Good morning, ladies and gentlemen, and welcome to the Farmer Mac First Quarter 2024 Earnings Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, May 6th, 2024. I would now like to turn the conference over to Ms. Jalpa Nazareth, Senior Director of Investor Relations and Finance Strategy. Please go ahead, ma'am.

Good morning and thank you for joining us for our First Quarter 2024 Earnings Conference Call. I'm Jalpa Nazareth, Senior 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 the risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer Mac's 2023 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 our most recent Form 10-Q and earnings release posted on our website, farmermac.com, under the Financial Information portion of the Investors section. Joining us from management this morning is our President and Chief Executive Officer, Brad Nordholm, who will discuss first quarter 2024 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?

Thank you, Jalpa. Good morning, everyone, and thank you for joining us. Our team has once again delivered excellent results, demonstrating our unwavering commitment to grow Farmer Mac profitably, while fulfilling our mission to rule America and generating strong shareholder returns across changing market cycles. The year is off to a strong start as we recorded core earnings of $43.4 million, reflecting a 12% increase over the same period last year. We provided $1.4 billion in liquidity and lending capacity to lenders serving rural America while maintaining our strong capital base, disciplined asset liability management and uninterrupted access to the capital markets. The overall earnings story continues to be consistent. The diversification and resiliency of our business model supports our long-term strategic growth objectives, while also providing a buffer against market volatility and changing credit markets. I'd like to highlight two noteworthy transactions that we've recently completed. First, the successful execution of our fourth FARM series securitization transaction. Farmer Mac remains committed to developing a vibrant and liquid agriculture mortgage-backed securities market that is central to our core mission to improve credit accessibility in rural America. This initiative is our opportunity to transform the agriculture mortgage market industry with new efficiencies, helping to lower the cost for the end borrowers. We are very pleased by the tremendous support we have seen from our customers and investors for this program and remain committed to being a regular issuer in the market with a set of securitization products, that align our borrower and investor interests. The second transaction worth noting is the acquisition of a $57 million pool of farm and ranch loans from a single agricultural lender. This acquisition underscores Farmer Mac's track record of providing agricultural lenders solutions for their capital planning, especially as there is uncertainty about how capital…

Thank you, Brad. Good morning, everyone. Our first quarter 2024 results highlight our balanced, well-measured approach, continued strong credit quality and resiliency across market cycles. We achieved $1.4 billion of gross new business volume this quarter and this was primarily driven by loan purchases in renewable energy, the previously discussed farm and ranch pool purchase and new advantage securities in our farm and ranch and corporate ag finance segments. After repayments and maturities, we grew about $400 million during the first quarter in our outstanding business volume and this speaks to the benefit of the strategic decisions that Brad enumerated that we've undertaken over the last few years to diversify our portfolio and create opportunities in all interest rate environments. Core earnings were $43.4 million or $3.96 per share in the first quarter of 2024, and this reflects a $1.5 million decrease sequentially and a $4.5 million year-over-year increase. The sequential change in core earnings was primarily due to lower net effective spread and this was driven by some seasonality related to non-accrual loans that were recorded in the first quarter. We often see an increase in non-accrual loans in the first and third quarters of every year and this is related to the annual and semi-annual payment schedule for the majority of our farm and ranch loans. It does tend to reverse with payment flow that occurs in subsequent quarters. We also encountered a modest increase in our floating rate funding costs during the first quarter and this was driven by certain dynamics in the SOFR credit markets that spilled into the fourth quarter of 2023. The year-over-year increase in core earnings was driven by $4.6 million after tax increase in net effective spread and a $2.1 million after tax decrease in our provision for credit losses, and this…

Thank you very much, Aparna. Before we turn to questions-and-answers, I want to let everyone know that we will be hosting our first ever Investor Day event on Thursday, May 16th, beginning at 10:00 A.M. Eastern time. Our results and consistent performance through our market cycles have resulted in a very strong momentum in the markets and we want to use this event as an opportunity to further educate the broader investment community on our organization, our core mission to increase the accessibility of financing for American agriculture and rural infrastructure. We will provide a link to access the live webcast and it will be available at our website. But if you're interested in participating in person, it will be a New York City based event and please reach out to our Investor Relations team as we still have some space available. And now, operator, I'd like to see if we have any questions from anyone on the line today.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Bose George from KBW. Go ahead please.

