Federal Agricultural Mortgage Corporation

earnings conference call. I'm Jelpa Nazareth, Director of Investor Relations and Finance Strategy here at Farmer Max. 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 Pharmac's 2021 Annual Report on Form 10-K filed with the SEC earlier today 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 2021 Form 10-K and earnings release posted on Pharmac's website, pharma.com, under the Financial Information portion of the Investors section. Joining us from management this afternoon are President and Chief Executive Officer Brad Nordholm, who will discuss fourth 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 President and CEO Brad Nordholm. Brad.

Well, thank you, Jalpa, and good afternoon, everyone. I really want to thank you for joining us today. 2021 was a transformative year for PharmaMAC. I'm extremely proud of our team, our continuing strong performance, and our new initiatives that we launched over the last year. Two of the more notable initiatives were the expansion of our internal loan servicing function in the third quarter, and the successful execution of a structured agriculture mortgage-backed securitization in the fourth quarter. These accomplishments, combined with our consistent financial performance and continued strong credit quality, provide us confidence in our ability to successfully execute our multi-year strategic plan and execute on our mission to bring even greater efficiency in how we provide financing to our lenders for the benefit of their farm and ranch agribusiness and rural infrastructure customers. The integration of the strategic acquisition to expand our internal loan servicing capabilities has been seamless. Our team's deep expertise has allowed us to offer our customers the same quality service without interruption. We view this acquisition as an opportunity to create greater efficiencies across our loan servicing platforms. We will harness this opportunity for more direct oversight and governance over a large part of our portfolio, giving us enhanced security, more control over and timely access of data, and better visibility into loan performance from inception to maturity. We're also excited for the growth opportunities this strategic acquisition will enable, as it will equip us with the talent and infrastructure to more effectively and efficiently service larger, more complex commercial loans and that is a key driver to our long-term growth. This move is an important example of our dual strategies to broaden our business opportunities while also deepening our relationships with our existing customers. We believe that will ultimately enable us to provide increased capital to support rural America and deliver better customer service to our lender network in support of our mission of increasing access to competitive credit for the benefit of our country's farmers, ranchers, and rural residents. The October 2021 issuance of the Agriculture Mortgage-backed Security was an important strategic milestone for PharmaMac, and the success of the transaction is evidence of PharmaMac's high-quality credit, strong balance sheet, and consistent financial performance, as well as the resilience of America's farmers and ranchers. Over the last few months, we have been focused on enhancing the infrastructure to support a securitization program and are closely monitoring the changing market dynamics to align with market expectations. Over time, we expect to eventually be a frequent issuer in the marketplace. With that said, in the near term, our plan is to ramp up the number of issuances per year as we focus on building a strong foundation for the program. In addition to these accomplishments, we developed a newly formed alliance with Ag Analytics, a leader in agriculture data collection and analytics. We're proud to be a part of this innovative and data-driven initiative, which has enabled us to better identify, track, and analyze the millions of acres pledged as collateral for PharmaMAC's farm and ranch loan portfolio. While we are in the early stages of mining this robust collection of data, we are focused on enhancing our farmland value modeling capabilities and our approach to collateral management. Turning to our results, our focus on our strategic plan and continued investment in people and technology resulted in a strong 2021. We provided a gross $8.6 billion of liquidity and lending capacity to lenders serving rural America in 2021, which resulted in outstanding business volume of nearly $24 billion at year end. We generated a record level of core earnings, and most importantly and fundamentally, our portfolio remained strong and credit performance continued to be very stable with 90-day delinquencies and substandard asset ratios moving favorably quarter over quarter. This year, we also introduced a realignment of our lines of business and operating segments. More specifically, we have consolidated our reporting from our four lines of business to two lines of business, agricultural finance and rural infrastructure finance, and seven operating subsegments with four segments that drive business strategy under the two lines of business. Our new lines of business reflect how we are managing, evaluating, and serving our business that centers around the customer and market rather than according to the type of the product that we offer as we previously did. We believe the simplified reporting format will more clearly present the distinct contributions of our operating businesses and how they drive value for the overall company. As we expand and scale our company, the transparency and utility of our disclosures must align and we believe these changes will make it easier for all of our stakeholders to digest and evaluate our results. The agricultural finance line of business, which is approximately 75% of our total outstanding business volume, and comprises all products secured by first liens on agriculture real estate, plus all USDA guaranteed loans, it grew just over $1 billion year over year. This