Good day, and welcome to the Farmer Mac Second Quarter 2018 Investor Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lowell Junkins, Acting President and CEO. Please go ahead..

Good morning. I’m Lowell Junkins, Farmer Mac’s Acting President and CEO. Farmer Mac is pleased to welcome you to second quarter 2018 investor conference call. We posted a slide deck on our website that we’ll refer to throughout today’s call. Information about where these slides can be found is included in this morning’s press release.

Our General Counsel is not available today. So, I’ve asked Anjali Desai to -- Farmer Mac’s Assistant 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..

Thanks, Lowell. 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, 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 2017 annual report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q.

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 three non-GAAP measures that Farmer Mac uses, are, core earnings, core earnings per share and net effective spread. Farmer Mac uses these non-GAAP measures to measure corporate performance and to develop financial plans. In management’s view, they are useful alternative measures for understanding Farmer Mac’s business.

These non-GAAP measures may not be comparable to similarly labeled non-GAAP measures disclosed by other companies. Farmer Mac’s disclosure of non-GAAP measures is intended to be supplemental in nature.

And these measures are not meant to be considered in isolation from, as a substitute for, or is 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 most recent Form 10-Q and 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 two weeks, starting later today..

Thank you, Anjali. Thank you all for joining us. Our second quarter 2018 results largely reflect the strong underlying fundamentals driving Farmer Mac’s business. From double-digit core earnings growth to continued favorable credit quality, Farmer Mac’s continues to post strong results.

Our business volume grew to $19.5 billion, our substandard assets remained unchanged as a percentage of our portfolio, and our core earnings per share grew 22% year-over-year.

These results demonstrate the focus and commitment of our team throughout the course of an ongoing agricultural cycle -- excuse me economic cycle in Farmer Mac’s transition period as we search for CEO. Our core earnings grew more than 20% year-over-year this quarter.

The growth would have been even more significant in the absence of the paying off of an interest-only mortgage security in our investment portfolio, which had a $1.6 million after-tax impact. In fact, growth would have been more than 30% year-over-year.

Our strong year-over-year growth was driven by a combination of good business volume growth, stable spreads, and the benefits of lower federal corporate income tax rate. Dale Lynch will describe this and other financial results in more detail shortly.

Farmer Mac continues to execute its strategic initiatives to increase capacity and efficiency which includes investing in our people, technology, infrastructure, and maintaining our leadership position and financing the rural America.

Benefits from the new lower tax rate has allowed us to further these initiatives while also increasing returns to our common stockholders. As guided by our mission, Farmer Mac’s has committed to find innovative ways to reach customers to increase availability and affordability of credit to rural America.

And as demonstrated by our second quarter performance, Farmer Mac’s business model is performing quite well. Now, I’d like to turn to Curt Covington, our Executive Vice President, Agricultural Finance to provide you with an update of the current agricultural environment.

Curt?.

Thanks, Lowell. Good morning. Much has been said and written about the decline in farm income over the past three years. For 2018 USDA forecast real farm net cash income at about $91.9 billion, which is about 38% below levels experienced during 2012 farm income peak.

The past three years have been very near the inflation adjusted average cash farm income. Finding three consecutive years with a lower average income level at this period, you must have to go back to 1980s.

However, conditions in the farm today, while not as rosy we’d like them to be or perhaps not as bad as some thought it might be, there’re few dynamics that work and they help explain the better than expected credit performance. First, farm balance sheet generally came into the current downturn in very good shape, low leverage and good liquidity.

Second, as markets deteriorated, farmers knew when and how to effectively tighten their belts. Third, with the earnings on their side, lenders didn’t panic, adhering to their time-tested and pragmatic underwriting standards.

And finally, relatively low interest rates combined with active buyers in the market continue to support generally stable to higher farmland prices. These factors, when added together, may help explain why agricultural loan delinquency and loss rates remained better than expected. From a commodity perspective, USDA’s cash farm income is mixed.

Of the 11 main commodity sectors identified, nearly all point to lower income in 2018 than in 2017.

And while the income forecast is -- not particularly good for grain, oilseeds and certain meat proteins, other commodities, particularly specialty crops such as nuts, tree, fruit and vegetables appear to remain profitable, despite lower average farm gate prices.

