Federal Agricultural Mortgage - Earnings Call - Q1 2025

Executive Summary

• Record quarter on core metrics: core earnings $46.0m ($4.19 diluted core EPS), net effective spread (NES) $90.0m (1.17%), and “total revenues” (core composition) $96.8m; core ROE 17% and efficiency ratio 29%.
• Versus S&P Global consensus: EPS beat and revenue miss — EPS $4.19 vs $4.06 (beat +$0.13), “Revenue” $91.10m vs $94.33m (miss -$3.23m); management emphasized NES expansion from higher average balances, lower nonaccruals, and opportunistic funding.
• Business mix pivot continues: Infrastructure Finance outstanding volume +$743m Q/Q (to $9.77b) led by Power & Utilities, Broadband (+22% since YE) and Renewable Energy (+$200m; +14%).
• Balance sheet/capital remain a support: Tier 1 capital ratio 13.9%, core capital 65% above statutory minimum; 289 days of liquidity; near‑term FARM securitization (subsequently closed $300.1m deal on 6/11) as additional catalyst.

What Went Well and What Went Wrong

• What Went Well

  • “Record quarterly revenue, net effective spread and core earnings” with NES up to $90.0m (1.17%) and core earnings to $46.0m; efficiency ratio 29% and core ROE 17%.
  • Infrastructure Finance momentum: Broadband Infrastructure outstanding volume +22% since year‑end to nearly $1.0b; Renewable Energy +~$200m (+14%); Power & Utilities added $134m net loan purchases and closed a $300m AgVantage security.
  • Funding execution: “Funding improved quite dramatically from Q4 to Q1” by “buying into narrowing SOFR spreads,” helping NES and allowing Farmer Mac to sit out volatility in Q2 as needed.

• What Went Wrong

  • GAAP results softer YoY and sequentially: net income to common $44.0m vs $47.0m YoY and $50.8m in Q4; GAAP diluted EPS $4.01 vs $4.28 YoY and $4.63 in Q4.
  • Non‑interest income fell YoY ($3.38m vs $7.31m) largely on derivatives marks; OpEx +8% YoY given tech investments, licensing and servicing costs.
  • 90‑day delinquencies rose to 54 bps from 37 bps in Q4 (seasonal), and management is monitoring tariff risk to ag exporters with pockets of stress in California permanent crops (almonds/pistachios).

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Farmer Mac 2025 earnings results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 8th, 2025. I would now like to turn the conference over to Jalpa Nazareth. Please go ahead.

Jalpa Nazareth (Senior Director of Investor Relations and Finance Strategy)

Good morning, and thank you for joining us for our first quarter 2025 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 2024 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 10Q 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 morning is our President and Chief Executive Officer, 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.

Brad Nordholm (President and CEO)

Thanks, Jalpa. Good morning, everyone, and thank you for joining us. I'm very pleased to share that we've achieved another outstanding quarter with record quarterly revenue, net effective spread, and core earnings. Our capital base remains strong, bolstered by strong earnings, disciplined asset liability management, and consistent access to the capital markets. These strengths support our long-term strategic growth objectives and provide a buffer against market volatility and shifting credit conditions. These results underscore the robustness of our business model and the effectiveness of our strategic initiatives of mission-based profitable growth. We continue to fulfill our mission to rural America even as we navigate broader market uncertainties stemming from interest rates, regulatory shifts, policy changes, and government action. In the first quarter of 2025, we achieved high single-digit growth in total revenue, net effective spread, and core earnings.

We achieved $1.8 billion in gross new business volume during the first quarter, reflecting growth across the infrastructure finance line of business and healthy loan purchase volume in the farm and ranch and corporate ag finance segments. After repayments and maturities, our outstanding business volume grew by $232 million, ending the quarter at $29.8 billion. This growth highlights the benefits of our proactive strategy to diversify our portfolio and create opportunities in all interest rate environments. The infrastructure finance line of business grew by approximately $750 million in the first quarter of 2025, continuing the strong growth momentum from 2024. During the quarter, we successfully closed a $300 million AgVantage security in the power and utility segment with a long-standing counterparty, and we added $134 million in net new loan purchases.

