Farmer Mac's Q3 2025 Earnings Call: Contradictions Emerge on Credit Provisions, Tariff Impacts, and Interest Rate Strategies

Guidance:

• Expect continued growth driven by infrastructure finance (renewable energy, broadband) and a continued shift to higher-spread businesses.
• Anticipate participation in renewable energy transactions and ongoing evaluation of renewable energy investment tax credit opportunities.
• Working toward a second farm securitization transaction in Q4 2025.
• Will continue to evaluate capital management tools (organic capital generation, preferred issuance, securitization) to optimize capital.
• Plan to return capital via dividends and buybacks as sustainable; repurchased ~$5M post-quarter.
• CFO appointment expected within Q4 2025.

Business Commentary:

• Financial Performance and Earnings Growth:
• Farmer Mac reported a record net effective spread of $97.8 million and core earnings of $49.6 million for Q3 2025, reflecting double-digit year-over-year growth.

• The growth was driven by higher average loan balances, the shift to higher spread business, and effective asset-liability management.

• Portfolio Diversification and Infrastructure Finance:

• The infrastructure finance line of business grew by $600 million in Q3, reaching $11 billion in total outstanding business volume.

• This growth was primarily driven by data centers, broadband expansion, and renewable energy projects, aligning with the company's mission to support rural infrastructure.

• Renewable Energy Segment Expansion:

• The renewable energy segment more than doubled from the same period last year, with outstanding business volume reaching $2.3 billion.

• The growth was supported by increased need for new power generation, tax credit phase-outs, and the strength of Farmer Mac's near-term pipeline.

• AgVantage Securities and Market Uncertainty:

• Farmer Mac experienced large maturity of AgVantage securities due to market uncertainties, but saw strong demand for wholesale finance products.
• The company successfully closed a new facility with $4.3 billion borrowing capacity, indicating the strength of its relationships and product offerings.

Sentiment Analysis:

Overall Tone: Positive

• Management reported a record net effective spread of $97.8M and core earnings of $49.6M, YTD spreads/core earnings of $281M/$143M, core ROE ≈17%, efficiency ratio below 30%. They raised Tier 1 to 13.9% (from 13.6%) after a $100M Series H preferred issuance and repurchased ~30,000 shares (~$5M), signaling confidence and capital strength.

Q&A:

• Question from Bose George (KBW): Can you talk about the outlook for spreads given mix and the forward curve with expected Fed cuts?
  Response: NES is largely neutral to Fed rate cuts due to match-funded ALM; recent NES strength is driven by mix shift into higher-spread infrastructure (renewable, broadband) and is expected to remain accretive as those construction-funded deals convert to funded loans.

• Question from Bose George (KBW): With newer business lines growing, should current provision levels be viewed as the new normal or will they be sporadic?
  Response: Provision volatility is episodic and modest; the $7.4M quarter provision reflects specific items (ag storage/processing, groundwater-affected CA loans) and portfolio growth in newer segments, but management does not see systemic credit deterioration or a likely large jump next quarter.

• Question from Bill Ryan (Seaport Global): Which crops are most impacted by tariffs and have market stabilization payments started?
  Response: Soybeans, corn, cotton and wheat face pressures but price moves are mixed (e.g., soybeans +10% recently); management expects ~$10–$12B in market stabilization payments imminent and emphasizes Farmer Mac's diversification across 100+ commodities limits concentrated portfolio impact.

• Question from Bill Ryan (Seaport Global): Is farm & ranch business volume accelerating and has loan structure changed (fixed vs variable)?
  Response: Farm & ranch growth is broad-based and driven largely by new-money loans (land/equipment); underwriting criteria remain consistent, product mix includes both fixed and variable terms, and management expects continued growth as loan demand rises.

• Question from Brendan McCarthy (OT): How are prepayment expectations and was the 1.2% NES level surprising?
  Response: Prepayment speeds are lower than peak post-2020 refi levels and not expected to spike since many borrowers locked low long-term rates; the elevated NES reflects faster-than-expected mix shift into accretive rural infrastructure, so the level is consistent with that mix change.

• Question from Bill Ryan (Seaport Global): Were you active in share repurchases discussed last quarter?
  Response: Yes — subsequent to quarter-end Farmer Mac repurchased ~30,000 Class C shares for about $5M.

