Good morning and welcome to the Farmer Mac Corporation First Quarter 2017 Investor Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Timothy Buzby, President and CEO. Please go ahead, sir.

Thank you. Good morning. I'm Tim Buzby, Farmer Mac's President and CEO. Farmer Mac is pleased to welcome you to our First Quarter 2017 Investor Conference Call. We have posted a slide deck to our website that we will refer to throughout today's call. Information for where these slides can be found is included in this morning's press release. Before I begin, I will ask Steve Mullery, Farmer Mac's General Counsel, to comment on forward-looking statements that management may make today as well as Farmer Mac's use of non-GAAP financial measures. Steve?

Thank you, Tim. Some of the statements made on this conference call may constitute forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance. We do not undertake any obligation to update these statements after the date of this call. We caution you that forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied by the forward-looking statements. In evaluating Farmer Mac, you should consider these risks and uncertainties as well as those described in our 2016 Annual Report on Form 10-K and our subsequent quarterly report on Form 10-Q which was filed with the SEC this morning. In the analysis of its financial information, Farmer Mac sometimes uses measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States which we refer to as non-GAAP measures. The 3 non-GAAP measures that Farmer Mac uses are core earnings, core earnings per share and net effect of spread. Farmer Mac uses these non-GAAP measures to measure corporate economic performance and to develop financial plans. In management's view, they are useful alternative measures for understanding Farmer Mac's economic performance, transaction economics and business trends. These non-GAAP measures may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of the non-GAAP measures is intended to be supplemental in nature and is not meant to be considered in isolation from, as a substitute for or as more important than the related financial information prepared in accordance with GAAP. Disclosures and reconciliations of Farmer Mac's non-GAAP measures can be found in the Form 10-Q and the earnings release posted on Farmer Mac's website, www.farmermac.com, under the financial information, portion of the Investors section. A recording of this call will be available on our website for 2 weeks starting later today.

Thank you, Steve. Farmer Mac is off to a good start in 2017, continuing the strong trends that developed over the course of the last year and the overall business climate for Farmer Mac remains positive. As we've been mentioning in recent periods, we believe the relative demand for Farmer Mac's products could increase as credit becomes somewhat tighter and we saw that throughout 2016. This is continued at a fast pace in the first quarter 2017. The financialization trend within agriculture also continues at a brisk pace and Farmer Mac continues to broaden its business with its institutional customers set. As we said last quarter, we're beginning to see the normalization in certain credit metrics that we have been anticipating as part of the current agricultural credit cycle. The modest deterioration in certain metrics over the last 2 quarters are within our excitations and remain more favorable than our historical averages. Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of our portfolio which Farmer Mac believes is adequately collateralized. The strength of Farmer Mac and its business model can be seen in our financial results this quarter, as business volumes and core earnings grew significantly and our current credit quality remains favorable. We grew our outstanding business volume by $0.4 billion and our core earnings by 12% sequentially and 26% year-over-year. Farmer Mac ended first quarter 2017 with outstanding business volume of $17.8 billion. We added $1.1 billion of new business during the quarter, resulting in net growth of $445 million after maturities and repayments. The increase in outstanding business volume was driven by broad-based portfolio growth across many of our products and lines…

