Good day and welcome to the Farmer Mac First Quarter 2019 Investor Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] I would now like to turn the conference over to Mr. Brad Nordholm president and CEO. Please go ahead, sir..

Good morning. I'm Brad Nordholm. And I am very pleased to welcome you to our 2019 first quarter investor conference call. We posted a slide deck to our website. And we'll be referring to that throughout today's call. This morning's press release also includes information about where these slides could be found.

We have a number of positive developments to discuss today, but before I begin I need to first ask Steve Mullery, our General Counsel to comment on forward looking statements that management may make today as well as to Farmer Mac's use of non-GAPP financial statements.

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 uncertainty as well as those described in our 2018 Annual Report on Form 10-K and our first quarter 2019 Form 10-Q filed with the SEC.

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-Q 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..

Thanks, Steve. I am happy to report a very successful first quarter of 2019. Our financial results are strong as we'll discuss, and we also work to build a stronger foundation for future growth. The objectives outlined in our long term strategic plan emphasize innovation and how we acquire customers and how we develop new products.

And we do that to further our mission. As a part of this, we're presently evaluating all of our lines of business, our products and how would go to the market as a wholesaler to streamline new business opportunities and more efficiently deliver on that mission.

Notably, we recently created a new executive level position here at Farmer Mac and that person will head up our lines of business. We're calling this our new Chief Business Officer, and he will be starting in about a week. So stay tuned for more information from him.

As I mentioned during our last quarter's call, we entered into a master participation agreement with CoBank in February of 2019, and we subsequently purchased $546 million of seasoned rural utility loan participations. This is Farmer Mac's first direct loan participation purchase with CoBank, also with any other farm credit institution.

And it represents important progress in developing on our mission to increase the availability and affordability of credit for rural America. We have good ongoing discussions with CoBank and also with other farm credit system banks.

And with several farm, large Farm Credit System associations as well with other market participants in Project energy finance. This is all part of building an even stronger foundation for future growth here at Farmer Mac.

You'll note in our SEC filings that on March 14, 2019, the Board of Directors modified the terms of Farmer Mac's existing share repurchase program by increasing authorization for the purchase of up to $10 million of Farmer Mac's outstanding Class C common stock and extending the term of that repurchase program through March of 2021.

To be clear, Farmer Mac intends to repurchase shares only when it uses repurchases as highly accretive and consistent with our strategic objectives. Let's now turn to our first quarter 2019 results. As you saw in our press release this morning, Farmer Mac grew its outstanding business volume by $782 million.

This exceeds the net growth we achieved in the entire year of 2018. Our overall credit quality declined modestly this quarter compared to the fourth quarter of 2018, but it remains favorable, and in fact comparable to the first quarter of 2018.

The first quarter is the one when we generally experience the most credit impacts, given that it's a seasonally heavy quarter for a number of payments that are scheduled to be due. Our first quarter total revenues grew by more than $2 million compared to the first quarter of 2018.

Despite the fact that our two large transactions this quarter didn't settle until mid-quarter that we only realized a half quarter spread on these significant transactions. Core earnings were $22.2 million, up $1.8 million from fourth quarter of 2018, and up about $400,000 from a year ago period.

Farmer Mac continues its measured and thoughtful investments in people, technology and business infrastructure to improve the capacity and efficiency. And we believe this will help us deliver on our long term goals. We've set meaningful market share goals for ourselves in our strategic plan.

And in order to achieve these goals over the long run, we're going to be able to need to execute gross annual business volumes that are about double our current levels. Dale Lynch will discuss our financial results in more detail shortly.

First I'd like to turn to Curt Covington, our Chief Credit Officer to give you an update on the current agriculture environment..

Thanks, Brad. For farmers and ranchers, spring is an important and symbolic season. Most producers by this time have their operating financing in place, represents a fresh start to a new crop year, a time for tactical planting and marketing decisions that are the first in the city of Dominos that set in motion the prospects for success in 2019.

In spite of a well-publicized flood in the Midwest, farmers moved ahead with spring planting decisions that will in large part determine the level of year in crop inventories and the direction of market prices.

For cattle ranchers, the outcome from a tough calving season would become much clearer by the end of spring, setting the stage for this year's and next year's operating results.