Our broadband infrastructure segment grew 22% since year-end, reaching nearly $1 billion as of the end of the first quarter of 2025. We anticipate increased financing opportunities for rural telecommunication providers driven by fiber line expansion, wireless broadband deployment, data processing center build-out, industry consolidation, and mergers and acquisitions. These developments are crucial for rural economic growth and the connectivity needs for rural America. Our renewable energy segment grew by nearly $200 million in first quarter of 2025, a 14% increase since year-end. Over the past five years, we've seen strong growth in the segment and believe that the near-term pipeline remains strong. Growing business volume in our infrastructure finance segments remains an opportunity, and we will continue to focus on strategic investments and talent acquisition in these areas to build our expertise and capacity as market opportunities arise.

Despite the seasonally large number of scheduled repayments we typically see in the January 1st payment date on the majority of farm and ranch loans, we saw a net increase of $86 million in farm and ranch loan purchases in the first quarter of 2025. We believe that we will see continued growth in the foreseeable future due to continuing agricultural economic tightening, a potential for increased tariffs and trade policy changes, and ongoing inflationary inputs. Offsetting farm and ranch loan purchase growth this quarter was $500 million in scheduled maturities with two large AgVantage counterparties. As previously noted, AgVantage security volume can be lumpy. It can be volatile due to the large transaction sizes and the scheduled maturities aligned with our counterparty's specific financing needs.

During the first quarter, we closed a new $900 million facility with a large agricultural finance counterparty, supporting future AgVantage funding opportunities and demonstrating the continued interest in this product. I would note that that $900 million facility is not yet drawn. We are looking ahead to partnering with this new counterparty for their future funding needs. Looking ahead, we believe that we will continue to be a key partner for refinancing and incremental borrowing for all of our AgVantage counterparties as they navigate a volatile interest rate and economic environment. The farm and ranch segment is core to our mission, and we remain committed to bringing our customers products and solutions that provide capital and risk management solutions, as well as support their borrowers' financial needs.

Our corporate egg finance segment was approximately $2 billion at quarter-end, relatively flat compared to year-end 2024, as $200 million in new volume this quarter was offset by scheduled payments and maturities. Although quarterly volume can be unpredictable, opportunities in this segment are generally more creative to net effective spread. We're continuing our efforts to build relationships and modernize our internal infrastructure, anticipating increased credit demand to support larger, more complex agribusinesses in the coming quarters. Our overall credit profile remained strong through the first quarter of 2025. Despite heightened volatility and market uncertainty, our prudent underwriting approach, emphasizing loan-to-value and cash flow metrics, positions us well to withstand market cycles. We have not seen any impacts on our portfolio related to government actions or changes in policy, and we'll continue to closely monitor industry credit conditions as new government policies are implemented, including specifically pending tariffs.

While some credit losses are inherent in our lending, we believe that any losses in the current cycle will be moderated by the strength and diversity of our diversified portfolio. I'm pleased with our progress since the start of the year. We have strong momentum with our customers and a focused approach to fulfilling our mission efficiently and innovatively, despite broader market uncertainties related to interest rates, regulation, policy changes, tariffs, and other government actions. Our resilient business model, supported by diversified revenue streams and a strong capital position, is a key differentiator. It is our ability to access the markets, coupled with our disciplined asset liability management, that truly sets us apart. With that, now I'd like to turn it over to Aparna Ramesh, our Chief Financial Officer, to discuss our financial results in more detail. Aparna.

Aparna Ramesh (CFO)

Thank you, Brad, and good morning, everyone. Our first quarter 2025 results once again underscore our consistent financial and operational execution, proactive balance sheet management, strong credit quality, and resilience across market cycles. Our diversified revenue streams and disciplined asset liability management enable us to fulfill our mission and generate consistent shareholder returns aligned with our long-term strategic initiatives. This consistency is a real differentiator for us as we navigate a volatile macroclimate. We achieved $1.8 billion of gross business volume this quarter, primarily driven by new volume in our renewable energy, broadband infrastructure, and power and utility segments, as well as new farm and ranch loan purchases. After repayments and maturities, we grew $232 million during the first quarter in our outstanding business volume, which speaks to the benefit of our strategic decisions to diversify our portfolio and create opportunities in all interest rate environments.