Thanks, Tim. Our first quarter 2017 results reflect Farmer Mac's commitment to the continued growing, developing new customers, innovating our product set and delivering upon our mission throughout market cycles. As Tim mentioned, we grew to a record outstanding business volume with $17.8 billion as of March 31, 2017. This growth was driven primarily from net growth in AgVantage securities, Farm & Ranch loans and USDA guaranteed loans. Our spreads improved in both dollar and percentage terms, both sequentially and year-over-year. Spreads on new assets generally remained stable, although Farmer Mac has recently tightened some pricing for the highest quality Farm & Ranch loans because we believe there's an attractive growth opportunity in this sector of the market. Our funding cost and LIBOR-based assets have improved due to changes in our funding strategy and some improvements in the LIBOR market. As Tim mentioned earlier, we're continuing to see signs of credit normalization that we've been anticipating as part of the normal agricultural credit cycle. Turning now to the financials. As you can see on Slide 7, core earnings for first quarter 2017 were $15.6 million or $1.45 per diluted common share compared to $12.4 million or $1.12 per share in first quarter '16 and $13.9 million or $1.30 per share in fourth quarter '16. The $3.2 million year-over-year increase in core earnings was primarily attributable to higher total revenues which included a $1.9 million after-tax increase in net effective spread, a $0.4 million after-tax increase in guarantee and commitment fee income, a $0.6 million after-tax increase in fees received upon the inception of swaps cleared through the Chicago Mercantile Exchange and the $0.3 million after-tax decrease in hedging costs. Also contributing to the increase was a $0.7 million tax benefit related to the vesting of restricted stock and the exercise…

Thanks, Dale. As mentioned earlier, we believe Farmer Mac's business model becomes more valuable in tighter credit markets and our first quarter 2017 results continue to reflect this. However and perhaps more importantly, Farmer Mac is delivering upon its mission throughout agricultural economic cycles, especially in today's more difficult environment. Our capital base is strong and growing, providing plenty of capacity for future growth and we believe our dividend policy is helping to enhance stockholder value. Over the past several years, Farmer Mac has brought in new personnel to fill positions, created new positions and significantly expand the investment in the technology and capacity to better grow our business and more fully deliver upon our mission. These investments are expected to continue. Farmer Mac continues to communicate the value of our products and solutions to current and prospective customers. We continue to sign up new lenders for our loan purchase and credit protection products. We see strong interest for our AgVantage family of products, including new business opportunities to provide wholesale funding to financial funds that originate and invest in agricultural mortgages. And we continue to grow Farm Equity AgVantage and look forward to working with new customers in this area. Over the last year, Farmer Mac has significantly increased its profile and name recognition as a nationwide expert in agriculture. We believe this will help as we seek to bring new capital to agricultural and rural communities. At this time, we'd be happy to answer any questions you may have.

[Operator Instructions]. And your first question will come from Eric Hagen of KBW.

The attractive growth opportunities that you mentioned on the -- in the opening comments for higher credit loans, can you go into some details on what that looks like and why the opportunity is available to you now and wasn't there before?

Well, I think it's probably always been there. I think it's something that we focus on. We mentioned some changes in personnel and some of the focus in how we look at the industry and relationships that we have with other lenders that are doing larger loans and loans to more complex financial borrowers. So I think it's really a matter of us reaching out to that market more so than had been done in the past. I think these opportunities will continue, also a bit of a more flexible approach to the underwriting process. And by that, I don't mean lenient standards. I mean by not just simply looking at a one-size-fits-all type of approach when we analyze an institution. It's more taking a look at the overall position for which how that player sits in the market, how they're financially structured and us being able to sort of more -- sort of a customized approach to things. So I think it's, in general, sort of an opening of our process rather than anything -- certainly, again, not a more lenient approach. These are strong credits, people that we know in the industry and are able to serve them now in a way that we didn't previously.

Right. Well, that's helpful. Sounds exciting. I'm hoping you can share a little bit more about how you think about the level of core capital that you have above the minimum and what goes into how much you target.

Well, we measure our capital in a number of different ways. The excess over the minimum capital requirement is really nothing more than a number. If you look back historically, it's varied between $75 million to $175 million or so. I think it's about $150 million now. I think that's more than adequate. Again, the way we measure our capital and position ourselves when we look at how much preferred stock we have and other items and with respect to our dividend policies, we obviously need to exceed that minimum by a comfortable measure and have done so all along at about $150 million above. I'd say anywhere between $175 million to $200 million is where we're comfortable. Again, we look at our capital position in a number of different ways. Our Tier 1 capital and other disclosures that we make are actually more critical in terms of how we run the business and where we want to be and the minimum capital excess just kind of falls out from there.