• Question from Bill Ryan (Seaport Global): The $6.8M provision in ag finance — was that growth-driven or due to groundwater regs in California?
  Response: It was a mix: seasonal/model-driven increases from volume growth, specific allowances tied to a few California groundwater-impacted credits, plus three small charge-offs — characterized as episodic rather than systemic risk.

Contradiction Point 1

Provision for Credit Losses

It involves the methodology and consistency in provisioning for credit losses, which affects financial reporting and risk assessment.

Is the current provision level reasonable, or will it be sporadic due to portfolio changes? - Bose George(KBW)

2025Q3: Our provision is low compared to other institutions. It reflects specific, episodic credit issues rather than systemic or sector-wide risks. We expect provisions to remain relatively stable at these levels. - Brad Nordholm(CEO)

Looking at provisions now, is your approach different from the past year and a half? - Gary Gordon

2024Q3: Provision for credit losses is up $2.4 million and $6.4 million from the third quarter of last year and the second quarter of this year, respectively, reflecting increased allowance for credit losses primarily associated with specific credit allowances. - Aparna Ramesh(CFO)

Contradiction Point 2

Impact of Tariffs and Market Stabilization Payments

It pertains to the assessment of the impact of tariffs and market stabilization payments on the agricultural sector, which influences the economic outlook and financial performance.

How are tariffs and market stabilization payments affecting the agricultural sector, and which crops are most impacted? - Bill Ryan (Seaport Global)

2025Q3: Tariffs pose financial pressures on major crops like soybeans, corn, and cotton. Market stabilization payments of about $10-12 billion are expected soon. - Brad Nordholm(CEO)

Any updates on tariffs and market facilitation payments to farmers? - William Haraway Ryan (Seaport Research Partners)

2025Q2: Tariffs have created uncertainty, with some markets opening up for exports. The American Relief Act allocated $33 billion in disaster relief to farmers and ranchers, supporting net cash farm income this year. - Zachary N. Carpenter(COO)

Contradiction Point 3

Interest Rate Environment and Spread Management

It involves the company's strategy to manage net effective spread amidst interest rate changes, which impacts investor expectations and financial performance.

What is the outlook for spreads considering mix and forward curve expectations as the Fed is expected to cut rates three times by next summer? - Bose George(KBW)

2025Q3: Our asset-liability management and match-funded funding strategy make us neutral to changes in interest rates. Fed cuts should not impact our net effective spread. - Brad Nordholm(CEO), Zachary N. Carpenter(COO)

What are the spread expectations in the current interest rate environment, and how will Farmer Mac manage net effective spread? - Bose George(KBW)

2024Q4: We see competition between lower capital consuming Farm & Ranch and higher margin segments such as renewable energy. Despite market volatility, our funding strategies have allowed us to manage net effective spread well. - Brad Nordholm(CEO)

Contradiction Point 4

Prepayment Expectations

This contradiction involves differing expectations regarding prepayment levels and their impact on the company's financial performance, which is crucial for investor forecasting.

What are projected prepayments and net effective spread? - Brendan McCarthy(OT)

2025Q3: Prepayments are expected to remain low due to previous refinancing at low rates and the lack of significant rate decreases. - Brad Nordholm(CEO)

How have provisions changed compared to the past year and a half? - Gary Gordon

2024Q3: We expect prepayments to remain low for the next several quarters. Looking at our historical trends, the current low rate environment has suppressed prepayment activity. - Aparna Ramesh(CFO)

Contradiction Point 5

Provision for Loan Loss

It involves the company's provision for loan loss, which impacts the financial health of the company and investor confidence.

What caused the $7.4 million provision in ag finance? - Brendan McCarthy(OT)

2025Q3: The provision reflects a mix of factors, including groundwater regulations in California and specific credit allowances. It remains at low levels and is expected to stay relatively stable. - Brad Nordholm(CEO)

Can you explain the $7 million increase in the loan loss reserve and whether it indicates a systemic issue or idiosyncratic events? - Unidentified Analyst

2024Q4: The increase in the loan loss reserve is attributable to specific idiosyncratic loans, with Farm & Ranch and renewable energy segments contributing significantly. - Brad Nordholm(CEO)