Good afternoon, and welcome to the Farmer Mac First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that, this event is being recorded. I would now like to turn the conference over to Jalpa Nazareth, Senior Director of Investor Relations. Please go ahead.

Good afternoon and thank you for joining us for our first quarter 2023 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 risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer Mac's 2022 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 Farmer Mac's website farmermac.com under the Financial Information portion of the Investors section. Joining us from management this afternoon are our President and CEO, Brad Nordholm, who will discuss first quarter 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?

Thanks, Jalpa, and good afternoon, everyone. Thanks for joining us today. I'm very pleased to announce we delivered a great quarter with new all-time records for revenue, earnings, and net effective spread, and all-time records in the growth rates of these three metrics. Our results not only highlight the resiliency of our business model, our disciplined approach to asset liability management and our successful efforts over the last few years to grow and diversify our revenue streams, but also the alignment of our team with our long-term strategic objectives and passion for fulfillment of our mission throughout changing market cycles. For some time, Aparna and I have talked with you about our disciplined approach to asset liability management. We've emphasized that our ability to issue long-dated fixed rate debt in all rate environments and economic cycles is a core competitive advantage that when combined with our approach to asset liability management, helps to produce consistent spreads and provides remarkable forward visibility to future earnings. The recent volatility in the capital markets and failures of depository institutions provide a stark contrast between Farmer Mac and banks. We're not a bank and we don't rely upon deposits as a source of funding. The terms governing our debt securities are contractual in nature, and we, not depositors, hold the optionality of when and how to call our debt. We will continue to talk about these differences and why Farmer Mac's business model is resilient and has the ability to deliver such consistent results. In the first quarter of 2023, we booked core earnings of $38.9 million, a 50% increase over the same period one year ago. We provided a gross $1.7 billion in liquidity and lending capacity to lenders serving rural America, resulting in total outstanding business volume growth of over $500 million…

Thank you, Brad. And good afternoon, everyone. Our record first quarter 2023 results highlight a balanced, well measured approach, continuing strong credit quality and resiliency across market cycles. We achieved $1.7 billion of new business volume this quarter. And some of the key components include: $500 million in Rural Infrastructure AgVantage bonds; $145 million in gross corporate Agricultural Finance loan purchases, which is about 135% higher than last year at this time; and $73 million in gross Renewable Energy loan purchases. After repayments, we grew about $600 million this quarter in our outstanding business volume and this speaks to the benefit of our diversified portfolio. And notably there has been strong execution in our Rural Infrastructure line of business. Core earnings were $38.9 million or $3.56 per share in the first quarter of 2023. And this reflects, as Brad noted, a 50% year-over-year growth that's driven by record net effective spread of $77.2 million in the first quarter of 2023 compared to $57.8 million in the same period last year. As Brad highlighted, despite the earnings pressure that many financial institutions are currently facing, our net effective spread this quarter increased appreciably, and was at 115 basis points. This was primarily driven by significant reduction in our cost of borrowing and strong pricing in the rural infrastructure sector. Despite short-term interest rates peaking, our cost of funds have trended systematically downward. This is because of our disciplined asset liability management practices, where we hedged our risk effectively, while changing our funding mix to take advantage of opportunities as the yield curve changed. Another significant driver of the lower cost of funds is from the low cost of debt and capital that we raised opportunistically, when rates were at historical lows in 2020 and 2021. These decisions have continued to pay-off…

Thanks, Aparna. We experienced a strong start to 2023, despite the backdrop of economic uncertainty and market volatility. I am extremely proud of our team and the excellent progress that we are making on our multiyear strategic initiatives. We believe we are well positioned to deliver strong financial performance and consistent returns to our shareholders over the rest of 2023, even though there is uncertainty in the economy. And now operator, I'd like to see if we have any questions from anyone on the line with us today.

[Operator Instructions] Our first question comes from Bill Ryan from Seaport Research Partners.