increase was primarily driven by farm and ranch loan purchase and egg vantage securities programs, with the growth in egg vantage securities largely comprised of opportunistic short-term bonds that are expected to mature in the first half of 2022. While the short-term nature of those securities may create some near-term volatility to volume, we do not anticipate a material impact toward net effective spread. Our pipeline in this line of business remains strong as we believe our strong relationships, knowledge, innovation, and flexibility have resulted in our ability to be adaptive throughout market cycles. Our rural infrastructure finance line of business grew a net 600 million or 0.6 billion dollars in 2021 primarily due to a net increase in egg vantage securities with a key counterparty this growth is a testament to farmer mac's ability to offer competitively priced financing structures while also demonstrating our ability to effectively execute and meet the needs of our customers during 2021 farmer mac purchased 132 million dollars of loans to telecommunication companies that provide wireless, cable, fiber transport, and broadband services to rural America as part of its strategic initiatives to support the telecommunication industry. PharmaMac also facilitated the financing of approximately $31 million of renewable energy loans. We view both as growing sectors that tie directly to our organizational mission and a significant opportunity for PharmaMac over the next few years, given the greater level of interest from rural electric cooperatives to develop and deploy broadband services and invest in renewable energy power generation. I'm also pleased to announce an 8% or 7 cent per share increase in our quarterly common stock dividend. That will take it to 95 cents per share starting in the first quarter of 2022. In deciding to increase PharmaMac's common stock dividend and maintain our payout target, the Board of Directors considered our strong capital position and the consistency of and outlook for our earnings to support our business and exceed all of our regulatory requirements. This represents the 11th consecutive year that PharmaMac increased its quarterly dividend and it's a tangible indication to our shareholders of our ongoing financial success. As we look to 2022 and beyond, we believe our 2021 performance provides a great foundation for visibility and growth well into the future as we continue to execute on our strategic objectives. We are confident that the strength of our underlying business model our strong capital position, and our commitment to our customers will continue to support our ability to generate consistent returns throughout various market environments and across economic cycles, as we have done historically. And with that, I'll turn the call over to Aparna to discuss our financial results in more detail. Aparna?

Thank you, Brad, and good afternoon, everyone. I'm pleased to share with you another year of record earnings results, reflecting focused execution throughout the organization. Before I delve into our annual results, I'd like to provide a few highlights around our fourth quarter results. Core earnings was $30 million, or $2.76 per share, as compared to $27.6 million in third quarter 2021. Our net effective spread modestly declined sequentially due to the sale of mortgage loans associated with the securitization transaction. And I'll describe that in more detail shortly. And finally, outstanding business volume increased $495.7 million from September 30th, 2021 to $23.6 billion due to new farm and ranch advantage volume and strong loan growth in the farm and ranch segment. Turning to our 2021 full year results, PharmaMac's outstanding business volume grew by $1.7 billion to $23.6 billion as of December 31st, 2021. Net effective spread was $220.7 million, which represents a 12% increase from $197 million in 2020. In percentage terms, net effective spread, or NES, improved five basis points to 98 basis points, compared to the prior year. And this is primarily due to the shift in higher earning assets and continued competitive execution on debt funding that is a result of our disciplined asset liability management process. Our newly introduced operating segments, which Brad described earlier, allow us to offer more transparency into the various contributing components of portfolio NES as we have implemented a funds transfer pricing methodology. This process allows us to allocate interest expense much more accurately to each of the operating segments, and this assumes a match-funded asset liability management approach, and it allocates both the benefits as well as the costs from the funding and hedging strategies to the funding segment. This also allocates the results of the investment portfolio and demonstrates how it's held for liquidity purposes. The year-over-year growth in net effective spread was primarily driven by net new business volume, particularly in the farm and ranch operating segment, accompanied by decrease in non-GAAP funding costs. We frequently discussed in the past the positive impact of our dynamic funding strategies, including the use of callable bonds to replace more expensive outstanding debt at lower rates, as well as leveraging derivatives to eliminate basis risk. We believe that the new segment reporting construct provides for clearer insight into the benefits of these funding strategies and how it contributes to profitability. The business compositional shift we've discussed since early 2020 is also highlighted in the new segment reporting, as the relationship between rates and volume are apparent in each segment. For example, our rural utility segment is comprised of low-risk, long-dated assets which generate a lower NES relative to our corporate ag finance segment, which has greater levels of credit risk, but higher levels of net effective spread. As we prepare for a steepening yield curve, especially at the long end of the curve, we are very carefully analyzing our duration and convexity matches to