Federal Agricultural Mortgage Corporation (AGM) Earnings Call Transcript

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farmer Mac Third Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Eric Esty, Director of Capital Markets. Please go ahead.

Good afternoon, and thank you for joining us for our third quarter 2026 earnings conference call. I'm Eric Esty, Director of Capital Markets 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 performance and prospects. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. All forward-looking statements are based on information available to Farmer Mac as of today's date, and Farmer Mac assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Please refer to Farmer Mac's 2025 annual report on Form 10-K 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 company's most recent press release posted on Farmer Mac's website. Joining me today are our President and Chief Executive Officer, Zach Carpenter, and our Executive Vice President and Chief Financial Officer, Matt Pullins. At this time, I'll turn the call over to our Chief Executive Officer, Zach Carpenter. Zach?

Thank you, Eric, and good afternoon, everyone. Thank you for joining us today. I'm pleased to report that Farmer Mac delivered another extremely strong quarter. Total business volume achieved another record, reaching $38.5 billion as of the end of the third quarter of 2026. In addition, our third quarter financial results were record performance for the first nine months of 2026 with $357.9 million in revenues and $163.1 million in core earnings, which is an increase of 18.3% and 14.1% respectively from the same period of 2025. These record results were powered by broad-based business volume growth and reflect the strength of our mission-driven franchise, diversified business segments, and the disciplined execution of our strategy across every part of the business. Notably, this performance was achieved against the backdrop of an increasingly dynamic, uncertain, and in many cases, more challenging environment. Farmer Mac's ability to successfully navigate these crosscurrents is a testament to our team and the strength of our market position. Farmer Mac continues to be a critical part of the financial ecosystem through providing liquidity in support of agriculture and rural infrastructure. As we execute our strategy, which we outlined at our 2026 Investor Day, we are on track to achieve $40 billion in business volume this year, reaching a key milestone two years ahead of the timeline outlined during our 2026 Investor Day. We continue to expect business volume growth to average approximately 8% to 11% annually through 2030, reflecting balanced expansion across our mission-focused businesses. Our strong performance to date has us tracking ahead of the pace required to achieve our 2030 guidance and positions us favorably relative to our previously communicated targets. While business volume growth remains an important measure of mission fulfillment and a key strategic priority, our ultimate objective is to generate sustainable earnings growth that strengthens our ability to support rural America and deliver long-term value for our stakeholders. Accordingly, we remain focused on expense management, achieving operating leverage while making targeted investments to support efficient execution. This quarter, we continue to execute on those priorities, delivering strong growth, maintaining an efficiency ratio below 30% target, and providing $2.7 billion of liquidity to critical sectors of the American economy. Outstanding business volume increased $1.3 billion in the third quarter of 2026, after taking into account all new business volume as well as maturities, sales, and paydowns on existing assets. This third quarter business volume increase was powered by broad-based growth led by our infrastructure finance line of business, where net outstanding business volume grew $920 million. This was driven by record quarterly net business volume growth in our renewable energy segment, where loan purchases and unfunded commitments grew 19.5% sequentially and contributed to over 45% of the increase in total net outstanding business volume in the quarter. We continue to see strong opportunities across our entire infrastructure finance portfolio, driven by a once-in-a-generation investment in data center infrastructure, cloud storage and enterprise digitization, as well as increased onshore manufacturing, leading to significant energy generation capacity demand, in addition to ongoing grid modernization and upgrades. The scale and velocity of capital needed to support these demands are driving infrastructure growth tailwinds. We see comparable tailwinds in agricultural finance as financial institutions adapt to changing market conditions, balance sheet priorities, and risk management objectives leading to a shifting competitive landscape. We believe these evolving dynamics reinforce the value of Farmer Mac's role in serving as a secondary market to rural America and position us for continued growth. Turning to our agricultural finance line of business, loan purchase activity in our farm and ranch segment had a strong quarter in what is typically a seasonally slower quarter for volume growth, sustaining the elevated pace that began in the fourth quarter of 2025 and continued through the first three quarters of 2026. This growth was aided by the first full quarter of Farmer Mac Loan Exchange, or FLEX, which makes it significantly easier for originators to submit loans to our ecosystem. We approved almost $700 million in loans during the third quarter of 2026, a record in loan approvals for any third quarter in our history. We saw net growth in loan purchases of $228 million during the quarter, outpacing the seasonally large number of loan repayments we typically see in the third quarter due to the July 1 payment date. We continue to operate at an elevated pace for new business volume and expect loan purchase growth to continue as lenders seek liquidity, driven by the need to diversify from