Federal Agricultural Mortgage Corporation

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 Former 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 PharmaMax 2021 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 PharmaMac's website, PharmaMac.com, under the financial information portion of the investor section. Joining us from management this afternoon are our President and Chief Executive Officer, Brad Nordholm, who will discuss first 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?

Thanks, Jalpa, and good afternoon, everyone. I'm really pleased that you were able to join us today. I'm happy to report a very successful first quarter 2022. Our financial results are strong, as we'll be discussing. And we also are working to build upon a solid foundation for our future growth. We've provided a gross $3 billion in liquidity and lending capacity to lenders serving rural America in the first quarter, 2022. This resulted in outstanding business volume of $24.2 billion as of March 31st. We generated consistent core earnings, and most importantly, our portfolio remains strong and credit performance continued to be stable with 90-day delinquencies and substandard asset ratios improving relative to the same period last year. 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 agricultural real estate plus all USDA guaranteed loans, grew approximately $500 million this quarter or roughly 3%. This is primarily due to our advantage securities and farm and ranch loan purchase programs. We are pleased to see our strong institutional relationships and the overall dynamics of the macroeconomic environment that have resulted in our ability to return as an invaluable partner in the wholesale financing space. At the onset of the pandemic, opportunities for new business volume in our AgVantage securities program were limited, as the liquidity support provided by the Federal Reserve Bank resulted in the tightening of investment-grade credit spreads to historically low levels and increased competition. Net farm and ranch loan purchase volume was strong during the first quarter, despite its seasonally large number of payments. That's because most of our farm and ranch loans have annual and semi-annual payment terms with January 1st payment dates. During the first quarter, markets experienced a disruption caused by a combination of factors, including inflation, a federal funds rate increase, expectations of future increases, as well as the conflict in Ukraine. Farm expenses are rising in nearly all categories with higher grain, fertilizer, energy, and labor prices driving the trend, and the impacts of these increases will vary by operation and commodity type. We believe the sector's operating expense ratio is likely to increase back towards a historically high level. However, firm commodity and food prices do leave room for farm profits this year. The USDA is forecasting record net cash incomes for 2022. While production expenses are forecast to increase and government payments are expected to fall, rising cash receipts should offset these changes, with recent commodity price data suggesting that even stronger incomes are possible. In terms of our portfolio, while we anticipate that lower financings could result in lower levels of new loan purchases in some of our farm and ranch and USDA products, It could also result in lower portfolio prepayment speeds. Our pipeline in this line of business remains strong, and we will continue to be adaptive as we navigate through this environment that is characterized by significant uncertainty. Our rural infrastructure finance line of business grew nearly $150 million this quarter, or 2%, primarily due to our loan purchase product. This growth was fueled by a competitive but increasing interest rate environment, resulting in demand for long-term financing solutions for planned maintenance and capital expenditures. Also contributing to growth this quarter in rural infrastructure line of businesses was a $35 million commitment to a large solar project. As I've said on prior calls, renewable energy is both an important economic development opportunity for rural America, and it's a business opportunity for us. Another business opportunity for PharmaMac is our securitization program. As mentioned in our last earnings call, over the last few months, we've been focused on enhancing our infrastructure to support a securitization program, and we are closely monitoring a changing market dynamic. The market for new issue securitizations was challenged during the first quarter, as the volatility in the debt capital markets resulted in somewhat of a slowdown in securitization markets. We remain committed to being a regular issuer in the market with a diverse set of securitized products that align with our investor interests. With that said, in the near term, our plan is to slowly ramp up the number of issuances each year as we focus on building a strong foundation for the program. FarmerMac continues its measured and thoughtful investment in people, technology, and business infrastructure to improve our capacity and efficiency, and we believe these will help us deliver on our long-term goals. We set meaningful market share goals for ourselves in our strategic plan, and to achieve these goals over the long run, we're going to need to be able to achieve gross annual business volumes that represent the growth over our current asset levels. As an example of our efforts to upgrade our technology platform, including doubling the eligible loan size for our AgExpress scorecard products from $1.5 million to $3 million, and upgrading and enhancing this underwriting solution to achieve this outcome will require appropriate investments. Another initiative currently underway at FarmerMac is our rebranding efforts. which are currently in early stages. We recognize that we have grown significantly in size over the last few years. And as a result, we are reaching a larger set of audiences and stakeholders with different profiles, but all with a shared passion for rural America. We hope that through our rebranding initiative, we're able to better to gain deeper insight from each of our stakeholders in order to continue to build on our strong reputation as the nation's key trusted secondary market for credit to rural America. The continuity of our culture and business model continues to deliver consistent, positive results. With the support of our board, we believe that our unified commitment to PharmaMac's strategic plan, in conjunction with the organization's talented and committed employee base, is enabling us to take PharmaMac to the next level. Now I'd like to turn the call over to Aparna, our Chief Financial Officer, to discuss our financial results in more detail. Aparna?