minimize our interest rate risk as rates rise. In general, our net effective spread, or NES, should be well cushioned against rising rates. The options on our callable issuances remain attractive even if rates rise, and these will prove to be a good hedge against prepayments if the rate environment remains flat or decreases. Securitization, which is a capability that we are now building, will also provide us with a diversified source of long-term funding. It will help us draw from a larger investor base a more diversified investor base. It will help us optimize our funding strategy when faced with widening issuances at the long end of the curve. This disciplined approach of managing our portfolio duration and convexity allows us to have a consistent performance in our net effective spread in both rising and falling rate environments. Core earnings for 2021 increased 13% to $113.6 million, or $10.47 per diluted common share, compared to $100.6 million, or $9.33 per diluted common share for 2020. The year-over-year increase in core earnings was primarily due to an $18.7 million after-tax increase in net effective spread, a net after-tax provision release of $8.1 million, and a $5.2 million after-tax gain on sale of mortgage loans. These factors were partially offset by a $9.5 million after-tax increase in operating expenses and a $6.9 million increase in preferred stock dividends. The successful execution of a $299.4 million agricultural mortgage-backed securitization in October was a key contributor to our co-earnings results this past year. The deal was structured around two tranches, a senior guaranteed tranche and a subordinate unguaranteed tranche. The transaction was overall very well received by the investment community, and this has provided PharmaMac with an opportunity, as I mentioned earlier, to diversify its funding sources and fulfill our mission of delivering low-cost liquidity even more effectively. We have spent the last few months identifying ways to potentially execute these transactions more efficiently, and we expect to return to the market this year with another similar securitization as we seek to make this a more programmatic effort for us in the future. Operating expenses increased by 20 percent in 2021 compared to 2020, and this is primarily due to increased headcount as we hired 32 net new employees this year, including 10 new employees in connection with the strategic acquisition of loan servicing rights that Brad described that occurred in the third quarter of 2021. Our headcount was 154 as of year end. The additional loan servicing expenses are expected to be offset over a multi-year period by additional revenue, and this will be reflected in higher spreads in our farm and ranch segment where we will not be paying a third party for servicing the loans that we will now service, and this should therefore make the initiative neutral to accretive for us in the midterm. The remaining hires were brought on to drive additional volume growth and support our long-term technology strategy. We also plan to continue investments, both in headcount as well as in technology, over 2022 and 2023. These will be primarily to modernize and mitigate risk in our infrastructure, enhance our technology platforms to support our revenue strategies, and continue to add relevant talent across the organization, especially as we scale and enter into new areas of business, such as renewable energy and telecom. While we expect these efforts to continue and increase over the next 12 to 18 months as we innovate and grow our business, we will continue, as we've mentioned previously, to closely monitor our efficiency ratio. Our efficiency ratio at the end of 2021 was 29%. Going forward, we do expect operating expenses to increase commensurately with revenue growth, but as we've noted previously, we intend to stay within range that is consistent with our historical averages, but always remain below a 30% operating efficiency level. Our credit profile continued to be strong over 2021. As of December 31st, 2021, the total allowance for losses was $16.4 million, a decrease of $1.2 million from December 31, 2020. This decrease was attributable to a $2.4 million release due to improving economic conditions and a recovery on the payoff of the agricultural storage and processing loan secured by a specialized poultry facility that had been partially charged off in 2020. Partially offsetting this decrease was a $0.2 million provision to the rural infrastructure allowance for loan losses related to the impact of the February 2021 Texas Arctic freeze. Turning to capital, for the max $1.2 billion of core capital as of December 31, 2021, exceeded our statutory requirement by $487 million, or 41%. This compares to $1 billion of core capital as of December 31, 2020. The increase in capital in excess of the minimum capital level required was primarily due to the issuance of the Series G preferred stock in May 2021 and an increase in retained earnings. The issuance of the Series G preferred stock earlier in the year positions us well for this inflationary environment that we're seeing. The capital efficiency of the securitization transaction also contributed to our improvement to 14.7% of Tier 1 capital from 14.1% as of year-end 2020. All of this further reduces the need in the immediate future to do more preferred stock issuance. As Brad mentioned, we are very pleased to announce a 7% per share increase in our first quarter 2022 common stock dividend, getting us to a total of 95 cents per share, and this represents an 8% increase from a year ago. We believe that our strong earnings and consistent capital position support this dividend increase and also our long-term target payout ratio, which is set at 35% of core earnings. In conclusion, our balance sheet is well optimized. Our access to capital markets also remains strong. We believe that we're well positioned for rising REITs and to fund future loan growth at levels that are earnings accretive. And with that, Brad, let me turn it back to you.