Farmland values have remained stable to slightly stronger across many parts of the country. Just last -- USDA released the 2018 land survey results which showed an average increase in the value of national farmland and building from about 1.9% from June of 2017 to June of 2018. It appears that top quality land still commands top prices.

This recent USDA reporting takes good gain in primary corn belt states, some losses in the upper plain states, significant gains in lower plain states and ongoing gains in the west. Farmer Mac’s credit and research team remained abreast of various headwinds in the ag economy that could impact both farm income and land values.

The most important of these today is just the current trade dispute and the prospects of rising interest rates. Global exports remained a vital outlet for U.S. agriculture production. And increasing friction with major markets in North America, Europe and Asia presents a challenge to producers.

However, in recent week, USDA has announced plans to help offset temporary market disruption due to trade policy negotiation, which is viewed as welcome news for many farmers and ranchers, similarly a rising interest rate environment increases the absolute level of debentures expense performance for farmers, but relative levels of interest to income remains very manageable for producers, in a historical context.

Despite these changes, we continue to believe that Americas farmers and ranchers have a bright future, and Farmer Mac has sufficient diversity in the portfolio to weather these challenges. And with that, I’ll return this to Lowell..

Thanks Curt. Now, I’d like to ask Dale Lynch, our Chief Financial Officer, to cover our financial results in more detail.

Dale?.

Thanks, Lowell. Our second quarter 2018 results reflect Farmer Mac’s commitment to delivering upon our mission while at the same time producing strong returns for our stockholders.

We provide the unique combination of high quality assets positioned within a market that provides attractive growth opportunities and the GSE funding advantage designed to benefit rural America. In terms of business volume. As you can see on slide five, outstanding volume grew to $19.5 billion as of June 30 2018.

We completed more than $1.3 billion of new business this quarter, resulting in a net growth of $145 million after maturities and repayments. This increase in outstanding business volume was driven by net growth in our Farmer & Ranch and Institutional Credit line of business.

We purchased $825 million of AgVantage securities in the second quarter which resulted in net growth of $66 million. During the second quarter of 2018, Farmer Mac purchased AgVantage securities from MetLife and Rabo Agrifinance in the amounts of $500 million and $175 million, respectively.

And these proceeds were used to refinance maturing AgVantage securities in the same amounts.

Also contributing to the business volume this quarter was $30 million of net new business with four other institutional counterparties in a series of smaller transactions, primarily with AgVantage for funds product Our Farm & Ranch loan purchases were $224 million in the second quarter of 2018, which was lower year-over-year, primarily due to the absence of three larger loans totaling $85 million completed in second quarter 2017, but which were not replicated during the second quarter of 2018.

Excluding these larger purchases, business volume loans for purchased in the first six months of 2018 was in line with that of first half 2017. We also added $126 million of Farm & Ranch loans under standby purchase commitments during the second quarter of 2018, which was a 125% increase over the same period last year.

We purchased $130 million in our USDA Guarantees line of business in the second quarter of 2018 compared to $169 million in the second quarter of 2017. The decrease reflected an increase in competition for these assets and the decrease in the use of the USDA Guarantees loan programs.

Due to the lack of loan purchase opportunities for larger and more competition loans to rural utilities borrowers, rural utilities. Our rural utilities partner, National Rural Utilities Cooperative Finance Corporation, or CFC, did not sell any loans to Farmer Mac this quarter.

Despite this lack of loan volume from CFC, we believe ongoing growth opportunities do exist within our Institutional Credit line of business within the rural utilities sector. Now, turning to the financials.

As you can see on slide six, core earnings for second quarter 2018 were $19.4 million or $1.80 per diluted common share, compared to $16 million or $1.48 per share in second quarter of 2017, and $21.8 million or $2.03 per share in first quarter of 2018.

The $3.4 million year-over-year increase in core earnings was primarily due to a $0.07 million after-tax increase in net effective spread, which did include a $1.6 million after-tax negative impact from the amortization of the IO security and the $4.8 million decrease in tax expense due to lower tax rate.

This increase was offset in part by a $1.2 million after-tax increase in operating expenses, driven by an increase in G&A expenses. Specifically, this increase in G&A is related to our continued investment in technology and business infrastructure, and an increase in compensation and benefits as Farmer Mac continues to invest in its people.

Also contributing to this asset was a $0.6 million after-tax decrease in net realized gains on the sale of real estate owned properties. As we’ve mentioned on prior calls Farmer Mac expects the annual increase in its aggregate compensation and benefits and G&A expenses to be above historical averages over the next several years.

Specifically, management believes that the aggregate comp and benefits, and G&A expenses will increase approximately 15% in 2018 relative to 2017 with the increase is likely to remain elevated in 2019.

The $2.4 million sequential decrease in core earnings was primarily due to a $0.7 million after-tax decrease in net effective spread which again included a $1.6 million after-tax negative impact from the amortization of this IO security, a $0.9 million after-tax increase in operating expenses, and a $0.7 million after tax increase in credit-related expenses.

As Lowell mentioned earlier, Farmer Mac experienced the payoff transaction in second quarter 2018 related to a legacy interest-only security within its investment portfolio; Farmer Mac purchased this IO security in second quarter of 2013 as part of the transaction through which the issuer repurchased and resecuritized a prepayable structured adjustable rate mortgage backed security that was then held by Farmer Mac.

As a result of this transaction, Farmer Mac realized a $3.1 million gain upon the sale of the original security in the second quarter of 2013 and acquired the IO security. Farmer Mac earned interest income over the five-year period that held this IO security in its investment portfolio.

Over the life of this transaction, Farmer Mac received a net after-tax economic benefit of $3.2 million. Farmer Mac does not currently hold any other IO securities in its investment portfolio.

Excluding this transaction, which again is not related to any Farmer Mac’s four lines of business, our $19.4 million core earnings this quarter would have been $1.6 million higher, and that would have made our year-over-year growth rate more than 31%. Now, turning to spreads on slide seven.

Farmer Mac’s net effective spread for second quarter of 2018 was $36.2 million or 86 basis points compared to $35.3 million or 91 basis points in the second quarter of 2017 and $37.1 million or 91 basis points in first quarter of 2018.

The $0.9 million year-over-year increase in net effective spread in dollars was primarily due to growth in outstanding business volume, which increased net effective spread by approximately $2.7 million. The increase was offset in part by the $2 million amortization of this IO security within its investment portfolio.

In percentage terms, the amortization of this security had 5 basis-point negative impact year-over-year. The $0.9 million and 5 basis points sequential decrease in net effective spread was again primarily attributable to the $2 million negative impact of the amortization of this IO security.

The decrease was offset in part by growth in on-balance sheet AgVantage securities and Farm & Ranch loans which increased net effective spread by $0.7 million. And an increase in the amount of cash basis interest income recognized on nonaccrual Farm & Ranch loans which increased net effective spread by $0.5 million.

Again excluding the amortization of this IO security, net effective spread would have increased $1.1 million sequentially. Turning to credit on slide eight.

As of June 30, 2018, the total allowance for losses was $9 million or 13 basis points of the $7 [billion] Farm & Ranch portfolio, compared to $8.5 million or 12 basis points of the Farm & Ranch portfolio as of March 31, 2018.

$0.6 million provision in second quarter of 2018 for the total allowance for loss was primarily due to the modest decline in overall portfolio of credit quality and an increase in the general allowance to the net volume growth in Farm & Ranch loans.

As of June 30, 2018 Farmer Mac 90-day delinquencies were $43.1 million or 0.61% of the Farm & Ranch portfolio compared to $47.76 million or 0.69% of the portfolio as of March 31, 2018. Those 90-day delinquencies were comprised 54 loans as of second quarter 2018 compared to 65 loans as of first quarter of 2018.

The modest decline in 90-day delinquencies from first quarter of 2018 is consistent with our seasonal pattern of Farmer Mac’s 90-day delinquencies fluctuating from quarter-to-quarter, both in dollars and as a percent of the outstanding portfolio with higher levels generally observed at the end of first and third quarters and lower levels generally observed as of the end of second and fourth quarters of each, as a result of the annual and semi-annual payment in terms of most of our Farm & Ranch loans.

Farmer Mac expects that over time, this 90-day delinquency rate will eventually revert closer to, and possibly exceed Farmer Mac’s historical average of approximately 1% due to macroeconomic factors and the cyclical nature of the agriculture economy.

With regard to substandard assets due to a relative balance between newly substandard assets and upgrades in payoffs and paydowns of existing substandard assets, the overall portfolio of substandard volume was little changed this quarter.

