Good day, and welcome to the Farmer Mac Fourth Quarter and Full Year 2020 Earnings results. Please note that this event is being recorded. I would now like to turn the conference over to Brad Nordholm. Please go ahead, sir.

Good afternoon. I’m Brad Nordholm, and I’m very pleased to welcome you to our 2020 Fourth Quarter and Year-end Investor Conference Call. We have a great report and a number of positive developments to present today. But before I begin, I will first need to ask Steve Mullery, our 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?

Thanks, Brad. Some of the statements made on this conference call may be forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance, and we may not be obligated to update these statements after this call. We caution you that forward-looking statements are subject to 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 2020 annual report on Form 10-K filed with the SEC this afternoon. In analyzing 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, also known as non-GAAP measures. Disclosures and reconciliations of Farmer Mac’s non-GAAP measures can be found in the most recent Form 10-K and earnings release posted on Farmer Mac’s website, farmermac.com, under the financial information portion of the Investors section. A recording of this call will be available on our website for two weeks starting later today.

Thank you, Steve, and good afternoon, everyone, and thank you for joining us. 2020 was certainly unlike any year that I’ve experienced in my 40-year business career, and I’m proud to report that Farmer Mac has once again demonstrated the resiliency and sustainability of our business model and disciplined growth of our business. From the pandemic to social and political unrest to record low interest rates to the seating of the new administration and of the strong volatility and rallies in agriculture commodity prices, 2020 presented more uncertainty than any single period in recent memory, and it has been challenging in many ways for so many people. As a mission and purpose-driven company that has always been acutely aware of our commitments to all of our stakeholders, and those include you, our shareholders, our customers, debt investors, our employees and especially the rural Americans, whom we are proud to serve, I’m extraordinarily proud of the team at Farmer Mac for executing on our ambitious strategic plan and for being able to trigger our business continuity plan so that we didn’t miss a beat. Our employees did this with flexibility, hard work, commitment and grace. So let’s break some of the numbers apart. Core earnings were a record $100.6 million for the year. That’s up about 7%. Net effective spread was 93 basis points, and it’s trending upwards. That’s at the – towards the top line of our 90 basis point plus or minus five basis points guidance. Total outstanding business volume increased by greater than $800 million or 4%, and new loan purchases in our Farm & Ranch line of business were $2.5 billion. That represents an 82% increase over last year, which, by the way, was another record. A significant portion of this refinancing was done at lower market rates of interest, which means that we put more money in the pockets of farmers and ranchers and their families. And keep in mind that well over 90% of these Farm & Ranch borrowers are family-owned farms. And we did that while also providing new capital to agri businesses and rural infrastructure projects that increase the competitiveness, the tax base and the viability of rural America.

Thanks, Brad. Before I begin, I’d like to thank our Farmer Mac team who continued to demonstrate their dedication to our customers, their borrowers and our mission during this volatile and challenging environment. In times like these, our customers truly value our commitment to being a relationship-oriented institution. And our performance this year reflects everyone at Farmer Mac’s extraordinary efforts as well as the strength of our franchise as we continue to fill our mission of providing affordable and efficient credit solution to the agricultural and rural communities we serve.

Thanks very much. I am going to turn to Jackson Takach in a moment here to give you an overview of what’s going on in the agricultural economy. But before I do, I’d like to just mention that we do anticipate that we will have a new Chief Credit Officer starting at Farmer Mac in the next couple of weeks. I look forward to introducing that new Chief Credit Officer to you as soon as possible. But in the meantime, I’d really like to commend the credit team, and that includes Mike Juergens, Danny Odom, Del Gustafson, along with Rob Maines, our Enterprise Risk Officer, who has stepped in to help. We’ve got good bench strength here at Farmer Mac, and they have done a wonderful job to assure that we provide consistent underwriting and consistent application of our underwriting standards to our business. And with that, I’d like to turn to Jackson, our Chief Economist, to give you an update on what’s going on out there in agricultural economy. Jackson?