For dairy farmers, who are anxiously awaiting for better economic conditions, the change of seasons brings what's known as the dairy flush, a time of year when cows are expected to produce seasonally higher levels of milk coming off a very cold winter, and signs of a healthy or perhaps unhealthy cattle herd.

Nut and fruit producers in the West are well into their 2019 growing season, and are thankful for the bountiful for rains received over the winter months. And the bloom of the fruit orchards remains – reminds us of a natural beauty that's intrinsic in food production.

If you've never experienced a full fruit or nut orchard blossom, it is truly a display of nature's many blessings. Amidst all this spring provides a lot of new data and decisions on which to evaluate the year ahead. And agricultural lenders are following and supporting these decisions intently.

This spring, it isn't difficult to locate stress in the agricultural economy. After all, we're entering in the sixth year of a slow Ag economy since the peak expansion in 2013. Here are some commodity prices to put things into perspective. Corn prices peaked at over $8 a bushel in 2013. And today those corn prices are closer to $3.50 a bushel.

Almonds traded at a high of $4.50 a pound in 2014. Today almond prices are clearing the mark and closer to $2.50 a pound. Dairy producer sold milk at $24 on 100 weight in 2014. Today dairy farmers see prices closer to $17 a 100 weight.

No doubt, trade disputes are keeping downward pressure on commodity prices preventing foreign markets from falling off taking the abundance of US agricultural products. Despite these headwinds, new economic sector is quite as resilient as the agricultural sector.

Why is that? More than most industries in the US, farmers and ranchers, it's an intrinsic network of uncertainty, risk and return. Because of these many uncertainties farmers and ranchers have learned through generations to be expert risk managers with a high degree of character and business acumen.

As an example, USDA estimates that since 2014, US farmers and ranchers have shed nearly $20 billion in farm expenses. Good business managers know the importance of focusing on things they can control like costs and budgets.

Good business managers also know that working capital is the lifeblood of liquidity and the first defense against commodity price volatility. During the most recent farm economy boom producers spent and saved wisely creating a relatively durable sector level balance sheet.

USDA estimates that farm working capital peaked in 2012 at $165 billion or roughly at 2.9 times current liability. That's a lot of dry powder to withstand an economic correction and it's a large reason why farm loan delinquencies and farm financial stress has been so measured today.

And while new application underwriting ratios have tightened in recent quarters, delinquencies in the Farmer Mac portfolio remain below historical averages, a similar story among many agricultural lenders such as commercial banks and farm credit institutions.

Finally farmers and ranchers have a tremendous level of support from policy makers and risk mitigation programs. Federal crop insurance programs, property and flood insurance and farm program payments like those made into the market facilitation program helped offset dips in income due to factors outside of the farmers control.

Be it weather policy or technology disruptions, farmers have become skillful and are nimble at managing the unforeseen and adapting to new conditions and economic environments. Adapting to uncertainty comes in various forms. From a financing perspective, farm and ranch borrowers continue to adjust to a changing interest rate environment.

The higher interest rate environment at the end of 2018 and the beginning of 2019 slowed the refinance rates. However, in the first quarter more borrower side financing for new farm purchases or investments and capital improvement projects, while at the same time unscheduled loan prepayments slowed to their lowest levels in 15 years.

Farmer Mac has spurred innovation as well, the adoption of an agricultural lending space through a new credit evaluation tool, we call Ag Express. This tool reduces average loan processing time on qualified credits by 40% delivering a faster and more consistent credit experience, while maintaining our time tested credit standards.

Finally, Ag and rural lenders across the country are adapting to the new economic landscape and increasing access to capital both on and off the farm. For example, the median loan to deposit ratio for agricultural banks has increased from a low 62% in 2013 to over 78% in the fourth quarter of 2018.

This increase in capital deployment demonstrates the need for and the importance of rural lenders in the face of market and credit uncertainty.

In an environment of heightened uncertainty, Farmer Mac has been able to be a reliable presence in the agriculture of rural utility lending space by adhering to a philosophy of consistent, conservative and pragmatic lending.

Farmer Mac does not have a history of chasing up trending market sectors in good times, or running away from down trending markets in lean times. Our policies remain consistent and that consistency tempers credit cycles from wild swings, up or down. Farmer Mac takes a pragmatic approach to our business.

We believe that if you plan to be a partner in rural finance during the good times, you'd better plan to be here during the tough times. Farmers and ranchers and rural America expect it and they deserve it.