high-cost deposits amid strong loan growth, a focus on capital efficiency and returns, and ongoing volatility that many sectors of the agricultural economy are experiencing. This quarter's growth in farm and ranch also benefited from an acquisition of fee servicing rights associated with $1.4 billion of loans completed in July. The Corporate Ag Finance segment grew modestly again this quarter to $2.14 billion in outstanding business volume. While deal flow activity in the broader agribusiness market was relatively muted during the first nine months of 2026, we have seen a sizable pickup in transactions heading into the fourth quarter of 2026. Two key themes have emerged driving this increase. First, transaction sizes are getting larger as agribusinesses look to enhance scale and navigate macro volatility, requiring incremental liquidity. Second, financial institutions continue to evaluate concentration levels and return on capital dynamics within the broader agribusiness sectors. In certain instances, this evaluation has resulted in decisions to reduce exposure or exit transactions entirely. The combination of these factors results in the need for incremental liquidity to support critical agribusinesses and more financial institutions are turning to Farmer Mac for reliable and consistent liquidity needed to support their borrowers. Turning to our infrastructure finance line of business, outstanding business volume increased $920 million sequentially to over $14 billion as of quarter end, with all three segments contributing to net growth. This is a continuation of similar themes we have seen over the last year, specifically the strong interest and investment in data center construction, broadband expansion, and the construction and completion of renewable energy projects, reflecting the overall need for significant energy generation and transmission capacity in rural America. Net business volume growth in our power utility segment this quarter was $165 million, driven by strong net loan purchases of $208 million or an increase of 5.2% from the prior quarter. Excluding the $197 million pool purchase in the second quarter of 2026, net growth in power and utilities loan purchases accelerated to over 70% compared to net growth last quarter. We continue to see a steady demand for capital in this segment as borrowers invest in system upgrades and grid modernization to support the significant increase in electrification demand as well as lenders managing their balance sheets. During the quarter, we provided over $1 billion in gross renewable energy loan purchases and unfunded commitments, and after scheduled maturities and repayments grew $586 million. This was the largest quarterly growth in net business volume in our history for this segment, surpassing the prior record by over $140 million. We expect a substantial need for new power generation to continue to drive renewable energy project demand, more than offsetting the natural runoff from a maturing portfolio. Current deal flow remains robust, with our pipeline approaching $1 billion, underscoring the strength of our reputation and role in the market and allowing us to selectively deploy capital focused on appropriate returns and structures with strong counterparties. While the industry continues to adjust to the H.R. 1 phase-out of tax credits beyond 2027, as well as supply chain dynamics, we expect increased demand for energy generation to position the industry for continued growth. Even excluding tax incentives, the underlying economics of these renewable energy projects remain highly competitive, particularly with speed to market, as renewable energy project development timelines are often shorter compared to traditional power sources. Broadband infrastructure also posted another strong quarter with net growth of $169 million, ending the period at just over $2 billion in business volume. While data center project investments continue to see strong demand, we have also focused on diversified business volume growth, providing liquidity to appropriately structure transactions supporting fiber, broadband, and tower projects that enhance critical digital infrastructure for rural communities. While the segment's growth has been substantial, our approach remains grounded in a close reading of market dynamics, and that discipline informs every decision we make. As the portfolio matures, we have intensified our portfolio management efforts, deliberately diversifying by geography, sub-segment, sponsor, and tenant, and pursuing a mix of funded financing structures so that the portfolio remains diversified and resilient should market conditions become less favorable. Through the first nine months of 2026, we generated $10.5 billion in gross business volume supporting lenders and borrowers across rural America, exceeding the gross business volume generated in any annual period in Farmer Mac's history. That number best captures our mission in action, broadening access to competitive financing for American agriculture and rural communities. Backed by a robust pipeline across all segments and a strong capital position, we enter the final quarter of this year and look to 2027 with a disciplined execution that produces durable, high-quality earnings and a runway to continue growing. We continue to remain mindful of the macroeconomic backdrop, including uncertainty around interest rates, trade and government policy, regulatory change, and geopolitical dynamics. A diversified portfolio that supports critical sectors of the U.S. economy, strong capital and liquidity position, disciplined underwriting, and a focus on expense management, all taken together give us great confidence that we can keep delivering consistent and durable results. However these backdrop dynamics play out, we believe Farmer Mac is uniquely well positioned to navigate the environment and continue to deliver on our mission. With that, I'd like to turn it over to Matt Pollins, our Executive Vice President and Chief Financial Officer, to review our financial results in more detail. Matt?