Core earnings increased by 6% both sequentially and year-over-year to $46 million in the first quarter of 2025, setting a record for Farmer Mac. Net effective spread also reached a record $90 million or 117 basis points, with sequential and year-over-year improvements of $2.5 million and $6.9 million, respectively. This sequential improvement was driven by higher average loan balances, a decline in non-accrual loans, and modest improvements in floating rate funding levels relative to SOFR. The shift to higher spread business has been a key driver of the increase in net effective spread over the past several years, and we believe our pipeline and business composition will continue to position us well for the remainder of the year.

Operating expenses increased 8% year-over-year as we continued to proactively invest in our infrastructure technology to support continued growth across our portfolios, including broadband infrastructure and renewable energy, as well as higher licensing fees and servicing advances. Operating efficiency was 29% for first quarter 2025, a modest improvement over fourth quarter 2024, and in line with the same period last year. Our efficiency ratios remain in line with our long-term strategic plan target and reflect our disciplined approach to expense management as we monitor and manage expense growth proactively against incoming revenue streams. We take pride in our focus on effective expense management as we continue to invest in people and continue to modernize our technology to support and enable our future growth. It enables our ability to innovate and also drive profitability. We remain committed to bringing cutting-edge technology to our secondary market.

With the completion of a major infrastructure platform upgrade that we've told you about, we now plan to turn our attention to new capabilities for our customers and are exploring options to build innovative systems that will accelerate growth by supporting the rollout of these new products. We are committed to closely monitoring our efficiency ratio and managing it such that we expect to remain at or below a long-run average of 30%, and also be disciplined in keeping our efficiency ratios in line with our growth expectations. Turning now to credit, our overall credit profile remains strong, which reflects our underwriting and credit disciplines that are both extremely consistent. We believe that our total portfolio is well-diversified both by commodity and geography, and that we are well-positioned given our strong levels of capital.

The fundamentals of our underwriting guidelines and credit policies enable us to continue to effectively navigate the current volatility and uncertainty in the agricultural cycle. Our total allowance for losses was $27 million as of March 31, 2025, reflecting a $1.7 million increase from year-end 2024. The increase was primarily attributable to new volume in the renewable energy, power and utilities, and farm and ranch segments. 90-day delinquencies were 54 basis points across our entire portfolio as of March 31, 2025, compared to 37 basis points at the end of December. The sequential increase reflects a seasonal pattern of Farmer Mac 90-day delinquencies, 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 seasonal pattern is due to the annual and semiannual payment dates on the majority of farm and ranch loans. Turning to capital, Farmer Mac's core capital of $1.5 billion exceeded our statutory requirement by $601 million, or 65%, as of March 31, 2025. The increase in core capital from the end of 2024 was primarily due to higher retained earnings. Our tier-one capital ratio was 13.9% as of March 31, 2025, compared to 14.2% at year-end 2024. The modest decline reflects growth in risk-weighted assets. Our strong capital position has enabled us to grow and diversify revenue streams while remaining resilient in volatile credit environments, and we continue to offer low-cost liquidity to our customers and borrowers, even in challenging times. Our capital buffer is a source of strength and also allows us to be opportunistic. We expect to be in the market soon with another farm securitization transaction.

The securitization program remains an important strategic initiative for Farmer Mac, as it allows us to enhance and optimize the balance sheet by the efficient deployment of capital, and it also enables our growth strategy by targeting new asset opportunities. We are very pleased with the tremendous support we've seen from our stakeholders for this program, and we remain committed to being a regular issuer in the market. As noted previously, we are exploring new structures that will allow us to expand our securitization offerings, and this will serve as another source of funding and capital management. Our liquidity and capital positions remain well in excess of all regulatory requirements. Our projections show minimal change in our profitability with limited exposure to movements in interest rates where the market rates go up or down.

As of March 31, 2025, Farmer Mac had 289 days of liquidity, and we held approximately $1 billion in cash and other short-term instruments in our investment portfolio. We expect to be well-positioned in the medium term as we navigate potential interest rate volatility, and we're confident in our resilience against potential short and medium-term market disruptions. To summarize, our team once again delivered strong, consistent quarterly results, maintaining key metrics while adhering to our credit framework. During the first quarter, we achieved a 17% return on equity and an efficiency ratio of 29%. It is important, in these uncertain times, that we emphasize some of the safeguards that prepare us for macro uncertainty. Our balance sheet is strong. We've cultivated robust demand for farm and ranch assets in the securitization market.