Thank you, Brad. Like most industries, the agricultural and rural economies experienced heightened volatility in 2020. The COVID-19 pandemic reshaped food and fuel demand in the early and middle parts of the year, putting considerable stress on the U.S. food supply chain. According to U.S. Census data, sales to food and beverage places fell by 53% compared with a year earlier. CBC report showed outbreaks occurred in more than 200 meat and poultry processing facilities, forcing many to restrict output or close entirely for a short period of time in April and May of 2020. Plant closures led to increases in food prices and decreases in livestock prices, both detrimental to local and national economies. Demand for core grains like corn and soybeans dropped in mid-2020 with fewer miles driven hitting ethanol production and stiff competition from Brazil driving down export demand for soybeans. 87% of all COVID-19-related Farmer Mac loan payment deferrals were approved during the second and third quarters of 2020 due to these unpredictable conditions. Despite these pressures early in the year, the agricultural and food sectors endured with a rebound in economic conditions to end 2020. Food consumption at home rose considerably. U.S. census data shows an 11% increase in sales at food and beverage stores in 2020 compared to 2019. USDA research demonstrates that farmers and food processors take a higher net margin of the food dollars spent at home. So, the shift of consumer spending to food at home could offset some or all of the losses from sales to restaurants and schools. Consumer mobility increased steadily in the second half of 2020, restoring fuel demand and pushing ethanol production back to 88% of 2019 levels by December. Record-setting government support payments to farmers and ranchers helped offset the midyear disruptions. The USDA estimates…

Thank you, Jackson. Credit events at Farmer Mac have historically been unique really to each rural business and in many cases, to each individual borrower. And that was certainly the case with the credit that we took – write-down that we took at the end of 2020, which, by the way, was the same credit, which we took the additional allowance at the end of 2019. As is the case with our provision in the fourth quarter, the increase in the total allowance for losses was primarily due to a borrower specific factor. We really don’t see this linked at all to macroeconomic or systemic factors in the overall agricultural economy. And I hasten to add that we do remain committed to our historically high standards of credit quality. We have not changed our underwriting standards. But as we do look at ways to further execute on our mission and provide credit to different parts of rural America, there may be some circumstances in which Farmer Mac’s risk tolerance needs to flex to accommodate different agricultural conditions or borrowers. When we evaluate these situations, they will be assessed with diligence of care that’s led to our strong historical results, and we will price for any additional risk that we take so that on a risk-adjusted basis, we have an expected outcome that is comparable to or even better than what we have on the overall current book of business. And with that, I’ll turn the call over to Aparna, our Chief Financial Officer, to discuss our financial results in more detail. Aparna?

Thank you, Brad. Before I get started with our financial results, I wanted to comment that January 2021 marks my first year with Farmer Mac as CFO. Over the year, Farmer Mac performed exceptionally well despite the enormous challenges we all faced as a nation. Our results and performance during 2020 reinforced the reasons why I was compelled to join the Farmer Mac team, which stems from our strategic vision, the strong caliber of the team and our dedication, most importantly, to our mission of providing low-cost credit to rural America. I’m incredibly proud to be a part of this team, and I look forward to continuing to collectively execute on our exciting vision in 2021. Before I delve into the annual results, I’d like to provide a few highlights around our fourth quarter results. Core earnings were $26.4 million or $2.45 per share as compared to $27.7 million in third quarter 2020. Our net effective spread increased 5% sequentially to $54.5 million, and our outstanding business volume decreased $65.2 million from September 30, 2020, to $21.9 billion, primarily due to repayments and maturities in our institutional credit line of business. As Zack mentioned, the Fed’s intervention in stabilizing market conditions resulted in other sources of alternative and cheaper funding for our counterparties. Turning to our 2020 full year results. Earnings were strong and driven by growth in higher spread business volumes, continued disciplined general and administrative, or G&A, expense control, and we saw substantially lower funding costs, given our strong access to debt capital markets and the strong relationships that we have maintained and built with our investor base. Our access to the capital markets remains strong throughout this unprecedented year. We issued debt daily, and we continue to maintain our disciplined asset liability management policies and practices that…

Aparna, thank you very much. We’ve given you a bit more detail on our comments today, and I know we’re eager to turn to your questions. So really, I’d just like to leave you with my closing thought, and that is that Farmer Mac is really a mission and purpose-driven company. We are here determined to improve the economic conditions of rural America by increasing availability and reducing the cost of credit for farmers, for ranches, for agri businesses and the rural infrastructure that supports them. We do this with a discipline that allows consistent and predictable returns to our shareholders to the fullest extent possible. I have the utmost confidence that we have the right team in place to continue executing on this so that we can take Farmer Mac to the next level while continuing to produce strong financial results, strong shareholder value, and we can do that while strengthening the communities and the customers across rural America, whom we serve. And so with that, operator, I’d like to now see if we have any questions in response to these comments. Thank you.

And our first question today will come from Greg Pendy with Sidoti. Please go ahead.