Thank you, Zach. As Zach noted, we delivered another outstanding quarter, highlighted by achieving $38.5 billion in outstanding business volume. Revenue for the quarter was $122.7 million, which we converted into $52.6 million of core earnings, or $4.82 per diluted share. With that overview, I will now walk through our quarterly results in more detail and discuss the key drivers of our performance. Net effective spread was $113.9 million in the third quarter of 2026, a 16% increase over the prior year period. After adjusting second quarter 2026 net effective spread for the one-time collection of $7.4 million of interest from a large delinquent permanent planting loan, third quarter net effective spread increased 3.5% sequentially. The year-over-year growth was driven by achieving record business volume across all segments. On a percentage basis, net effective spread for the third quarter of 2026 was 116 basis points. This compares to 120 basis points in the year-ago period and an adjusted 118 basis points sequentially, which excludes the previously mentioned one-time benefit from the collection of interest. The 2-basis-point sequential decline, as adjusted, primarily reflects the impact of seasonally higher non-accruing loans in the farm and ranch segment, as well as business volume mix with higher AgVantage average balances during the quarter. This quarter's results also benefited from the previously mentioned acquisition of mortgage servicing rights associated with $1.4 billion of farm and ranch loans, which included $280 million in new loan service for others. Our net effective spread performance continues to demonstrate the strength of our funding strategy and balance sheet. As market volatility and credit spreads increase, our reliable capital markets access, strong liquidity, and limited interest rate sensitivity become increasingly differentiated. Historically, these volatile environments have had a less pronounced impact on Farmer Mac compared to many other market participants. As funding becomes more expensive or less available elsewhere, our ability to consistently provide liquidity further enhances the value proposition we deliver to the market, creating opportunities to deepen customer relationships, capture attractive new business, and achieve favorable economics on new transactions while maintaining our risk standards. While we remain well positioned on funding costs and liquidity, providing significant flexibility to support our customers, capitalize on opportunities, drive long-term growth, and enhance profitability. Operating expenses declined $1.5 million, or 4.2%, on a sequential basis, as expected, due to lower incentive compensation expenses this quarter, as the second quarter results included a one-time $4 million true-up of performance-based incentive compensation. We expect full-year compensation expense to be at the low end of our previously guided range of 20% to 22% year-over-year increase from 2025. Our strong operating performance resulted in an efficiency ratio of 27.5% for the quarter, below our long-term target of 30%. We continue to anticipate full-year operating efficiency ratio in the 27% to 29% range. During the third quarter of 2026, we were minimally active in the tax credit market. We continue to view tax credits as an attractive source of risk-adjusted returns and a mission-aligned investment that supports renewable energy, infrastructure development, and job creation in rural communities. With nearly all of our carryback capacity utilized, we have greater flexibility to monetize tax capacity on a current year basis and remain engaged with a strong pipeline of opportunities. We expect future purchases to be selective and executed at opportune times, reflecting a disciplined assessment of tax capacity, capital priorities, valuation, and market conditions. Turning to third quarter credit and asset quality results, the $11.1 million provision for credit losses was driven primarily by three factors: approximately $5 million or 45% of the total provision related to reserves established on new loan purchase volume during the quarter, reflecting robust growth in our infrastructure finance line of business. In addition, we recorded a $4.4 million provision on a telecommunications sector exposure within our broadband infrastructure segment. Credit had been deteriorating over time and was previously placed on non-accrual status with approximately $5.2 million of credit loss provisions previously recognized, primarily in the fourth quarter of 2025. The borrower subsequently filed for bankruptcy after liquidity challenges related to an unsuccessful fiber network build-out intensified. The remaining provision primarily reflected the impact of modest credit migration within the broader portfolio. We continue to actively manage our portfolios through a disciplined risk management framework that incorporates ongoing monitoring of borrower performance, collateral values, industry conditions, and broader economic developments. As conditions evolve, we regularly reassess expected credit outcomes and adjust