Even when bond markets were turbulent recently, we were able to access funding at all points on the curve. We also have enough liquidity to last nearly a year, and our portfolio is diversified by commodity and geography, making us less susceptible to uncontrollable headwinds. This stability allows us to consistently deliver strong financial performance and maintain or exceed our key metrics. With that, Brad, let me turn it back to you.

Brad Nordholm (President and CEO)

Thanks, Aparna. We are very pleased with our first quarter 2025 results, and we believe that we're well-positioned to deliver on our multi-year strategy with strong liquidity and capital levels, a diversified business mix, highly effective risk management practices, and most importantly, a dedicated team of professionals here at Farmer Mac. As I've mentioned on prior calls, as a publicly traded, federally chartered financial services company, our mission is to increase the accessibility of financing to provide vital liquidity for American agriculture and rural infrastructure. Our initiatives strengthen the economic framework that supports rural America and enable families, businesses, and entire communities to thrive. We strive to deliver on our mission throughout agriculture and macroeconomic cycles, and our loan pipeline and capital base are strong and growing. Our revenue is well-diversified, providing capacity for further growth and creating more opportunities for us to enhance shareholder value.

We're optimistic about the future and will maintain our singular focus on fulfilling our mission efficiently and innovatively as we navigate the backdrop of a broader market uncertainty attributable to interest rates, regulation, policy changes, tariffs, and other government actions. This is how we believe we can continue to differentiate ourselves and to deliver to our customers and end borrowers in rural America. Now, Operator, I'd like to see if we have any questions from anyone on the line today.

Operator (participant)

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press * followed by the number 1 on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press * followed by the number 2. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Bill Ryan from Seaport Research Partners. Please ask your question.

William Ryan (Senior Analyst)

Good morning and nice results for the quarter. Start off with a macro question and then also another micro question. The macro question, just kind of looking at the tariffs, I mean, there's obviously been some disruption in the month of April and into early May with ag shipments, particularly to China. Could you maybe give us some indication of what happened, what the administration did last time in terms of supporting the ag community and sort of what exactly happened in 2017, 2018?

Brad Nordholm (President and CEO)

Yeah, good morning, Bill, and thank you very much for joining us. Certainly, let's go back to the first Trump administration when there were tariffs and other trade restrictions imposed on China and what happened in American agriculture. At that time, there were programs for voluntary payments to U.S. farmers who were deemed to be impacted by that. You may recall they were called market facilitation payments, and they had the effect of kind of closing a significant part of the net income gap attributable to that. We're actually seeing a bit of a repeat of that right now. While certainly the 145% tariffs that are currently imposed upon China are resulting in a shift of trade, particularly to Mexico right now. Ultimately, a lot of these agricultural commodities are fungible. They can transfer across the world with relatively little friction, but we're seeing a shift to Mexico.

Mexico and Canada are positively protected by reference to the prior trade agreements. We saw yesterday the announcement of an agreement, at least in principle, with the U.K., and notably, that included a callout on specific targets for American agricultural products, including ethanol. What's underway right now, about a month and a half ago, the Secretary of Agriculture announced a $10 billion program. The applications were open for that. I think there have been about $6 billion-$7 billion of applications so far, I believe, something like that. There is considerable discussion about an additional voluntary subsidy program to American producers in consideration of these tariff actions that might be in the $20 billion-$25 billion range. That's looking out the next couple of months.

USDA has kind of baked that into their net income projections for the year, and remarkably, the current projection for net farm income for this year is projected to be about the third highest. This is something on which we're keeping a very, very close eye because high sustained tariffs will have a damaging effect on prices that will negatively impact many producers. We're also looking at how any kind of subsidy programs, as well as tariffs, are applied and impact different crops, different producers. For example, we're seeing reasonably strong focus on negative impacts to row crop producers, corn, soybeans, for example, right now. We're keenly interested in any programs that would benefit perma crop producers in California, almonds, pistachios, for example, where we are seeing some of our credit stress. That's really the pocket where it is today.

William Ryan (Senior Analyst)

Okay. Thanks for that, Brad. Very helpful. Second question, a little bit more micro, but obviously, the net effective spread had moved up a basis point in the quarter, continuing the trend line it's been on for quite a while. There was some movement among the various business lines, farm and ranch being up, corporate ag being up, broadband and renewable energy down. Could you maybe talk a little bit about the microdynamics of the NES for the business lines?