Hey, guys. Thanks for taking my questions. Just a couple of questions I had. First of all, I don’t want to oversimplify the 90-day delinquency trend, and I know you gave some color in the press release. But it’s not – when you guys mentioned commodity groups and then you talked about the storage processing facility, is it fair to say you’ve got relief commodity groups from the higher commodity prices? Is that the general underlying trend there?

Greg, Brad here, and thanks very much for coming on today. Yes, our 90-day delinquencies have trended down. Our classified credit has trended down. So we’re seeing that trend in positive directions. We really can’t point to any one commodity group that is the result of that. As you know, we historically have not had any delinquencies in our rural infrastructure portfolio. That continues to be the case. In our institutional credit, we really don’t have it. So when we talk about these delinquencies, we’re talking about the Farm & Ranch portfolios. And as you know, it’s well diversified, 23%, something like that, Upper Midwest; 25% California. It’s also very well diversified by different crop types, over 100 different crop types financed by Farmer Mac. So, to try to say that is attributable to any one commodity really doesn’t work. But I would add that during 2020, we did see a record level of federal transfer payments under a couple of different programs, including those intended to help address financial issues associated with tariffs, imposition of tariffs and also from COVID-19. And those transfer payments ended up being at a record level and contributed to farm income being at a record level, at least for – through the last cycle. I think we’d have to look back to 2012, 2013 before we saw anything close to what we had this last year. So looking ahead this year, we do see an expectation of some continuation of those payments, although not quite at the same levels. And we have a forecast, as Jackson mentioned, for very strong net farm income in 2021, in greater part attributable to very, very strong rally in many agricultural commodity prices over the last quarter. So the fundamentals are really showing up in the economic health of American agriculture. And of course, that’s what farmers want, and that’s what we like to see.

Great. That’s helpful. And then just moving over, just – it looks like for the year, you had about $64 million in solar and wind, I guess, the majority of that is solar. How should we be thinking about that? You mentioned earlier a team in place and just kind of how the outlook will – how should we be thinking about the outlook in 2021 in that area?

Sure. Yes, the majority of that was solar. We actually did close one wind transaction. But our expectation is that going forward it’s primarily in the great majority solar finance opportunities. Over time, we expect that, that will be a growing line of business. Certainly, the new administration, the Biden administration is putting an emphasis on renewable energy and decarbonization of the economy. We haven’t seen specific policy proposals yet that might drive that. But I think the general tone of the political climate is – makes us very bullish for renewable energy. So as you know, it was earlier in 2020 when we really had our systems and some of our master agreements in place to start generating business. We fully expect that over the course of 2021 and into future years, that we will see continued growth in that business. Looking out five years or more, I think it will become a very important line of business at Farmer Mac that begins to move the needle. So we’re happy with the $64 million in 2020.

And how long – how far out does the typical solar deal go? Or is it too early to...

No, no, not at all. So the solar project finances that we do, our classic project finance, these are loans that are underwritten to credit metrics that if you pull down a Moody’s or S&P report on typical underwriting metrics for large-scale solar project finance loans, our guidelines are very much in line with that. So one of the principles of it is that, generally, the loans are amortizing over the life of the fixed price power purchase contract on that facility. Sometimes that’s 15 years, sometimes that’s 20 years, sometimes it’s even 25 years. And so typically, the amortization is against – it’s variable quarter-to-quarter against the projected cash flow of the facility. Obviously, a solar facility is going to produce a bit less in most climates, most environments in the winter than in the summer. So the amortization is sculpted to maintain an anticipated constant fixed coverage ratio and amortized fully over the life of the contract. So by the time that power purchase contract is expired, 15, 20, 25 years out, our loan is fully amortized and retired. These loans are fixed right, and we typically have very strong prepayment protection on them. So these loans actually become some of the most predictable performers from a nonprepayment standpoint in the portfolio.

Great. That’s helpful. And then just one more, just on the expenses. Did I hear correctly in the sense that expenses are expected to be maybe outsized for the next 12 to 18 months and then normalizing more in line with revenue growth from an operating expense standpoint?

Yes. I think that was basically Aparna’s comment on that. I think for a better part of two years now, we have tried to manage your understanding and expectations that we’re going to be spending a bit more money investing in technology. And frankly, our comments were ahead of our actual ability to spend money in 2019. And our efficiency ratio gravitated towards, I think, it was about 26% that year. This year, we did start getting some of those expenditures, primarily in the form of investment in our platform, and a lot of that was hiring of new people, particularly in IT and project management. And we – expenses, we did push them up a bit. As Aparna said, they were about 27% on efficiency ratio standpoint, that is expenses to assets, last year. And we’re – as she also mentioned, we’re going to keep that under 30%, I think, for the next year, 27%, maybe even 28% is what you would expect to see. But then greater efficiencies should kick in from these – the investments that we’re making. And it should start gradually trending down on an efficiency ratio standpoint.

That’s helpful. Thanks a lot.

Our next question will come from Harry Gorman with Harry Gorman Investment.

I saw your interest spread, obviously, widen out in Q3 and then again in Q4. Looking at the lines of business, it looked like a lot of it came from USDA portfolio and the utilities portfolio. So maybe you could talk a little about what was going on in those two portfolios to widen the spread.

Yes. I’ll turn to Zack Carpenter to jump into this one and give you – so he can give you a little bit more color on the portfolios. As Aparna mentioned, we also had particularly good execution of some of our funding. And so a small part of that is from improved execution in the debt capital markets. But there are some shifts going on in the portfolios and maybe a deemphasis of some of what we call our institutional business and more market-based pricing and other parts of it. And so Zack, can you please take – carry through how you’re seeing that portfolio shifting taking place?

Yes, sure, Brad. Great question, Harry. I think one of the key pieces to think about, aside from the favorable funding dynamics that Aparna mentioned, is we did have quite a sizable maturities in our institutional line of business from some large counterparties. And those are really at tight spreads, especially in this current market. So while that volume shifted off, it was at much lower NES spread than the overall portfolio. In addition, the Farm & Ranch growth, the $1.2 billion in net growth is one of our higher spreading business. So while market rates in those lines of business came down, we had more beneficial funding costs. So we were able to, I’d say, clip a little bit higher NES than we historically had and that continues. And then lastly, a couple of things just to note in some of these new initiatives. We’ve talked about renewable energy. Those bills are more accretive spreads. And then we also mentioned, in the prepared remarks, that we booked about $370 million of larger commercial agribusiness-type loans. Those loans are, I’d say, shorter in duration. So it helps from a funding perspective, they diversify our portfolio and generally with more market-based pricing, as Brad mentioned. When you look at some of our businesses, we are a secondary wholesale pricing shop. And so that really comes at a wholesale rate. These deals that we’re executing and be taking a part of were more at market rates. So we’ve been able to get more attractive yields there. So the combination, I think, of the favorable funding, the lower institutional credit volumes and then our pursuit of some of these larger transactions in the renewable and agribusiness that have higher yields are really helping attribute that growth in NES over the second half of the year.

Okay. So that, the portfolio shifts, is that something that persists going forward or there’s a reason to go back to more traditional?

As we look going forward, I mean, I think our initiatives focus on some of these new areas of growth. As Brad mentioned, renewable energy, that’s an area of growth. The agribusiness side is another strategic initiative that we talked about. We’ve put a lot of resources and foundational improvements to be able to execute at a larger rate and amply scale up those initiatives over the next one, two, three years, but also focus on our core businesses in Farm & Ranch and USDA. And if we can continue to manage our funding costs tremendously like we have and market-based price a lot of our products, then I think the portfolio shift will happen as well, but also continue to get strong NES from our existing portfolios.

Sorry, one last thing. These agribusiness loans, I’m not really familiar with them, what are they? What sort of collateral you have?

Yes. It’s – so it’s all within our charter in terms of first lien on agricultural real estate. This is a broad array of agricultural production. So maybe much larger loan exposures to just normal Farm & Ranch type loans or in California, there are significantly large parcels of pistachios and almonds that have a much larger exposure. And so we look at those a little bit differently. But also new initiatives up the value chain in the ag space, really to drive the commodity price from the farmer and rancher. So manufacturing of pulp or timber or sugar beats, facilities that really takes the commodity, improves it to the next level and pull it through the chain. So again, these are more market-based structures with pricing. And many instances are loans that are done with numerous financial institutions. And so we’ve been looking to partner with those financial institutions and support those new initiatives.

And this will conclude our question-and-answer session. I’d like to turn the conference back over to Brad for any closing remarks.

We appreciate the questions very much. We – as indicated, we provided a little bit more detail in comments, and it’s getting late. We understand that. So please reach out to Jalpa and if you have follow-up with any additional questions or call, we’re always happy to do that. We appreciate your interest very much. And look forward to speaking with you in another quarter. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.