Yes, to Tim's point, our Tier 1 capital is about 12.7% which kind of puts us in the company of what you'll likely consider pretty well capitalized monies in our banks. The statutory capital that Tim talked about is really a pretty simple formula of 275 basis points for on-balance sheet assets irrespective of the nature of that asset, whether it's a farm loan, the desk in our office or a treasury bond. And 75 basis points are off-balance sheet assets. So on the statutory side, we want to make sure we have plenty to cushion to not ever come close to those minimums and I think we have plenty of cushion at this point to Tim's comment. But then once we have a sufficient confidence that we have that cushion, we look more to the -- we'd argue the more intelligent credit metrics which are more volatile-related metrics that we publish in our Q and Ks.

Got it. Yes, that makes good sense. One more from me, if you don't mind. The refinance MetLife AgVantage securities sounds like that will be coming on-balance sheet rather than most of it sitting off-balance sheet. You learned to spread on that instead of a GC. I just want to make sure I got all that correct. And it sounds like your return should go up on that portion of AgVantage. Is that correct?

That's correct, both of the move from off-balance-sheet to on-balance sheet and higher income earned due to spread rather than guarantee fees.

The next question will come from Scott Valentin of Compass Point.

Just with regard to the net excess spread, it was up 2 basis points this quarter. I think you guys called out mostly it was a liquidity portfolio decline that drove that. And it looks like you guys are doing a lot of excess liquidity, I think 2x, what you required the whole. Just wondering, one, if there's room to reduce that amount of liquidity which should benefit in the excess spread going forward. And two, maybe just asset sensitivity, asset liability management, have a balance sheet position if short term rates go higher, if long term rates go higher.

So on the liquidity side, the 190-plus days we talked about was a point in time measure. We also disclosed the average days of liquidity over the quarter and that number is somewhat lower than the 190. So the way that's calculated, you should lay out your liability ladder. And that can vary -- those days can vary significantly just based on what maturities you have coming up or whatnot. So can we reduce it a little bit? We probably already have. We've already take it from -- taken it from $3.6 billion down to $2.8 billion, $2.9 billion in the last 12 months. And we've taken our cash equivalents from over $1.2 billion, $1.3 billion down to $300 million in the last 9 months. So somewhat a work on that front and I think where it sits now in and around $2.8 billion to $3 billion feels like the right size. So I wouldn't anticipate any future reductions in that. If it is, it's plus or minus $100 million. What was the second part of your question?

Just in terms of asset liability management and positioning the balance sheet, if short term rates rise, would that be beneficial? Long term rates going up, would that be beneficial; shape of the old curve, et cetera?

To separate that into 2 scenarios. From the existing book of business on our balance sheet, it's a de minimis effect. We match fund -- all of our assets from a technical perspective duration convexity match, so our exposure on a market value of equity basis is pretty low. We put the numbers in the Q. I forget the exact number, I think it was low single-digit percentages for 100 basis point shot to our balance sheet. I would say separately, though, however, if rates were to go higher, particularly 5- to 10-year treasury rates and stay higher and by that, I mean materially higher, 60, 70, 80 basis points, over time, that might lead to wider spreads. We'll see. But we're not like a bank. We're not asset-attentive and you shouldn't expect any significant changes to our equity market value of equity based on changes in rates.

Okay. That's helpful. And then on G&A, looking at Page 27 of the press release. It looks like the G&A was running about $10 million a quarter. Last 2 quarters, it popped out about $11 million a quarter. Just wondering if this quarter is kind of given rate going forward in terms of G&A?

I think we -- there's 2 things, one that we mentioned. There is some seasonality to some of the consulting expenditures we have. Some of the consulting expenditures are related to things like the regulatory exam that we undergo, thanks related to internal audit. And some of those things tend to occur more in the second, third quarter of the year. So what I would do is sort of take a look at what our average has been over a couple of trailing quarters and then sort of think about that over the course of the year. It's hard to say. We're continuing to make investments, as Tim noted in his closing comments, on -- with people and infrastructure to increase our capacity. And the volumes that we're putting through Farmer Mac right now are -- compared to even or years ago are significantly larger and so we need to make investments. So I would continue to expect ongoing increases in G&A over the course of going forward and in people to. We're going to continue to be wholesaler, but I think you've seen it reasonably significant percentage increases in both those line items. I'm not sure they're going to continue at the pace they have in recent 18 or 15 months, but I would certainly expect those to continue to be higher-than-inflation kind of growers.