Brad Nordholm (President and CEO)

Absolutely. I am going to turn to Zach Carpenter to provide additional detail on that. Let me just make the point at the outset that at Farmer Mac, we are not allocators to business segments as we see margin opportunity. We are opportunistic and responsive to the market opportunity, and that is really how we fulfill our mission. What you see is really a reflection of where we are seeing demand where we can also satisfy our credit and earnings objectives. Zach, can you provide some additional color on that?

William Ryan (Senior Analyst)

Yeah, happy to. Starting with farm and ranch, I think this is heavily volume-driven. We had a very strong fourth quarter last year and continued strong loan activity in the first quarter, clearly given the tightness of the ag economy, but also with liquidity and capital relief needs at banks. They're definitely looking to utilize the secondary market to enhance their capital and liquidity needs. A lot of the farm and ranch is heavily volume-driven, and we see a very strong pipeline heading into the second quarter. In fact, we're looking at loan approvals, which significantly convert to purchases, typically in a similar range to 2021 and 2022 when we had record levels. Corporate ag is a very similar story, a very strong fourth quarter. What we saw in the fourth quarter was fairly high credit spreads for these loans we purchased.

You are seeing kind of the impact of that in the first quarter where we had record net effective spread and record net effective spread percentage. We had a strong first quarter, and we see some near-term pipelines that are relatively strong, but I think the borrowers and the later rangers are kind of navigating the market in terms of what Brad highlighted earlier. Broadband infrastructure, you noted net effective spread was slightly down from a % perspective. The one thing I would note in this space is the significant amount of loan purchases that we saw during the first quarter were data center related, and those are construction loans. A lot of those commitments are unfunded commitments, and as those convert, as these centers are being constructed, you will see that funded volume increase and accrete more in the net effective spread perspective.

Similar to renewable energy, there's a construction component there, but it's definitely a market dynamic. We look to try to find strong transactions in the market with very strongly rated off-takers with strong power purchase agreements. Given the strength of those counterparties, you'll see credit spreads be somewhat volatile, but given their investment-grade rated performance, they're going to be a little bit tighter in certain times. This will ebb and flow based on market dynamics. The one thing I would note with renewable energy is more than double the net effective spread dollars year-over-year. We're excited to see this portfolio grow, and at least for the second quarter, still see a strong market, especially related to solar and battery storage. Okay. Thanks, Zach, and thanks everybody for taking my questions.

Operator (participant)

Your next question is from the line of Bose George from KBW. Please go ahead.

Bose George (Managing Director and Senior Equity Research Analyst)

Everyone, good morning. Just wanted to follow up on the spread question. When I look at the on page 10 where you have that breakout, your spread on farm and ranch went up a couple of basis points, but the ROE was up 5%. Is there some other piece in there, like credit or lower capital allocation, or because it seemed like a relatively big move in ROE relative to the spread move?

Brad Nordholm (President and CEO)

Yeah. Aparna, can you shed some light on that?

Aparna Ramesh (CFO)

Yeah. So the big component of that probably has to do with the fact that we had.

My apologies. I think there was a little bit of noise there. Can you hear me okay right now?

Bose George (Managing Director and Senior Equity Research Analyst)

I can hear you now. Yes.

Aparna Ramesh (CFO)

Okay. Terrific. A big part of the driver of what you're seeing in terms of shift in ROE within that ag segment has to do with the fact that we had a reduction in non-accrual activity quarter over quarter. That was really the big driver of it. A lot of the hit that we took in terms of non-accruals happened in the prior quarter and did not have that happening now. You see a little bit of a denominator pop right there.

Bose George (Managing Director and Senior Equity Research Analyst)

Okay. Perfect. That makes sense. Thanks. Yeah, Aparna, you talked about the market volatility and the continued access, etc. Has there been anything in terms of the funding cost side that is worth highlighting? You noted the securitization you guys are going to come to market with. The economics there, do you anticipate it'll be similar to what you did on the last transaction?