Thank you, Brad, and good afternoon, everyone. Core earnings for first quarter 2022 were $25.8 million, or $2.37 per diluted common share, compared to $30 million, or $2.75 per diluted common share, in fourth quarter 2021, and $25.9 million, or $2.39 per diluted common share, for the same period last year. The sequential decrease was due to the non-recurrence of the fourth quarter 2021 $5.2 million after-tax gain on sale of mortgage loans, a net change in our total allowance for losses of $1.1 million after-tax, and a $0.7 million after-tax increase in operating expenses. These factors were partially offset by a $2.8 million after-tax increase in net effective spread. The year-over-year decrease in core earnings was primarily due to a $2 million after-tax increase in operating expenses and the $1.5 million increase in preferred stock dividends. These factors were partially offset by a $3.1 million after-tax increase in net effective spread. Net effective spread for first quarter 2022 was $57.8 million, an approximate 7% increase compared to fourth quarter 2021 and the same period last year. The sequential and year-over-year improvement in net effective spread was primarily driven by net new business volume and cash basis interest income, also contributing to the year-over-year increase was an increase in net coupon yields related to the acquisition of loan servicing rights in third quarter 2021. Our liability side of the balance sheet remains strong, as we continue to benefit from our dynamic funding strategies that we've outlined to you in the past, and we continue to maintain our disciplined asset liability management. Additionally, we continue to very carefully analyze our duration and convexity matches, especially in this rising rate environment, to minimize our interest rate risk. Last quarter, we introduced operating segments to allow us to offer more transparency into the various contributing components of our portfolio's net effective spread. We've implemented a funds transfer pricing, or FTP, methodology. This process allows us to allocate interest expense much more accurately to each of the operating segments. Since funds transfer pricing, or FTP, assumes a match-funded asset liability management approach, 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 that we primarily hold for liquidity purposes. We believe that the new segment reporting construct provides shareholders and other stakeholders with clearer insight into the benefits of our disciplined ALM practices and dynamic funding strategies and how they ultimately contribute to enterprise profitability. The successful execution of a $299.4 million agricultural mortgage-backed securitization in October was a key contributor to our core earnings results in fourth quarter of 2021. While we have spent the last few months identifying ways to potentially execute these transactions more efficiently, and we hope to return to the market this year with another securitization transaction, we are taking a more measured approach in the short term, just as Brad mentioned, recognizing that current market dynamics are resetting credit market perspectives and rate outlooks. First quarter 2022 was extremely challenging for the securitization market as the evolving macro rate environment has contributed to spreads that are widening and interest rate volatility that is increasing throughout the quarter. We are, however, still committed to building a robust securitization program, which we believe will provide PharmaMac with an opportunity to diversify its funding sources and fulfill our mission of delivering low-cost liquidity even more effectively. Our current focus, therefore, is strengthening the platform and remaining opportunistic in terms of timing and structure to ensure we are not issuing in the face of volatility and uncertainty and that we continue to create value for our shareholders with these and other transactions. Operating expenses increased by 13% in first quarter 2022 compared to first quarter 2021, and this was primarily due to increased headcounts including 10 new employees in connection with the strategic acquisition of loan servicing rights in third quarter 2021, increased stock compensation, and increased spending on software licenses and information technology and other consultants to support growth and strategic initiatives, some of which Brad mentioned earlier. The increase in loan servicing expenses are expected to be offset over a multi-year period by additional revenue that 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 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 plan to continue our investments in both headcount and technology through 2022 and into 2023, and this will be primarily to modernize and mitigate risk in our infrastructure, enhance our technology platforms to support our revenue and hedging strategies, and add relevant talent across the organization, especially as we scale and enter into new areas of business, such as renewable energy and telecom. Over the next 12 to 18 months, we'll continue as we've done before to closely monitor our efficiency ratio, which ended March 31st, 2022, at 33%. Going forward, we expect operating expenses to increase commensurately with revenue growth, but as we've noted previously, we expect to stay within an annual range that is consistent with our historical averages and below a 30% operating efficiency level. Our credit profile continues to be strong. As of March 31st, 2022, the total allowance for losses was $16.3 million, a modest decrease from year end 2021. This decrease was primarily attributable to a risk rating upgrade on a single loan related to the borrower's successful securitization of a large payable that was incurred as a result of the Arctic freeze that struck Texas in February of 2021. and this was partially offset by new loan volume. Turning to capital now, pharma max $1.2 billion of core capital as of March 31st, 2022, exceeded our statutory requirement by $489 million, or 66%. Core capital modestly increased from year end, primarily due to an increase in retained earnings. Our tier one capital ratio improved to 15% from 14.7% as of December 31st, 2021. Subsequent to our February earnings call, the outlook for interest rates has changed materially. Low levels of unemployment and continued supply chain disruptions exacerbated by the situation in Ukraine have pushed inflation to levels not seen since the early 1980s. Interest rates began to rise even before the Federal Reserve raised its Fed funds target in late March, and rate hikes are predicted to occur more quickly than we anticipated in the beginning of the year. We locked in low fixed-rate funding over the past two years, and that has positioned us extremely well to withstand either a rising or flattening rate environment. Despite rising rates and higher input costs that are experienced by our borrowers, credit quality remains strong given the increase in commodity prices that has outpaced the increase in input costs. We're managing expense growth thoughtfully, as mentioned before, and commensurately with revenue growth as we navigate this volatile rate environment and our opportunities. We are, however, overall very well positioned for the future and excited about the opportunities ahead of us. And with that thread, I'll turn it back to you.