Federal Agricultural Mortgage Corporation

Good afternoon, and thank you for joining us for our second quarter 2021 earnings conference call. I'm Jelpa Nazareth, Director of Investor Relations and Finance Strategy here at FarmerMax. 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 PharmaMac's 2020 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 relief posted on PharmaMac's website, PharmaMac.com, under the financial information portion of the investor section. Joining us for management this afternoon are our President and Chief Executive Officer, Brad Nordum, who will discuss second quarter business and financial highlights and strategic objectives, and our 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 our President and CEO, Brad Nordholm. Brad?

Jalpa, thanks very much. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that PharmaMac produced record core earnings this quarter. We did that while expanding our net effective spread, maintaining strong credit quality, and further rationalizing our portfolio in ways that are very consistent with our strategic plan. These results largely reflect the continuation of the trends that have developed over the course of the last few years, including excellent funding execution in the Dec capital markets, disciplined asset liability management, and ongoing shift in the composition of our portfolio towards higher spread loan purchase products. We achieved record core earnings of $30 million during the second quarter. And that effect was spread above 1% for the first time in a number of years. Our asset quality metrics remain strong with 90-day delinquencies and substandard asset ratios moving favorably. In other words, moving lower quarter over quarter. And we're pleased with the overall performance of the portfolio. As you've probably read in the news, while the persistent of drought conditions in the certain parts of the American West are causing real pain, real hardship for a number of farmers and ranchers in America West. Particularly in California, we really have not seen any evidence of this in our portfolio. For loans in areas that commonly experience exceptional drought conditions or do not always have access to underground water as a primary or supplemental source, PharmaMac's underwriting process provides for the assessment of anticipated long-term water availability for the property and includes analysis of how that impacts the collateral value in the borrower's cash flow. While we pay close attention to what is going on in American agriculture and empathize strongly with people who are experiencing drought conditions, we must state emphatically that the overall tone of agricultural real estate market today is very positive. Commodity prices are strong and farmland values are projected to be stable or even slightly higher as we're seeing evidence of that in numerous public auctions and sales. And in fact, a few of them have record high sale prices. During this last quarter, we provided a gross $1.5 billion of new credit to rural America This results in our expanding business volume exceeding $22 billion at quarter end. Our success continues to be driven by consistent customer-centric approach, which focuses on providing products and solutions that address funding needs through all agricultural economic cycles and to both our existing and our new markets. Strong loan purchase growth in our farm and ranch line of business this quarter was largely attributable to our proactive outreach to our customers. Farm and Ranch's long-term standby purchase commitment product also exhibited some growth, a reversal from prior quarters. Regional farm credit system associations growth within our core sectors resulted in lenders exceeding commodity concentration limits and requiring additional need for capital relief and that is provided by PharmaMax purchase commitment product. Across our other lines of business, we continue to see increased levels of competition in terms of price structure and execution, primarily due to the historically low interest rate environment and the Federal Reserve Bank's continued support of the lending market. In our USDA guaranteed line of business, in addition to increased competition, we're seeing lower demand for the product in certain regions due to strong increase in commodity prices. In other words, because the farmer's financial health is stronger, they need the guarantee program less. This has also resulted in a higher increase in the high coupon USDA loans paying off compared to 2020. Although we've seen maturities in our institutional credit line of business, We did successfully fund four new AgVantage bonds with our rural infrastructure counterparty for an aggregate amount of $375 million. We also funded a $25 million AgVantage bond with a new counterparty that we believe offers significant agricultural holdings and growth potential. The successful funding execution of these institutional counterparties is a testament to PharmaMax focus on expanding its customer and business relationships and challenging ourselves to find more efficient and effective ways to provide our customers with the flexibility and assistance their borrowers need. We have stated in the past that we won't do egg advantage when the margins are too thin. This quarter, we were able to find a number of situations where that wasn't the case. While we had limited loan purchase activity that closed from our rural utility counterparties, we do see positive momentum in the broadband and renewable energy project finance pipeline. We view this growing sector as significant opportunity for PharmaMac over the next several years, given the greater level of interest from rural electric cooperatives to develop and deploy broadband services and invest in renewable energy generation, as well as renewed interest from a federal policy perspective in broadband and renewable energy. When I joined PharmaMac nearly three years ago, I took steps to do a couple simple things at PharmaMac, among them making PharmaMac a more commercial institution, making sure that we were listening to and responding to the needs of our customers by coming up with more competitive and responsive products and delivery systems. This vision really had attached to it meaningful business volume objectives that required our team to develop innovative approaches in how we acquire and retain customers and how we develop and deliver new products. We also took into consideration the appropriate investments in people and infrastructure required to meet our long-term plans. I am really proud to say that our consistent financial performance over the last three years And effective execution in a highly competitive lending environment where there's an abundance of liquidity today is the direct result of the team's dedication to successfully broadening and deepening our business that's come about by learning to listen to and respond to our customers' needs. This ultimately helps us support our mission of developing and delivering more credit products that are of benefit to all of rural America. As part of our efforts to identify opportunities to reach a larger audience, we recently engaged in a joint marketing campaign to promote a white paper that we co-authored with the American Banker Association. It's available at our website. The multi-week promotional campaign is intended to shine light on agriculture mortgage market in the United States and PharmaMac's role in helping agricultural lenders grow their business in relationship with the customers, ultimately to benefit all those in rural America. This has been an exciting opportunity for PharmaMAC to demonstrate to a wider audience how our mission is helping create tangible benefits in the agriculture marketplace. So in summary, we are very pleased with the second quarter results. And we generally expect the positive trends we've seen in the first half of 2021 to continue. While the emergence of the Delta variant creates some level of near-term uncertainty, we're confident that our current infrastructure, strong capital position, and commitment to our customers, as well as our employees' resilience and demonstrated ability to execute on our plans while working from home, is going to help us navigate whatever comes our way during the remainder of the year. And now, with that, I'd like to turn the call over to Aparna, our Chief Financial Officer, to give you a little bit of additional insight into the financial results for the quarter. Aparna?