Aparna Ramesh (CFO)

Yeah. It's hard to sort of predict what will happen, and we do intend to come forward with another transaction, hopefully before the second quarter is up, and I'll just touch upon that in a minute. To your first question, just around funding dynamics, I do want to note that funding actually improved quite dramatically from Q4 to Q1. This, again, sort of highlights our very opportunistic strategy. When we see an opportunity in the market where credit spreads are narrower, we try to take advantage of that, and that's exactly what our treasury team did in the first quarter. We saw an opportunity to really buy into narrowing SOFR spreads. I'm really glad that we did that. You saw the benefit of that come through in our overall funding, as well as in how it contributed to an increase in our net effective spread quarter over quarter.

Net effective spread just in basis points went up about one basis point. When you look at the second quarter, and with all of the activity and volatility as a result of the bond markets reacting to the tariffs being announced on Liberation Day, we did not see a SOFR widening. What does that mean for us? Both is that we can actually stay very comfortably out of the market as needed because we have loaded up on funding costs when it was much narrower in the first quarter. That is a dynamic, and it plays very favorably for us in the first quarter. The second part of your question, just in terms of securitization, let's wait and see. I think we are going to time you can never really sort of time these things perfectly, but we are seeing a little bit of settling down.

We're not going to go into the market when we think that there isn't receptivity, but there's a lot of cash sitting on the sidelines. I think we're very well positioned to take advantage of that. Just based on our recent investor outreach in the first quarter, we see continued strong appetite and demand for this particular asset class. It is very, very encouraging.

Bose George (Managing Director and Senior Equity Research Analyst)

Okay. Great. Thank you.

Operator (participant)

Your next question is from the line of Brandon McCarthy from Sidoti & Company. Please ask your question.

Brendon McCarthy (Equity Research Analyst)

Great. Good morning, everybody. Thanks for taking my questions here. I just wanted to start off in the renewable energy line of business. I think last quarter, we had talked about there were certain tax credits that you purchased during the year, during 2024, that is, that ultimately benefited the fourth quarter. Was there any similar activity in the first quarter of 2025? Maybe you could talk about your outlook there for the rest of the year.

Brad Nordholm (President and CEO)

Yeah. No, there wasn't activity in the first quarter. It probably remains an opportunity later this year, and we're monitoring the markets, but no activity in the first quarter.

Brendon McCarthy (Equity Research Analyst)

Understood.

Aparna Ramesh (CFO)

I'll just add.

Brendon McCarthy (Equity Research Analyst)

Thanks, Brad.

Aparna Ramesh (CFO)

I'll just add, Brandon, we did actually see a benefit quarter over quarter in operating expenses because we had some legal fees that were associated with the tax credits in the fourth quarter. We saw a fairly material decline in legal fees. You saw an improvement in our OpEx as a result of that.

Brendon McCarthy (Equity Research Analyst)

Understood. Thanks for the clarification there. Looking at farm and ranch, I know it looks like you mentioned there was a sequential decline in volume there. On a sequential basis, it looks like farm and ranch really drove the bulk of the increase in net effective spread revenue, if I'm looking at that correctly. Just wondering if you can dissect that change there and how we can kind of think about that trend.

Brad Nordholm (President and CEO)

Yeah. I think, Aparna mentioned the non-accruals going accrued, and that is a scrape back of additional interest, which you would see showing up there. But Zach, maybe you can talk about kind of the forward expectations on farm and ranch, and especially the seasonality that we experienced in the first quarter.

William Ryan (Senior Analyst)

Yeah. Happy to do it. About $550 million of new business volume in farm and ranch, and a significant majority of that, Brandon, as you noted, was loan purchase volume. This is a continued trend we've seen that really picked up in the fourth quarter of last year. Very similar to the themes that we saw in 2024 with continued tightening of the ag economy, a continued focus on liquidity and working capital needs for the farmers and ranchers, and capital efficiency at the banking community, just given everything that's going on. Looking forward, as I noted, our pipeline for farm and ranch loan purchases in the second quarter appears very strong. Like I mentioned, loan approvals, which typically convert to a purchase, are at almost record highs. Continue to see a significant amount of loan submissions from sellers across the country.

Just given everything going on, I mean, we already had an ag economy that was tightening. There is a lot of volatility out there, as Brad mentioned, pertaining to tariffs and what the impact may be. As these farmers and ranchers need to support the liquidity and working capital needs through the cycle, we anticipate this to continue, especially into the second quarter. I think government payments will be a critical component to further aid and support the farmers and ranchers through the near term, at least. We do not anticipate, at least heading into the second and possibly a third quarter, this momentum to slow down, just given the environment that we are seeing.