Farmer Mac has a long history of serving rural America through all economic conditions, and so our phones are on, our doors are open and our hearts and minds are ready to serve. Brad, I return back to you..

Thank you, Curt. Dale, you want to go through the financial results..

Sure. Thanks, Brad. Turning to first quarter 2019 results, as you can see on Slide 5, our outstanding business volume increased by a net $782 million to $20.5 billion as of March 31, 2019. This increase is driven by net growth of $483 million in our Rural Utilities and $349 million in the Institutional Credit lines of business.

This net growth was offset in part by net recent decreases of $31 million and $18 million respectively in the USDA guaranteed securities in the farm and ranch lines of business. The net growth in our Rural Utilities line of business is primarily due to the large purchase of a large pool of loan participations.

As we mentioned on last quarter's call, Farmer Mac entered into a master participation agreement with CoBank, under which we purchased a portfolio of participations of seasoned rural utilities loans in the amount of $546 million.

This transaction settled on February 19 and thus contributed less than a half a quarter's worth of net effective spreads this period.

Within the Institutional Credit line of business, we experienced net business volume growth in augmented securities purchased from large counterparties of $334 million and net growth purchased from smaller financial fund counterparties of $15 million.

The net growth from our large counterparties is driven by the purchase of a new $325 million AgVantage security in the rural utilities industry. Because of purchase of this security settled on February 15, it contributed approximately half a quarter's worth of net effective spread in this period.

Looking at Farm & Ranch, our Farm and Ranch line of business experienced a net decrease of $18 million, which is comprised of a $41 million net decrease in loans under purchase commitment, which is our credit protection product, partially offset by a $23 million net increase in our outstanding loan purchase volume.

Based on our analysis of bank and FCS call report data, there was a decline in the growth rate of the overall agricultural mortgage market in 2018.

Nevertheless, we believe that our net growth of 7.9% in our Farm & Ranch loan purchases over the 12 months ended March 31, 2019 does compare favorably to the 4.7% net growth of the overall market for the twelve months ended year-end 2018.

Although our gross purchase volume slowed during first quarter 2019, our prepayments in the quarter are among the lowest we've ever experienced leaving our net growth at favorable rates.

Turning to our USDA Guarantees line of business, we experienced a net decrease of $31 million in the first quarter 2019, as compared to net growth of $40 million in the year ago quarter. This decrease reflects the impact of the government shutdown during January and increased loan approvals in general by the USDA.

I am turning to our financials on Slide 6. Farmer Mac net effective spread for first quarter 2019 was $39 million, a 5% increase from the $37 million in first quarter of 2018. The improvement was primarily due to growth in outstanding business volume, which increased net effective spread by about $2 million.

In percentage terms, net effective spread for first quarter was 0.89%, which decreased 2 basis points as compared to the first quarter last year. This is primarily due to an increase in our LIBOR-based funding costs.

Turning now to core earnings that Slide 7 shows, our core earnings for first quarter of 2019 were $22.2 million or $2.06 per diluted common share, as compared to $21.8 million or $2.03 per share in first quarter 2018.

A $400,000 a year-over-year increase in core earnings is primarily due to $1.3 million after tax increase and net effective spread, and again that was driven by a growth in business line. This increase was offset in part by a $1 million after tax increase in operating expenses.

Increase in operating expenses is primarily due to increased headcount and continued investment in technology and business infrastructure in order to increase capacity and efficiency, which Brad referred to in his opening comments.

Farmer Mac continues to expand its investments in human capital, technology and business infrastructure to increase its capacity and efficiency, and it seeks to accommodate its growth opportunities and achieve this long term strategic objectives.

Specifically Farmer Mac believes that aggregate operating expenses, compensation employee benefits, general & administrative expenses and regulatory fees will increase in aggregate by approximately 8% to 9% in 2019 relatively to 2018. This was the same guidance we provided last quarter as well.

This level of cost increase will be dependent upon the execution of various growth and strategic initiatives. Turning now to credit, the overall credit quality as of March 31st, 2019 declined only modestly as compared to year-end 2018.

Our 90-day delinquencies and substandard assets, each increased both in dollars and as a percentage of the Farm & Ranch portfolio as compared to year-end 2018. However, Farmer Mac's 90-day delinquency rate in substandard rate, each remained favorable and below Farmer Mac's historical averages.