As of June 30, 2018, Farmer Mac substandard assets were $226.5 million or 3.2% of the Farm & Ranch portfolio compared to $221.2 million or again 3.2% of the portfolio as of March 31, 2018. Those substandard assets were comprised of 333 loans as of June 30 2018 and 318 loans as of March 31 2018.

As of June 30, 2018, the loan volume migrating into the substandard asset categories primarily comprised of feed grains, oilseeds and other crops. This is in line with previous quarters’ trends.

Farmer Mac expects that over time its substandard asset rate will eventually revert closer to and possibly exceed Farmer Mac’s historical average of approximately 4% due to macroeconomic factors and the cyclical nature of the agricultural economy.

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 we believe is adequately collateralized. Now, turning to capital on slide nine.

Farmer Mac’s $693 million of core capital as of June 30, 2018, exceeded our statutory minimum capital requirement of $543 million by $150 million or 28%. This compares to core capital of $657 million or $137 million of capital in excess of the minimum as of year-end 2017.

The increase in capital in excess of our minimum was due primarily to an increase in our retained earnings. More complete information about Farmer Mac’s second quarter 2018 performance is set forth in our 10-Q, which we filed today with the SEC. And that, Lowell, I’ll turn it back to you..

Thanks, Dale. Farmer Mac’s performance is strong as we continue to deliver upon the mission throughout agricultural’s economic cycles. Our capital base is also strong and growing, providing capacity for future growth. And we believe the dividend policy has helped stockholder value.

We continue to bring in new personnel to fill the key positions here at Farmer Mac and to expand our investment in the technology and capacity to better grow our business. Farmer Mac has been a champion for and an integral part of this nation’s rural economy for 30 years, and we look forward to the decades ahead.

Our CEO search efforts have made significant progress, and Farmer Mac’s Board expects to hire a new President and CEO with the perfect qualifications and expertise in a timely manner. We look forward to being able to provide you with more information on our next earnings call. And we would be happy now to answer your questions that you may have..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Valentin at Compass Point. Please go ahead..

Just a couple of questions regarding credit. I know you can make reference to the fact that at some point credit may return to more historical levels, implying kind of an increase in delinquencies and substandard assets. Just wondering what that implies for the level of the allowance for loan losses, as a percent of loans.

I think, you mentioned right now you’re running about 0.13% of loans. Just wondering what that could increase to if we get it back to a more kind of say 4% substandard assets and 1% delinquency level..

So, we’re not -- we haven’t gotten that level of specificity around that forward-looking component. I mean, if I were you, i.e. good proxy would be to look through our cycles over the past 10 years or so and sort of calculate historic substandards and allowances as a percent of our relevant portfolio.

And then, that would give you good applicable long-term average. But, again, we’ve been trending at this 12 or 13 basis-point amount for a long period of time now, good five years or so, exclude ethanol. So, even reverting to historical averages would presumably take some time because they’re higher than that.

But we’re not going to get specific, as you’d like on that statistic..

Okay, fair enough. Yes. I know excluding ethanol, since it’s a high loss content in that product, so I just wanted to see if there is way that you should adjust for that and figure out what the appropriate level of loan loss reserve. But I will look back at the historical..

I think we gave you all the dollars on the ethanol. So, if you wanted to do that labor, you could get there. You could exclude the ethanol I think and get a good proxy for that..

Okay, will do that. And then, just secondly, I think in the past, you said July 1st, is typically a large pay date or due date for loans.

Just wondering if there is any way you can provide kind of a view into what you are seeing, post July 1st, if you see any change -- material change in delinquencies?.

Yes. We haven’t disclosed that. And good questions, but we don’t have the data on that yet..

Okay. All right. And then, just in terms of tariff impact, I appreciate the macro color in terms of land values and crop prices and farm income.

Are you seeing any signs -- when you talk to various banks and people that you purchase loans from, are you seeing any signs of reduced loan demand as farmers may be pull back on production because of the perceived impact of tariffs?.

Curt, do you want to take that?.

No. Our -- it’s a good question. But we keep pretty close track of that. And what we are seeing in terms of demand is -- for loan products is still fairly robust. There was a lot of renewal activity that could take place over the last six months. But, we haven’t seen any significant drawback in terms of demand for loan credit across the country..

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

Seeing no more questions, I’d like to thank you for listening and participating this morning. I look forward to the next call to report our third quarter 2018 results in November of 2018. Thank you very much..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..