Hey, everyone. Good morning. I wanted to start just on the spread. Aparna, you noted the seasonality of the non-accrual loans impacting the yield side and then that SOFR issue on the funding side. As both of these normalized into the second quarter, should we see spreads go back to the 4Q '23 levels as long as interest rates remain fairly stable?

Yeah. Hey, Bose, nice to hear from you. There are those factors at work we talked about the impact of the reversal of the interest accrual. And another point I'd like to make related to NES, which is at the heart of your calculation, is that a good part of our volume growth came on late in the quarter. So we had a numerator or denominator rather that grew at the end of the quarter as the numerator had been accruing through the quarter. So those are all factors. Now as it relates to reverting or snapping back to 118 basis points, I think we would caution, that it would snap back to exactly that level. I think on prior calls, we have explained that over time we expect that 118 basis points to 120 basis points to slip. I was asked on the last call, we'll go back to the 100s and I indicated probably to the 100 teens -- low 100 teens. So we do expect some erosion over time. But based on the first quarter results, some reversion towards that higher level should be expected.

And Bose, I'll just add one thing with respect to the widening that we saw in credit markets. This was a dynamic that persisted in Q4. You probably heard the FOMC transcripts last year with the Fed easing up on some of the tapering activities that they're planning to undertake that should flow favorably into the market. And in fact, we started to see quite a few signs of that in Q1 of this year. And we very opportunistically pre-funded. So just to give you a sense, there was a widening to the tune of about 15 basis points relative to SOFR spreads in the fourth quarter of last year. We've seen that actually come inwards to be less than five basis points. So we pre-funded at those levels. We got a little bit of negative carry in Q1 that also resulted in some erosion in our net effective spread. Couple that with the non-accruals and the volume dynamic that Brad just mentioned, optimistically, we should trend higher. But all things notwithstanding, I think that high water mark of 118 basis points or 119 basis points is a little unrealistic to sustain.

Oka. Great. Thanks. That's very helpful. And then actually switching to the securitization that you guys did, can you just talk about the spread impact of securitizations versus on balance sheet? And then when you look at the spread and include sort of the risk-based capital benefit, what's sort of the overall ROE impact of using securitization?

Bose, thank you. As I mentioned, we saw some really favorable market dynamics in Q1 and we timed our securitization transaction extremely well. And so when you look at just the long term impact of the coupon that we received relative to the yield that was received in the market, we were extremely favorable when you compare that to the transaction that we did just about a year ago. In terms of just the capital benefit, we can come back to you on a lot of the specifics with respect to just how accretive this transaction was, but I'll just say that just one data point. As we look out over 18-year horizon, we actually took a chunk of our cash flows and we've locked in a fairly attractive spread over a very long duration. So all-in, we expect to see our hurdle rate for any transaction that we do is about 30%. Securitization transactions come in, I want to say at least double that, if not, then some. And then we also get list based capital relief. That really starts to enable our continued growth strategy into these higher NES products like telecom and renewable energy.

Okay, great. Thanks very much.

Thank you. Our next question comes from the line of Bill Ryan from Seaport Research Partners. Go ahead please.

Good morning and thanks for taking my questions. One, a bit on the micro side and then one macro. But on the micro following up on the NES, thinking about the treasury segment. You talked about there was some pre-funding. I assume that's obviously where that took place. You had a little bit of compression. But you've also historically talked about increasing the duration of the portfolio. To what extent did that have an impact on the treasury NES?