Brendon McCarthy (Equity Research Analyst)

Got it. That's helpful. Thanks, Zach. I appreciate the insight. One more question for me just on the treasury segment. Looking at net effective spread revenue there, it seems like it's been maybe regaining steam and increasing from the back half of 2024 with funding, net effective spread revenue increasing, and then investment side up a little bit from late 2024 as well. Can you walk us through the dynamics there? I know the funding strategy is match funding, but can you walk us through the dynamics there on what's kind of driving that momentum?

Aparna Ramesh (CFO)

Yeah, sure. As I mentioned, we try to take a lot of pride in being very opportunistic. When rates are trending in or credit spreads are coming in within a particular segment, we try to opportunistically issue into that. We saw a narrowing of our SOFR spreads quarter over quarter. That really created a fairly nice benefit overall, in fact, substantially down quarter over quarter. We have also taken advantage as we see the yield curve sort of steepening. We will start to call issuances, and we started to do that in the back half of the year. You start to see some of those benefits come into play as well in terms of just our overall hedging strategy when we think about where rates are headed. Those were the primary dynamics, the SOFR funding being definitely the larger of the two.

Brendon McCarthy (Equity Research Analyst)

Great. Thanks, Aparna. That's all for me. Thanks, everybody.

Operator (participant)

Your last question is from the line of Gary Gordon, private investor. Please ask your question.

Gary Gordon (private investor)

Okay. Thank you. Two things in our changing world. There's also just a number of discussions about the changing energy policy. Anything going on that you think would or you're anticipating could have an impact on your rural infrastructure business? Again, I'm both in now. Another change is AI. What are your thoughts at the moment about applications of AI for Farmer Mac?

Brad Nordholm (President and CEO)

Yeah. Hey, Gary. Thank you for being on with us today. As it relates to our renewable energy projects, the investment tax credit is really embedded in the Inflation Reduction Act. It's been very interesting to watch the debate in Washington because continuation of those credits enjoys some pretty good bipartisan support. We don't take that for granted, however. We are very, I think, satisfied with our position because when we commit to a project financing for a renewable energy project, solar, solar plus battery, wind, renewable natural gas, for example, when we commit to that project, really the entire network or web of contracts associated with that project, the construction contract, the offtake power purchase or fuels purchase contract, the operating and maintenance contracts, the land leases, and the commitment for the tax credits, those are really all in place at the time of the funding.

We do not really wear risk associated with the change in tax law on the projects as they're currently structured. We are keeping a close eye on it. We are cautiously optimistic that they'll continue. Keep in mind that the economic viability of many of these projects is extremely high and that some of them would continue if there was a reduction in investment tax credits. We are keeping a close eye on it. We do not see any immediate adverse threats from changes in tax legislation, but we will be monitoring closely. Gary, the second part of your question was focused on what again? Could you remind me?

Gary Gordon (private investor)

Yes. It was related to AI. What sort of applications are you foreseeing?

Brad Nordholm (President and CEO)

Yeah. Right now, the internal focus is very much on process. How can we utilize AI to improve processes within Farmer Mac? Scraping of literally thousands of loan documents is an example for all the pertinent information that goes into a loan file when those documents vary one to another because of differences in segments and seller servicers and other factors. How can we use that to improve efficiency, to reduce the labor? The focus really for the time being is on process. There'll be a time in the future when it may shift or be expanded to include decisioning. Right now, it's a very, very fertile field for us to apply to process.

Gary Gordon (private investor)

Okay. Thank you.

Operator (participant)

There are no further questions at this time. I'd like to turn the call over to Brad Nordholm for closing comments. Sir, please go ahead.

Brad Nordholm (President and CEO)

Thank you, Operator. Thank you, everyone, for being on this call with us today. These are times when it is relatively easy to get distracted by changes and potential changes in policy and economic conditions. Here at Farmer Mac, we are heads down. We are focused on mission and what is a very, very sustainable, resilient, and well-established business model that we have. We have a terrific team here at Farmer Mac. They share this commitment to focus on mission and deliver results. That is exactly what we have done during this record quarter and what we expect to do going forward. Thank you very much for participating. If you have questions, follow up with Jalpa. Otherwise, we look forward to speaking again in this formal call following the end of the second quarter. Thanks very much.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.