yes. elaborate ‘XX, on between that, go we QX back

If XXXX, XX%. not really XX% the between were we and you to is QX, go This back outlier.

‘XX that -- efficiency our or that level. be also is XX% slightly is But higher. get down goal it year ratio Although slightly to for the specific, -- it fiscal is below -- to to be

back concludes sir. remarks. like closing This the Brad Nordholm any go I would conference session. to ahead, turn question-and-answer our to over for Please

call. you, in thank you the thank and participating Well, all operator, for

be asset you’ve don’t we while and designed get real to and we do think mission very Farmer is the things positioned standpoint, questions. call great origination to steady It always, time agriculture. Mac’s to from also resilient. today from model. right This of very, well know exactly an an commodity American we’ll But confidence interest And we’re now, is results very, from that liability And you optimism in prices heard that serving of standpoint structured, will continue highly from rates continue know to X where the way follow-up be volatility. to with we’re touch the fulfill our confidence. to very and answer your deliver months As on clarified, comes you’d business put people heard I to please this Jalpa, that questions or have together like and with

I’ll and to for you leave talking all look forward with So, very you much participating, you thought. just to that soon. Thank

concluded. now attending is presentation. for you conference today’s The Thank

disconnect. now may You