The duration extension, I would say maybe ticked our NES down by 0.5 basis point or 1 basis point. We do expect to see some erosion, and it's very hard to predict, Bill, what the Fed is going to do. But if you look at just where things are trending today relative to where the market predicted six months ago, and you take a look at the forward curve, I think markets were predicting seven rate cuts this year. And based on what we've heard more recently from the Fed, they're going to stay higher for longer. So what does that mean, possibly two rate cuts in the back half of this year. Something that we've continued to emphasize is that, when we actually manage our ALM or asset liability management, we try to mitigate volatility first. And so we did that, and we extended duration, but we had a benefit of almost $1 billion of cash that we raised back in 2020. We've been layering in maybe a third overtime and extending our duration on our investment portfolio. Will we see a little bit of negative carry as the Fed stays higher for longer, it's the opportunity cost of not reinvesting back relative to a year ago? Yes, we will, but as I mentioned, that's probably likely to be anywhere in the tune of about 1 basis point or under on an NES percentage basis. We'll really start to see a pickup in that strategy over a year as we start to see the yield curve steepen and we start to see more rate cuts come into play. But again this is something that we do not to maximize short-term profits, but we do it to minimize our volatility, which is laid out very well.

Okay. Thanks for the detailed response on that. And second question, again, kind of a little bit more bigger picture, but could you provide an update on the Farm Bill? What is being proposed in there that could benefit Farmer Mac? I believe a couple of things mentioned in the past have been like increasing the acreage that you can finance, being able to work around co-ops in the utilities business, but maybe you can give us a little bit of color on that?

I'd be very pleased to. You're going to start seeing more headlines, I think, about the Farm Bill. Of course, it was -- it's scheduled to be revisited and repassed every five years. And that expiration, that maturity was in 2023. So it's already operating under an extension. Just in the last week and a half, GT Thompson, Congressman from Pennsylvania who Chairs the House Agricultural Committee, has announced his intention to release the House Ag Committee's draft of the Farm Bill before Memorial Day weekend. And with that, we're seeing a lot of conversations. We're in active discussions, conversations, with the staff, and really appreciate the fact that the Farm Bill is, by all indications, beginning to move forward. Now, this is important for farmers and ranchers and agribusinesses across the United States as well as those who benefit from other programs that are delivered under the Farm Bill. We weren't sure what would happen on the Senate side. Certainly, there's been a huge amount of work done, but Senator Savannah has announced that she too is going to move forward the Senate Ag Committee's version, and we've been closely monitoring the details of both. It's premature for us to project exactly what this means for Farmer Mac. Obviously, when bills are negotiated, where the reconciliation taking place, a lot can happen. So we just can't project exactly what happened. But the things that we're interested in, you mentioned enhanced ability to originate renewable energy project finance loans, not changing the eligibility of the borrower, but just who originates them, broadening that, to be able to do more types of USDA loans that are consistent with the mission, possibly getting some relief from the 2000 acre limitation, which actually by our regulator was recommended to be dropped and with some substitute for a capital requirement, which we believe would be favorable to Farmer Mac. These are things that we have consistently talked about now for a number of years, and where our key stakeholders and even our detractors are well aware of what we want and more importantly, exactly why we think it would be beneficial to rural America, to agriculture, to rural infrastructure, and why it's absolutely consistent with our overall mission. So stay tuned. We hope a lot happens in the next couple of months on the Farm Bill.

Okay. Thanks, Brad.

Thank you. [Operator Instructions] We have our next question coming from the line of Brendan McCarthy from Sidoti. Please go ahead.

Hey, good morning, everybody. Thanks for taking my questions. I just wanted to start off, taking a look at volume. I think you mentioned a potential softening in farm net income, maybe driving increased borrowing in farm and ranch side -- on the farm and ranch side. Can you talk about how you look at that from an underwriting perspective and any changes in underwriting there?

Yeah. I'm going to turn over to Zach Carpenter who is with us today to talk about both underwriting and the impact that changes in that farm income may have in volume and maybe how that breaks down by sector. So, Zach?