reserves as appropriate to reflect our current view of risk. This approach has been a long-standing component of our portfolio management strategy and supports the overall quality, resilience, and diversification of the portfolio across market cycles. Allowance for loan credit losses was $48.3 million as of September 30, 2026, reflecting a $1.2 million increase from the second quarter of 2026 and a $13 million increase from the same year-ago period. The sequential modest increase primarily reflects the cumulative impact of portfolio growth, which was the largest component of the increase along with select credit migration, partially offset by an $8.2 million charge-off on the previously mentioned single exposure within the telecommunications sector. As of quarter end, the allowance for credit losses represented 16.8% of non-accrual loans, compared with 19.6% as of June 30, 2026, and 13.9% as of the year-ago period. 90-day delinquencies were 54 basis points at quarter end, up 17 basis points from the second quarter of 2026, and down 3 basis points from the year-ago period. The quarter-over-quarter increase was generally in line with historical seasonal patterns, particularly within our farm and ranch portfolio following the July 1 payment date. While delinquency levels can fluctuate during the annual payment cycle, overall portfolio performance remains stable, with delinquency metrics continuing to compare favorably to the prior year. Total substandard assets as a percentage of our entire portfolio were 2.1% this quarter, a deterioration from 1.7% as of June 30, 2026, primarily reflecting negative credit migration within the farm and ranch segment related to certain commodity and region-specific factors. Turning to capital, Farmer Mac's core capital increased by $38 million during the third quarter of 2026 to over $1.9 billion, driven by continued earnings generation net of $17 million in dividends to common shareholders. As a result, core capital exceeded our statutory minimum requirement by $735 million, or 62%, at quarter end, an increase from the prior quarter. While strong business volume growth is increasing the need for capital, we remain committed to returning capital through our dividend to common shareholders. Our Tier 1 capital ratio was 12.9% as of September 30, 2026, compared to 13.2% at June 30, 2026. The quarter-over-quarter decline primarily reflected strong business volume growth as risk-weighted assets increased faster than capital, driven by robust customer demand and our ability to effectively deploy capital in support of our mission. Importantly, retained earnings growth contributed approximately 25 basis points to the Tier 1 capital ratio during the quarter. We believe our capital position remains a key strategic advantage, providing flexibility to support increasing customer demand for liquidity while maintaining a disciplined approach to capital allocation and risk management. Last quarter, I discussed our plans to incorporate risk transfer solutions as a complementary source of capital capacity at Farmer Mac, which we view as a natural extension of the successful farm securitization initiatives we developed over the past several years. Building on that foundation, we continue to view risk transfer as a strategic and increasingly important component of our capital and credit risk management framework. We are actively advancing multiple risk transfer initiatives, including a credit-linked note transaction, which we believe can serve as a flexible tool to support growth, manage credit risk, and improve capital efficiency. More broadly, these tools can strengthen our ability to create secondary market liquidity, expand our support of rural America, and potentially enhance shareholder returns over time, while reinforcing Farmer Mac's role as a critical link between investor capital and the agricultural and rural infrastructure markets we serve. We believe we may have the opportunity to execute the first transaction in the next generation of Farmer Mac's risk transfer solutions as early as this quarter. This would mark an important milestone in expanding our risk transfer capabilities and further integrating these tools into our capital and risk management strategy. Over time, we believe these risk transfer solutions can enhance our ability to support customer growth, manage risk, and deploy capital efficiently across market cycles. We will remain disciplined, pursuing opportunities only where transaction economics, risk management objectives, and strategic priorities are aligned. In closing, this quarter's strong performance highlights the strength of our franchise and the successful execution of our strategy. As we continue to grow, we remain focused on expanding our mission, prudently deploying capital, and delivering sustainable earnings growth and long-term value for shareholders. As always, you can read more about our performance and strategy in our latest earnings release and in our Form 10-Q for the quarter, which we expect to file by November 9. Now, I would like to turn the call back over to Zach.