I think in summary, you had nailed it. I think G&A going up is a good signal for our business than the growth that we anticipate. So our investments in technology and people and also the need to spend money on things related to securitization structures and other things is all good. So I actually like to see G&A going up because that means that we're reinvesting in the business and the business is growing.

Absolutely.

And one final question. Just, Dale, on the single credit you called out, I think you guys disclosed the credit. You said it was about $1.5 million gain. Is that after the reserve was taken? Or what was the gain versus original balance? Or I mean, how we want to think about that...

So think of it this way, we have run through our P&L previously at $200,000 loss essentially, okay? Once it becomes an REO, then we just sell the property versus our cost basis. We ended up netting an approximate $0.5 million gain. So you would compare the $0.5 million gain compared to the original $200,000 loss. So economically, we essentially came out about $300,000 ahead in that transaction.

The next question will come from Brian Hollenden of Sidoti.

Can you talk about what drove MetLife's decision to move from a guaranteed fee to paying higher spread?

It's not actually, quite frankly, MetLife's decision. When we did that original transaction, many years ago, we sold the security to investors rather than holding on our own balance sheet. From an overall cost perspective, that was -- I think it was even -- I can't remember. It was a 5-year asset or a 10-year asset, the bond that was off-balance sheet. But from an overall cost perspective, they refinanced into 3 different tranches, a 1-year piece, 2-year piece and a 3-year piece. So overall, their costs have come down somewhat significantly. The fact that we happen to hold it on our balance sheet is simply because we can deliver better economics by holding that bond on our balance sheet rather than selling off to third-party investors.

So the spread differential is -- the off-balance sheet GP we earned on the bond and it was a 10-year originally, it was about 15 basis points. And we put this in our queue. The blended spread we're going to earn now on the billion dollars which is on-balance sheet, is about 42 basis points. So you can do your math there and figure out the accretion.

Okay. And then do you have any other large issues out for renewal in '17?

No. We have some modest $50 million pieces here and there. Our maturity profile last year and this year were the 2 big bulges of maturity walls. And thankfully, as Met -- and largely MetLife-driven. As Met refinanced each of those $0.5 billion tranches last year and the $1 billion tranche this year, they broke them into smaller pieces. And so from a liquidity perspective, we have a much easier path going forward. We don't think there'll be any stress in our liquidity portfolio and it makes this business that much easier.

All right. Then last one for me. With farm incomes set to fall in '17, how much of your extra volume do you anticipate compared to if farm income were to hold flat? Just trying to gauge your sensitivity there.

Not sure I completely understand that question, but I think maybe what you're trying to get at is as farm income decline, that puts the farmer in a position where they may need to access liquidity and they may take unlevered assets farms that they own and borrow against them in order to raise operating capital. That we've seen increase over the course of the past year and expect that to continue as long as commodity prices remain low. I'm not sure if you're asking about what we see as overall stress in the portfolio. We've indicated we expect to see delinquencies go up. We expect those substandard assets to rise, but we remain adequately collateralized and don't think that will lead to significant losses in the portfolio. But at the same time, prolonged time of stress, it gets worse in years 2 and 3 than it is in year 1. So we'll continue to monitor things, continue to check on the health of our portfolio. But that certainly doesn't keep us from continuing to expand as we see opportunities for lending money to good farmers, good operators and people and commodities that we think are going to continue to do well over the long term.

And ladies and gentlemen, at this time, we will conclude the question-and-answer session. I would like to hand the conference back over to Tim Buzby for his closing remarks.

Well, thank you all for listening and participating this morning. We look forward to our next call to report our second quarter 2017 results in August. Thank you, all.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.