Thank you, Brad, and good afternoon, everyone. I'm pleased to share with you Final Math's record second quarter results. This reflects focused execution throughout the organization, as Brad just noted. Parliament's second quarter 2021 earnings growth was driven by higher spread business volume and substantially lower funding costs, giving us strong access to debt capital markets. Our return on equity to our common stockholder was 18% year-to-date, and this is well in line with our historical averages. And this is the spike the continued investments were making to support our strategic growth initiatives. Notably, we exceeded 100 basis points this quarter for net effective spread, And this exceeded our 90 basis points plus or minus five basis points guidance that we have previously provided. Our access to capital markets remains strong. We've issued debt daily. We raised preferred capital of $125 million at historically low rates for us. And we've continued to maintain our disciplined asset liability management practices. And this includes a methodical transition out of LIBOR-based instruments. The year-to-date average balance of spread earning assets was $22.3 billion, which is comprised of $4.8 billion in cash and investments and $17.5 billion of loans and securities. Summer max net effective spread for second quarter 2021 was $56.6 million, a 22% increase from $46.5 million in second quarter 2020. In percentage terms, This translates to a net effective spread that I mentioned previously of 1.01% compared highly favorably to 0.89% in the same period last year. The overall compositional shift this quarter of $395 million of net new higher spread farm and ranch loan purchase product combined with a net decline of $100 million in advantage bonds that are lower spread combined with our effective funding execution were the primary drivers of our record net effective spread increase during the quarter. Year-to-date, we have successfully issued $6.6 billion in long-term debt funding across the maturity spectrum, with increases in the 5- to 9-year and greater than 10-year sectors. By extending our liabilities, we were able to adequately prepare for a potential rise in rate environment at pricing levels that are very attractive. We're also actively analyzing our duration and convexity matches on both our existing portfolio and our pipeline to ensure that we minimize our interest rate risk in the event of a sustained rise in interest rates. Turning to core earnings, our core earnings for second quarter 2021 grew 14% to $30 million, or $2.77 for diluted common share, compared to $26.3 million, or $2.45 for diluted common share. in the same period last year. The year-over-year increase in core earnings was primarily due to an $8 million after-tax increase in net effective spreads, and this was partially offset by a $2.2 million after-tax increase in operating expenses and a $1.9 million increase in preferred stock dividends from our recent Series G preferred issuance. Our operating expenses increased by 20% year-over-year, and this is primarily due to increased headcount and high spending on software licenses and IT consultants, information technology consultants, to support various core and strategic initiatives. These increases were offset by lower levels of expenses that were related to consulting fees, travel, and conferences. However, as we've mentioned previously, these decreases are very likely to be temporary and expected to normalize post-pandemic once normal activity resumes. We expect to see higher investments for the foreseeable future, primarily to modernize our infrastructure, to enhance our technology platforms to support our revenue strategies, and we'll continue to add relevant talent across the organization as we grow. While we expect these efforts to increase over the next 12 to 18 months as we innovate and grow our business, we do expect to see a tapering off in expense growth. Moreover, we have instituted a very disciplined approach to controlling both our personnel and non-personnel expenses. We monitor our operating expense ratio. We do a thorough and rigorous review of our results each quarter as a management team. Our efficiency ratio ended second quarter 2021 at 26%, and this is below our target 30% level. As we continue to upgrade our platforms and invest strategically in multi-year technology commitments that we hope will improve customer service and our competitive position, our efficiency ratios are projected to stabilize at historical levels and remain under 30%. We benefited from an improving macro environment as evidenced by a $1 million release of our total allowance for credit losses for March 31st, 2021, bringing us to $16.6 million as June 30th, 2021. Turning now to capital, we opportunistically strengthened our capital levels through a successful issuance of $125 million in Series G preferred stock, and this happened in May. The addition of preferred capital together with our strong earnings, increased our tier one capital ratio this quarter from 14% as of March 31st to 15.3% as of June 30th, 2021. Common that $1.2 billion of core capital as of June 30th, 2021 exceeds our statutory requirement by $483 million or 71%, putting us in a very robust position. Additionally, in March 2021, Our board of directors reinstated our share repurchase program, which had been suspended since the first quarter of 2020. The plan was reinstated on its previous term and has a remaining authorization of up to $9.8 million and an extended expiration date of the program, March 2023. We have not repurchased any shares in the first half of 2021, and we must note that we intend to repurchase stock only when we view repurchases as both accretive and consistent with our strategic objectives. Overall, and in conclusion, we are very pleased with the consistency in our results this quarter, and this is reflected both in our profitability and it's bolstered by consistent credit quality and our capital adequacy. More complete information about PharmaMax second quarter 2021 performance is in our 10Q we filed today with the SEC. And with that, Brad, let me turn it back to you.