Thank you, Matt. We are extremely proud of our continued focus on providing liquidity to support American agriculture and rural communities. We are also excited about the opportunities ahead as we finish 2026 and look forward to 2027. As our leadership team completes its first full quarter together, we remain focused on our mission, delivering on the strategy we outlined at our Investor Day earlier this year and the opportunities ahead. We are focused on innovation and investing in our people and technology so we can deliver the capital and services our customers need to strengthen rural America. The strong growth across our portfolios reinforces our confidence in the opportunities ahead. We will continue to pursue those opportunities thoughtfully and responsibly. Before we turn to Q&A, I do want to thank our employees for their dedication to our mission, our customers for their partnership, and our shareholders for their continued confidence in Farmer Mac. Operator, I'd like to see if we have any questions from anyone on the line today.

[Operator Instructions] Your first question comes from the line of Bose George with KBW. Please go ahead.

The first question is just on your expectation for spreads. Is the 3Q number sort of a good run rate to look at as we look out into 2027?

You know, going line of business by line of business here, Bose, I would say in broadband, renewable energy, and corporate ag, the historical guidance we've given is relevant and maintainable. As we look at farm and ranch, as we've talked about in the past, clearly mix plays a component here. We had sizable AgVantage transactions in the fourth quarter and the second quarter of 2026. And clearly those are extremely strong returning transactions, but also have a lower NIM percentage. So that weight in the portfolio will drive that down. And again, as Matt noted, this quarter was impacted by seasonal non-accrual activity in farm and ranch. So I wouldn't necessarily use this quarter as a consistent bellwether for NES percentage going forward. Again, we target around that 115 to 120 basis points, but overall our focus is on double-digit revenue growth. We think that is the appropriate metric as we look out into the future on how we can drive higher revenue to drive shareholder value.

Okay, great. Thanks. Actually, on the new risk-sharing transactions that you'll start potentially later this year, if you roll forward a couple of years, could that be a reasonably meaningful part of how you fund your balance sheet? And looking at some other industries, they also get capital relief for that in terms of regulatory capital. Is that part of the mix as well?

Yes, both sides. This is Matt. Thanks for the question. So as we look out into the future, our objective is to have a broad array of tools available to support and capitalize our business. And a critical component of that tool set are actually multiple risk transfer options that we're currently evaluating. With respect to your question about how we foresee the future, yes, we definitely see risk transfer playing a more prominent role in our capitalization of the business or using those tools to create capital capacity, which enables us to scale up the business and increase the amount of liquidity we're able to offer to the agricultural and rural infrastructure markets. Our strategy and plan is to take a programmatic approach to issuing risk transfer transactions, and ideally, over time, get into that being somewhat serial in nature, where we are commonly coming to market with tools like credit-linked notes.

Okay, great. Thanks. Actually, just on the regulatory discussion with regulators on capital relief related to that, is that part of the mix as well?

Yes, so there's a two-pronged objective for our risk transfer strategy. The first is maybe a little more directly evident, and that is to aid in our credit risk management framework. The second objective is very much in terms of capital relief and capital capacity, and that would relate to the regulatory capital framework and how it treats the risk that remains on the balance sheet after the credit risk transfer transaction. And so we are actively engaged with our regulator, the Farm Credit Administration, in discussions about the specific regulatory capital framework and regulatory capital relief that would be received through these risk transfer transactions. And that's something that I would anticipate that we would have more information to share in the coming quarters as to the specifics of, as these transactions come to bear, how they are impacting our regulatory capital levels.

Okay, great. Thanks.

Your next question comes from the line of Bill Ryan with Seaport Research Partners. Please go ahead.

First question is on broadband and more specifically, the data centers given what's going on in the market today. Broadband in total, I believe, is about 5% of outstanding, and I believe data center is probably about 3% to 3.5% of the total. So you're kind of a small fish in a very big pond, but unfortunately, the stock does tend to trade with the exposure at times. If you could maybe go through for investors the 4 or 5 attributes of the loans in the portfolio that do minimize the risk? Have you seen any major project delays? And what kind of risks do you see as these credits move out of the construction phase, which I believe most of them are in right now?

Hi, Bill. It's definitely something in the news post the election results. Just to take a step back as we think about our data center portfolio, I think it really comes down to how we frame the risk component of these transactions. And as we've talked about for many quarters now, we've been very methodical and very specific in terms of the risks that we look at, specifically power in place, permitting completed, appropriate developers, appropriate sponsors, investment-grade hyperscaler tenants. We don't consider underwriting transactions unless all of that is in place. And frankly, that's our focus on being at the lower end of the risk spectrum in terms of this entire ecosystem. So we feel very good about what we're underwriting, the transactions that we're participating in, and if anything deviates from our credit quality, it's not something we need to participate in, just given the general growth we have across our portfolios. As it pertains to our overall portfolio, they're all in construction at this point. We're actively monitoring them. Approximately 3/4 of the entire portfolio are on track or near completion. There is a portion that clearly we're monitoring, and these are just typical delays. There's nothing significant that we've noticed that will give us concern in terms of what's transpired in the market or a lack of completion. Going forward, I actually think what's transpiring is, frankly, credit positive for our portfolio. The data centers completed or nearing completion are going to be more valuable. Clearly, you're going to see capital divert to more friendly states where data centers can be built. This is probably more of a 2028 dynamic. But as we look out to 2027, we will see the significant amount of our unfunded commitments start funding as these near completion. Overall, we're going to continue to monitor the real-time developments and focus on the potentially right transactions that support rural communities and most importantly fit our credit risk standards.

Okay, thanks for the detailed answer on that. And just a follow-up, looking at the operating leverage, you had very good performance for several quarters. This quarter, you had like 17% revenue growth and the OpEx was up about 16%. Looks like there was a step up in G&A, which kind of drove that disparity, if you will. If you can maybe talk, is there anything specific in G&A this quarter, and then how are you viewing the operating leverage long-term?