We had a release from a loss allowance in the amount of $400,000 this quarter, as the decline in Farm & Ranch outstanding business volume and the migration of $25 million in loans to the individually evaluated specific reserve, serve to reduce the total allowance for this period.

In first quarter 2018, we also had a release from our loan loss allowance in the amount of $400,000. Regarding delinquencies, 90-day delinquencies increased to $52 million or 0.73% of the Farm & Ranch portfolio in first quarter of 2019, compared to $27 million or 0.37% as of year-end 2018 and $48 million or 0.69% in the year ago quarter.

Farmer Mac's 90-day delinquencies have historically fluctuated from quarter to quarter, both in dollars and as a percent of the Farm & Ranch portfolio with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarters of each year.

This is a result of the January and July payment terms for most of our Farm & Ranch loans. As of first quarter 2019, Farmer Mac's substandard assets were $247 million or 3.4% of the portfolio compared to $233 million or 3.2% of the Farm & Ranch portfolio at year-end 2018, and $221 million or 3.2% in the year ago quarter.

Farmer Mac's 90-day delinquencies and substandard rates during first quarter '19 each remained well below Farmer Mac's historical averages of 1% and 4% respectively. Turning to capital on Slide 9; Farmer Mac's $742 million of core capital as of March 31st, 2019 exceeded our statutory minimum requirement of $573 million – $569 million or roughly 29%.

This compares to the core capital of $728 million or $183 million of capital above the minimum as of year-end 2018. Our Tier-1 ratio was 13.2% this quarter, compared to 13.4% as of year-end. The modest decline was due to growth in business volume in first quarter.

The increase in dollars of our core capital this period was due to an increase in retained earnings. More complete information for Farmer Mac's first quarter 2019 is in the 10-Q we filed with the SEC today. And with that I'll turn it back to you, Brad..

First of all, Farmer Mac is in very strong financial condition, with excellent credit quality, exceptional access to competitively cost funding, strong earnings, disciplined cost management and a strong capital base. Second point is that we have an extremely dedicated group of employees.

They're smart, they're capable, they're mission driven and they're eager. And with some of the changes that are currently under way, some of the personnel changes that are being made, we're seeing further excitement and passion and creativity to do even more.

Third is that our suite of products have inherent competitive advantages, and those advantages are attributable to our competitively cost funding and our efficient delivery. I just note that we're currently running about a $20 billion balance sheet and about $5 billion of annual originations, and we're doing that with about 100 employees.

And because we have the plan and the commitment to improve how we utilize technology, we have potential for further improvement in that operating efficiency. I believe that we have an opportunity to drive organic growth at rates well ahead of the general agricultural credit markets.

We can increase market share, and by doing that we better fulfill our mission of serving rural America. This is an entirely exciting time for Farmer Mac. It's an exciting time for me. And now, operator, I'd like to see if we have any questions from many on the line today..

Thank you, sir. We will now begin the question and answer session. [Operator Instructions] The first question is from Mr. Scott Valentin of Compass Point. Please go ahead..

Thanks, operator. Good morning, everyone. Thanks for taking my question. Dale, Just with regard to the spread, I know it's in the range. You talk about it historically, but did drop linked quarter, and I didn't know if it was either due to the timing of the participations or whether it was – I think you mentioned LIBOR as going – driving part of that.

But LIBOR curve has kind of come down a little bit and if there's some offsetting, maybe some positive impacts going forward given changes in LIBOR – the LIBOR futures curve?.

Scott, I think it's – the biggest single impact really is our financing costs relative to LIBOR IV, here we call sort of our basis risk asset, the assets that we have to refinance the funding for on a regular basis. And as you know, all financials are seeing this pressure. The swap curve relative to the sovereign curve has been under pressure.

In particular, the last four months has been – probably it's been – that the most unfavorable it's been in three or four years. We make some adjustments to that. We can optimize it, and mute the impact, but over half of that 2 basis point change for – sequentially was due to the LIBOR impact.

It started to come back a bit, and we think we have a – that our outlook here for the next period of time, next number of months, say, three – two to four months in that window. We're little bit optimistic that we're going to see some of these pressures ameliorating less Treasury issuance et cetera, et cetera.