Yeah. Good morning, Brendan. First off, well, net farming kind of expected to decline from 2023 and the highs of 2022. It's still above the historical average here. So, in context, right, we've seen a decline, but still doing well at the farm gate. Now, we are seeing some pressure on liquidity across certain sectors of the farm gate. So that is driving the need to potentially lever a little bit more on the farmland, where there's plenty of equity, as we continue to see farmland appreciate, albeit at a slower rate. So, overall, we still feel very comfortable with the borrower and the types of transactions we're seeing. So when we look from an underwriting perspective, clearly this component of leverage and cash flow, so we are seeing some tightness in cash flow, but as long as we feel comfortable, that there's good liquidity at the borrower level and allowing them to tap some equity in the farmland also supports that liquidity. We are comfortable. So we haven't seen a significant deterioration. That being said, we have seen some stress at certain sectors across the farmland space. But overall, our underwriting standards remain very strong. Credit quality remains very strong and we see additional opportunities to support the farmer to kind of weather some of the declines in commodity prices and maybe a little bit more sticky on the input side.

Got it. Thank you. That's helpful. And I believe you mentioned there was a $57 million pool of farm and ranch loans that you purchased that added to the business volume in the first quarter. Can you talk about that transaction? I guess was that any kind of stress scenario from the -- on the lender side?

Yeah, happy to. No, it was a great opportunity for us to support one of our key originators. It did close in the back half of the quarter, so we'll see some benefits of that heading into the second quarter. This is really kind of a theme that we've been talking about, right? When rates were low, we saw a lot of originators, lenders, kind of hold loans on balance sheet to take advantage of growth in deposits and capital. Now, as things revert with higher interest rates and potential issues with capital and changes in capital from a regulatory perspective, they're kind of re-looking at their balance sheet to say, hey, what makes sense for us to keep on balance sheet, as well as potentially offload for liquidity purposes? So this wasn't a stressed scenario. This was pure capital and liquidity management for this organization. And a lot of these institutions are trying to grapple with servicing an overhead and in capital requirements, especially for, I'd say smaller farmland loans, right? A lot of these loans still take the same or require the same servicing and management as larger loans. So that's a lot of overhead. That's a lot of structure to put in place to manage that. And so when you get a portfolio of size in that nature, it kind of stresses that dynamic internally from a expense and capital perspective. So this is purely why Farmer Mac was created to help support these lenders in this specific area. And frankly, I think, could provide more opportunities for us in this dynamic to support more financial institutions as they continue to look at liquidity and capital.

Got it. That makes sense. One last question from me, just from a very broad perspective, what could really drive outperformance or underperformance relative to your expectations for the rest of the year? Obviously, assume the interest rate environment plays a big part of that. But just kind of curious as to your thoughts.

With the increasing diversification in our business and a relatively conservative approach to budgeting and forecasting at Farmer Mac, it's hard to forecast what that event might be. It would really be some kind of black swan event. So could it happen on the credit side? I would never say never, but our credit metrics have been very consistent and I think speak for themselves. Could it be on the volume side when kind of quarter-in, quarter-out, we show single-digit growth for the quarter, aside from an occasional opportunity to do a large portfolio purchase, such as in 2019, when we purchased a portfolio of, well, infrastructure loans or some of the opportunities that maybe Zach is looking at in the back half of this year. Aside from that, it's pretty predictable. So I don't really foresee anything that would be a major change on the upside or downside and the kind of growth and performance that you've seen from us very consistently now for a number of years.

Great. Thanks, everybody.

Thank you. There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Nordholm for final closing comments.

Good. Well, thank you all very much. We truly appreciate it when you participate in these calls. It gives us an opportunity to think in a disciplined way about how we are assessing our recent past performance and our prospects and also to hear from you what's on your mind and maybe the gaps in what we've explained to you and how we can better respond. So thank you very much. We truly appreciate your participation. As I mentioned, if you're interested, check in on the Investor Day presentations, both webcast as well as live. That will be coming up a week from this next Thursday. And if there are other questions as follow-up, please follow-up with Jalpa. And with that, we wish everyone a very good day. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.