First one for Brad. You mentioned the regional banking crisis a few times in your early commentary. And I was wondering if you're seeing any additional inquiries coming in about potentially additional volume coming your way as banks might be looking to let's just say increase their liquidity positions or capital levels?

Yes, Bill, we are paying a lot of attention to that and there are two potential ways and I emphasize potential ways that, that can occur. There may be banks that hold portfolio of loans that otherwise they might have sold to us in the past, that now they're ready to sell. Just for a very simple example, Silicon Valley Bank had approximately 700 and some odd million dollars of first mortgage loans on vineyards in California. So, that's slowly working its way through receivership. But we'll keep an eye on that and other similar situations, as well as those banks that may hold portfolios like that, that are feeling under capital pressure today. The second way that it can arise is the banks that in the past may have had a bias towards doing a three or five or seven year first mortgage loan and arm, and holding on our balance sheet. And today, a couple things are working against them. One, they may be having liquidity and capital constraints that they weren't experiencing six to 12 months ago. And the others with the shape of the yield curve. It really favors longer term fixed rate debt where we have an advantage in funding, especially in comparison to bank that is dependent on deposits. So it hasn't -- those two opportunities haven't been reflected in the numbers yet. And it's very difficult to project to what extent they may be reflected in future numbers. But we're keeping a close eye on it. And just common sense tells us that yes, there should be some additional opportunities coming because of that. Now, there's still a headwind out there, particularly for first mortgage loans for the Farm & Ranch program of very few refinancings and higher overall interest rates having a kind of depressing or stifling effect on new origination. But these two factors that I just mentioned provide a bit of a tailwind for us and should provide some additional opportunity through the remainder of the year.

Okay. And one follow-up on the finance business. You mentioned it last quarter that it was kind of a little bit log-jammed, given the disruption in the capital markets, you kind of echoed that comment again this quarter. What's it going to take to kind of free up the volume that's kind of like sitting there ready to go?

Well, right now, a higher portion of the first mortgage loan Farm & Ranch opportunities are going to be associated with the transfer of real estate. And you can read some of our publications, The Feed and others and our Chief Economist, Jackson Takach commenting on land values, which have held up remarkably well. So you apply higher interest rates to already high land values and you have a higher cost to carry of more challenging kind of economic value proposition. So we are not seeing a big increase in the transfer of land that is motivating new financing opportunities. But I would draw your attention, Bill, back to our comments and our presentation of our numbers across all of our segments. And while Farm & Ranch is, we have noted now, both in our formal comments and I've also noted them just now, while it's down for Farm & Ranch, our volumes for some of our rural infrastructure and specifically telecom, rural utility and renewable energy project finance are up. They are up substantially. And those are accretive. They are higher NES segments of business for us. They are contributing to those higher NES numbers. They are part of that story. And the volumes there are not just holding up, they are growing for us in this environment. So we can talk about a logjam as you described it in Farm & Ranch, but in other areas of our business, we're not experiencing that. In fact, we are experiencing more opportunities. As I mentioned, we are allocating more resources to Renewable Energy project finance right now. And that increasing diversification of our portfolio is giving us greater strength, and ability to deliver the steady returns you have seen from us year-over-year to keep delivering those steady returns throughout 2023.

Our next question comes from Gary Gordon, Private Investor. Please go ahead.

Okay. Thank you. Questions on the remarkable interest spread. First, the benefit was all attributed to the -- over a year ago, it was attributed to the financing group Treasury. I assume the way you calculate is some calculation of your cost of funds versus some sort of average. So I mean, why isn't the cost of funds attributed to an operating unit rather than the finance group?

Yes. I'll let Aparna get to that, Gary. It's a very interesting question. But I'd first kind of draw your attention to part of that positive change being attributable to these accretive lines of business where we are seeing a little bit stronger growth right now. As you point out, the majority of it is attributable to how we run our book and our Treasury operations. And I will let Aparna take you through some of that detail, both the simple math denominator, numerator question that you're getting at, but then maybe a bit more detail on how other factors and how we run our book are contributing to that.

So about a year ago, we actually segregated our portfolio into segments. And with that, we are now able to get a more granular view of just how we can actually allocate NES between the operating units that you mentioned, Agricultural Finance, and Rural Infrastructure Finance, and then Treasury as its split out between the actual funding desk and then our investment portfolio. So when we actually spread the interest rate benefits across the operating units, what we do is we assume that with all other things being equal, the way in which we would fund the balance sheet, if we did not have a Treasury desk, would be through match-funding every single loan, relative to the benchmark interest rate based on the tenor of that loan. In reality, what we do is we don't assume any interest rate risk. But we will actually hedge or synthetically convert a fixed or floating rate asset into an appropriate liability, and actually match the duration and convexity of the asset and liability. So this gets to be a little bit technical. But essentially, the way to think about this is, the funds transfer pricing mechanism that we use, provides a baseline of what funding costs would be out in the marketplace in the absence of the Treasury desk. So to the extent that the assets are being generated at a spread above this market rate, they get credit for it to the extent that the Treasury funding desk is able to issue debt the level of this market rate that we calculate, then that credit is ascribed to the Treasury unit. So essentially, what has happened over the past year, has been that we've been able to opportunistically fund at certain points in the yield curve, and issue debt that's been below the market rate. So that's one factor. The other factor is just as persistent benefit that we received when we extended our debt, as well as raised additional capital to preferred issuances that related to an excess in capital, that gets reinvested in the investment portfolio, that reduces the cost of borrowing. So those are the two big drivers. But the formal explanation really gets us I would say, in all environments, how we really ascribe that NES and apportion it across our lines of business, that's Agricultural Finance and Rural Infrastructure Finance, and then the Treasury.

A follow-up on that. It sounded like I heard that some of those benefits due to the rise in rates and some of them may be lost in a fallen rates, which suggests some asset sensitivity to the book. Did I hear that correctly or no?

No, there's no real asset sensitivity. So I think the key thing here is that we actually hedge our interest rate risk, such that we have no or minimal exposure to any changes in the repricing or changes in the benchmark. The only risk that we might be exposed to when we change the tenor of our liability stack relative to the asset stack is when there is actual changes in credit spreads. So there's no real change of risk that we experience in different rates environments because of the way in which we hedge our book. So for the best way to think about this is, the duration of our assets and liabilities are perfectly matched and we're able to do this because we can actually opportunistically hedge our liabilities against our assets in response to changing interest rate environments. So very different phenomenon than what other institutions might have, that allow us to minimize our risk, but also be fairly opportunistic on where we fund on the curve.

Okay, I don't want to be beating the dead. But one follow-up is then the real benefit that your cost of funds that you've generated is -- has improved versus credit spreads out in the marketplace?

Yes, that is definitely the case. And it has to do with the fact that, we are seeing really strong flight to quality in general for GSEs. And so we compare pretty well to other GSE, so that's one point. The second one is just the fact that we've been conducting consistent investor outreach, and there's strong demand specifically for our debt issuances. And also given our size, we're able to issue in a way that really matches our investors' preferences. We don't do bulk issuances. We can do some really customized issuances. And that's -- it's a small benefit but certainly all of it adds up and it helps us really issue at rates that are below market, especially in this environment.

The next question comes from Brendan McCarthy from Sidoti.

I was wondering if you could provide some additional color on the telecommunication sector. I know volume, you had a huge jump this quarter. What really drove that the jump in volume there?

Probably two factors, Brendan. And by the way, thank you very much for joining us today. Probably two factors. One is that we have Zach Carpenter and our business development team have been much more active, that team has really been built out significantly in the last couple of years. And the -- that includes the build out of the Rural Infrastructure team, which is now what I would describe as in place and mature. And so they've been reaching out to institutions -- keep in mind we're in a secondary market, so we're always originating with or from other financial institutions. They've been reaching out much more consistently and aggressively and credibly, I would also add, to originate that business. So for example, there's one institution, a prime credit institution that with which we've been doing a significant amount of telecom over the last year. So that's been a positive. The other I think factor is that for those telecommunications firms that are predominantly focused on rural America, which of course is where our interest is, there's significant capital investment going on, there's investment in broadband, there's investment in other forms of communication, and that's all a part of improving rural infrastructure, some of it's stimulated by government programs, some of it by new technologies. But there's real capital investment going on out there and that leads to opportunity for us.

And then a follow up to that, are you able to disclose the spread figure that telecom typically generates on average?

Yes. I think we do break out our business segments by average spreads. Don't we Aparna?

We do. But it's really meshed into the Rural Utilities segment, but I'll just give you perhaps some averages here. But if you just look at, where we were just about a year ago, our Rural Utilities segment you see as a result of telecom has on average gone up about 13 basis points, right? So when you think about that, those spreads tend to be -- our Rural Utilities segment on average is about 36 basis points today. It was in the 20s about a year ago. And with this increase in telecom, which has been a small amount, telecom tends to be in the mid-100s, so about 150 basis points. So when you think about a change in business composition towards telecom, that Rural Infrastructure segment is where you can really track it. And you can see a fairly notable double-digit increase in basis points spread on average across the portfolio.

Yes. Aparna mentioned 150 basis points. On the telecom, I've seen a few of the telecom deals going through here that have been even materially higher than that, Brendan. We also have -- if we look at project finance, we have mentioned that as an area where while the numbers aren't large, the percentage increases are. And there just as an example, the NES on those deals will be 150 basis points to 250 basis points compared to 100 basis points to 115 basis points, which is what we have been talking about as our average right now. So we talk about telecom or we talk about project finance for Renewable Energy projects being highly accretive, we are talking about factors of 1.5x to 2.5x.

Great. Thank you. That's helpful. And I guess lastly, as a quick follow-up, given the diversification of the loan book in Rural Utilities and Renewable, do you still feel that an NES target range of 90 basis points to 100 basis points is a prudent measure going forward?

Thank you for asking that. We would have been at this point had not because we talked about that a lot. The starts really aligned from a funding standpoint this quarter. I think that going forward, we will look for accelerating growth in our telecom and Renewable Energy project finance portfolios. So yes, accretion there. On the other hand, we will not back away from doing as much Farm & Ranch business at our historic Farm & Ranch spreads as we possibly can. That's so absolutely core to our mission. So I think you could see some continuing support for this NES going into the next quarter or two from accretive assets as well as Treasury operations. And then maybe see a little bit of dampening effect beyond that as we look to comparative pickup in Farm & Ranch and some of our lower yielding Rural Utility business. How that exactly shakes out? I don't know. I think 90 bps to 100 bps NES is looking pretty conservative to us today based on where we are. And I think we have always tried to provide conservative indications of where that NES is. I remember a time when we were talking about 85 to 95, but what you have seen as opportunistic Treasury, you have seen the benefits of diversified portfolio. You've seen the benefits of more opportunistic pricing. There was a time when Farmer Mac not too long ago when Farmer Mac was kind of at a price, what's the minimum we need to earn? And I think now we're much more attuned to what's available in the marketplace and that also is contributing to some higher returns. So I think 90 to 100 feels very, very conservative and for the remainder of this year, seeing that 110 range, maybe even a bit higher, is not out of the question at all.

This concludes our question-and-answer session. I would like to turn the conference back over to Brad Nordholm for any closing remarks.

Well, again, I just like to thank everyone for joining us today. I hope you can hear it our voices, just how proud we are of these results. It feels like it's a combination not of just everything working in one quarter, but to greater and greater extent, every quarter, we go on our overall business plan, I think our very strong management team, our enthusiastic and very, very capable employees. All executing on our strategic plan here at Farmer Mac, and just showing better and better results from it. One of our directors the other day described this as not just a continuation, but an upward shift in our curve. And I think that is an apt description. And, again, I hope you hear our pride in what we're doing. So thank you very much for your interest. Don't hesitate to follow-up with any follow-on questions. We're very happy to talk more about this. And with that operator, and our gratitude, we can conclude this call.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.