We need repos to kind of normalize and see before [ph] it's normalizes here a little bit, that'll come off. But look, strategically we're kind of in that spread range that we've been talking about for quite a bit, being kind of locked between 89 and 91-ish.

That's where we've been and other than some erratic [ph] move in business mix, I – even it feels pretty stable in those – in that range..

Okay. That's helpful. I appreciate it. And then, Brad, you mentioned long-term market share goals requires a doubling of volume.

Is there a kind of time frame associated, are we making investments now to – you're adding staff and improving processes, but is there – is that a goal to double volumes in next, call it, couple of years or is it a matter of quarters do you think?.

If you look out at strategic plan, Scott, we have kind of framework reference of five years and 15 years. And so you see growth rates in the 9%, 10%, 11% range, ramping up a little bit in out years. And so that's a general reference to a general higher level of volume attainment of doubling, that would be achieved in that period of time..

Okay. Thanks. And then and regarding that the pipeline, obviously a very good quarter for originations and you had a good quarter. Two questions regarding that. One on the pipeline, how's that look relative to, say, same time last year? Is it in line, is it much higher? And two, you point out prepayments slowed quite a bit.

Do you think that's durable or is that transitory?.

Now, on your last point, prepayments have been historically at the lowest end of the range for a long time now, but they continue to grind a little bit tighter each year. We're looking at plus or minus CPRs around 5 right now. I'd say two years ago, we had CPRs of maybe 7.5 to 8.5. So with ground a bit tighter, but still 7.5 and 8.5 are pretty low.

So as far as pipeline [indiscernible]..

Sure. Scott, as relates to pipeline, it can kind of break apart and come in on some of the different lines of business we have. Curt talked about some of the factors going on in the countryside right now that are impacting this. I think our near-term outlook for Farm & Ranch is pretty flat as it has been last year.

There are fewer refinances for the reasons Dale mentioned. Some of those related to interest rates and changes or lack of changes in interest rates. But Farm & Ranch fairly flat. I think our rural utility outlook with the exception of a potential new area of projects announced is also fairly flat.

But our institutional business, where we have an opportunity for more innovation around structured product and with various types of agro businesses the pipeline there is actually deeper than it's ever been..

Thanks for that. And I'll ask one more – a final question. On credit, you mentioned, it's still below historical levels. It's crept up, I know there's some seasonality involved, so it's tough to tease out seasonality from any real deterioration.

But just wondering on credit, two things; one, how important is NAFTA, USMCA getting that executed and getting that passed for the farm economy.

And if it does pass, do you see a material benefits to credit quality? And two, are you making any changes in kind of targeting asset classes or agricultural products based on what you see in agricultural economy, maybe less, and less dairy and more fruit and nut, as an example?.

I'll let Curt elaborate on this. But I think as it relates to targeting sectors, we really look at everything that is coming in through important Farm & Ranch and Institutional business, and we evaluate those credit opportunities based on our current assessment of market conditions and what that means for cash flow.

But Curt?.

Yeah. I would just say in terms of as it relates to our pipeline, but also relates to the segments we've looked at. We talked around here a lot that we still see really good deals in tough industries.

In the last year and even in the first quarter of 2019, just as an example, Gary has probably been under the most pressure of any commodity out there as it relates to trade issues. But in that regard, there's still principally a number of really good operators and deals and we've had an opportunity to purchase or be a part of.

And they are very, very solid credit. But I guess, to finish this is to say, yeah, all these trade issues are a drag. They are a drag on the farm economy. I don't think anybody can argue that. Some of them might just be emotional, more than it is economic. But it is definitely a drag.

And so these trade issues, that the NAFTA get signed off and we reengage China, it's going to be a, I think, in many respects a boon for the dairy sector and for, meaning the fruit and vegetable sectors, and also for the grain sector and hog sector for that matter..

Okay. Thanks very much for the color..

Thanks, Scott..

[Operator instructions] Gentlemen, this concludes our Q&A session. I'd like to turn the conference back over to Mr. Nordholm for any closing remarks..

Good, well, I'd like to conclude by just thanking everyone for listening and participating in our call this morning. We will be having our next regularly scheduled call to discuss second quarter results in August of 2019, and look forward to sharing additional information with you at that time.

As is always the case, if you have questions that you'd like to discuss with us, don't hesitate to be in touch. With that thank you very much and good day..

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect..