Federal Agricultural Mortgage Corporation

Good morning, ladies and gentlemen, and welcome to the Farmer MAC fourth quarter 2024 earnings results conference call. At this time, all lines are in a 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 Friday, February 21, 2025. I would now like to turn the conference over to Jalpa Nazareth. Please go ahead.

Good morning, and thank you for joining us for our fourth quarter and full year 2024 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 the risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer MAC's 2024 annual report on Form 10K filed with the SEC today for full discussion of the company's risk factors. On today's call, we will also be discussing certain non-GAP financial measures, disclosures and reconciliations of these non-GAP measures can be found in the 2024 Form 10K 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 CEO, Brad Nordholm, who will discuss 2024 business and financial highlights and strategic objectives, and Chief Financial Officer Aparna Ramish, 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?

Thanks, Jalba. Good morning, everyone, and thank you for joining us. We delivered another year of strong financial results, building upon our record performance over the last few years. Our 2024 performance was highlighted by record net effective spread and core earnings, driven by consistent loan growth, effective asset liability management and funding execution, and coupled with well-managed operating expense control. We also successfully closed two $300 million farm securitization transactions, supporting our commitment to being a regular issuer in the market. This is the first time we have completed two issuances in one year. All these factors have allowed us to execute in a manner that is consistent with our long-term strategic growth objectives, and it showcases the resiliency of our business model against market volatility and a changing credit environment. This morning, we also announced our 14th consecutive annual dividend increase. Beginning in the first quarter of 2025, we will be increasing our quarterly common stock dividend by 10 cents per share to $1.50, which represents a 7% increase from the quarterly common stock dividends paid in 2024. This increase is a tangible indication to our shareholders of our ongoing commitment to provide a dividend payout that balances previous and expected future earnings growth while maintaining an adequate level of capital to exceed regulatory and market requirements and support our expectations for future business volume growth. Our total revenues in 2024 improved to $362 million compared to $349 million in 2023, primarily due to higher net effective spread. This reflects the compositional shift of new business volume towards higher spread businesses that we have seen over the last few years and the continuing effectiveness of our proactive management of our balance sheet and funding levels. Core earnings year to date improved to $172 million, modestly exceeding our prior year record. Reflected in 2024 results is the recognition of renewable energy investment tax credits of $2.6 million as a benefit to income taxes from two dairy renewable natural gas projects. We are actively looking at these types of renewable energy credit opportunities in 2025 as we continue to be a significant participant in the renewable energy project finance market, which gives us unique insights into the value of these credits. Turning to volume, in fourth quarter 2024 we introduced a new segment reporting construct that provides for clear insight into the various contributing components of our portfolio's net effective spread and our overall bottom line profitability. Aparna will cover this in more detail, but we're now showing you more granular information on each segment's direct allocation to operating expense. We've also rebranded our rural utilities segment to power in utilities and introduce the new broadband infrastructure segment to more crisply communicate the core areas of focus. The power and utility segment includes loans to rural electric generation and transmission cooperatives and distribution cooperatives, as well as egg vantage securities secured by those types of loans. The broadband infrastructure segment includes loans to rural fiber, cable broadband, tower, wireless, local exchange carriers, and data center projects, which were previously held in the former rural utility segment. Rural cell communication and data connectivity has proven to be of vital economic importance in the last decade, especially in rural America, as more households and agricultural enterprises require more data and connectivity to thrive. We have strategically expanded our footprint in this market over the last several years, positioning us well for the expected growth in digital technologies that is expected to require significant more computing and storage capabilities, as well as investment in additional fiber network capacity. This new segment reporting construct aligns better with how we actually manage our business and provides better transparency into the economics of our portfolio and the overall value creation of our operations. In 2024, we purchased $7 billion in gross volume with farm and ranch and renewable energy loan purchases significantly outpacing the prior year. After repayments and several large maturities in farm and ranch and power utilities' advantage volume, we grew $1.1 billion, ending the year at $29.5 billion. Our infrastructure finance line of business grew over $1 billion in 2024, largely driven by loan purchase volume within the renewable energy segment. As of year end, we have nearly $1.5 billion in total renewable energy volume, reflecting the continued strong demand for renewable energy power generation and storage and the dedication and commitment from our organization to grow this segment in alignment with our long-term initiatives. We introduced this segment in 2020 and have successfully doubled our volume in this segment every year since then. We believe that the growth in renewable energy generation and deployment of energy storage technologies has the potential to continue to deepen pharma max relationships with existing customers through new business opportunities. Our 2025 pipeline within the renewable energy segment remains strong as our robust efforts and investments to grow this portfolio remain one of our top priorities over the foreseeable future. The broadband infrastructure segment grew over $300 million, or 60% year over year. We expect a continuous increase in financing opportunities for other telecommunication providers in rural areas, with fiberline expansion, wireless broadband deployment, industry consolidation, and efficiency through mergers and acquisitions. And data processing center build-outs, all increasingly important to rural economic opportunity and the constant connectivity required by the food and agricultural businesses. Within the agricultural finance line of business, corporate aid finance saw net growth of about $200 million during 2024, reflecting our continued efforts to support larger, more complex agribusiness focused on businesses that span the food supply chain. While volume tends to be lumpy on a quarter by quarter basis, opportunities in this segment are generally more creative than pharma and ranch loans, as evident in our new segment construct. We closed over $1.5 billion of new pharma and ranch loan purchases in 2024, compared to a total of $780 million in 2023. That loan growth included $179 million of two pools of loans purchased from single agricultural lender, underscoring our secondary market track record of providing agricultural under solutions for their capital planning and our expansive product set to support customers of all types of businesses. We expect to see this positive momentum continue in 2025 as tightening bank liquidity and an adjustment to higher rate environment takes hold. While the USDA expects an increase in cash farm income in 2025 due to potential increases in government support payments for the American Relief Act, the ongoing uncertainty and forecasted volatility in commodity prices is expected to drive more loan volume as producers navigate current market dynamics. Pharma and Ranch segment is core to our mission, and we remain committed to bring our customers products and solutions that fit their profiles as they continue to navigate industry change and the economic cycle. Offsetting pharma and ranch purchase growth in 2024 was over $2 billion in scheduled maturities with several large pharma and ranch advantage counter parties driven by slower market loan growth for them and tightened market credit spreads that resulted in less liquidity and diversification needs for these counter parties. We successfully closed two arms securities transactions in 2024, the second of which closed in November and was structured similarly to our earlier deal in April 2024. Since our initial farm securitization in 2021, our execution has significantly improved, leading to better financial results due to better spreads and reduced transaction and administrative costs. Looking ahead to 2025, we're planning to continue our target deal sizes of approximately $300 million, consistent with the size of our prior deals. As we are continuing to explore the opportunity to introduce new securitization products and asset classes, including renewable energy for our customers while continuing to build liquidity in the farm securitization program. As we look ahead, we are confident that our underlying business model from capital position and uninterrupted access to the debt capital markets will continue to uniquely position us to partner with our customers to help them grow and manage any capital and liquidity risks they may might face in the future, including risks related to ongoing market uncertainty and potential regulatory policy change. Our ability to navigate industry changes and economic cycles while growing earnings positions us well to continue to create more opportunities or enhance shareholder value through mission fulfillment. And now I'd like to turn the call over to Aparna Ramish, our Chief Financial Officer, to discuss our

financial results in more detail. Aparna?

Thank you, Brad. And good morning, everyone. Our 2024

results

once

again highlight our consistent financial and operational execution coupled with proactive management of our balance sheet and funding sources. Our diversified streams of business revenue and our funding and hedging capabilities stemming from our disciplined approach to asset liability management allow us to continue to fulfill our mission and generate consistent shareholder returns across market cycles while staying in alignment with our long-term strategic initiatives. Debt volume growth in fourth quarter 2024 was $1.1 billion and this was primarily driven by strong loan purchase volume in the farm and ranch, renewable energy, and broadband infrastructure segments. Offsetting loan purchase volume growth in the fourth quarter was $255 million a farm and ranch advantage that matured without refinancing. As we saw throughout the year, changes in the quarterly advantage securities volume are primarily driven by the larger transaction sizes for the product, scheduled maturity amounts for a particular quarter, the liquidity and loan growth opportunity needs of farm and ranch advantage counterparties, changes in the pricing and availability of wholesale funding, and the relative value of our wholesale financing product versus other funding alternatives. Based on these factors, we expect advantage business volume in both lines of business to continue to be volatile as we navigate the evolving needs of our stakeholders and as the yield curve steepens and interest rates stabilize. Positive momentum that we saw in the farm and ranch, renewable energy, and broadband infrastructure business segments included strong loan purchase volume which is generally more accretive and higher spread relative to the advantage product. The shift in business composition to higher spread business has been one of the drivers of the increase in net effective spread quarter over quarter. We believe that our pipeline and the overall compositional shift positions us well heading into 2025. Turning to 2024 results, four earnings were $171.6 million or $15.64 per diluted share in 2024 and $43.6 million or $3.97 per diluted share in fourth quarter 2024. Our full year core earnings results reflect modest growth over our record-breaking 2023 financial performance. And this is largely due to our proactive debt funding strategies, disciplined asset liability management approach that is designed to minimize earnings volatility over the medium to long term coupled with opportunistic debt issuances that have allowed us to accretively fund new asset opportunities as they've arisen. Net effective spread improved $12.6 million year over year and this is largely due to a shift in volume to more higher yielding assets. In percentage terms, net effective spread compressed year over year by three basis points to 115 basis points due to loans moving into non-accrual status which has resulted in a decrease in interest income and that has been coupled also with a more volatile funding environment. This dynamic was partially offset by our diversified revenue streams and opportunistic funding and hedging of our balance sheet with the use of callable debt securities. Core earnings in fourth quarter 2024 declined sequentially by $1.4 million and this was primarily due to an increase in operating expenses and credit expenses. These factors were partially offset by an increase in net effective spread, a decrease in preferred stock dividends and the previously mentioned renewable energy investment tax credits. Net effective spread in dollar terms improved quarter over quarter to $87.5 million from $85.4 million. This improvement was driven by several factors and this includes our proactive equity capital allocation strategy where we are laddering and layering duration to minimize balance sheet and earning volatility, the opportunistic redemption and re-issuance of fixed rate callable debt at lower market interest rates, a modest improvement in floating rate funding levels relative to SOFA and the expanded yield from volume growth in the renewable energy and broadband infrastructure portfolios. As we mentioned on prior calls, our treasury and funding desk opportunistically takes advantage of favorable market conditions and this coupled with our disciplined asset liability management positions us very well in changing credit environments to deliver consistent spreads across all business cycles. In percentage terms, net effective spread was unchanged sequentially at 116 basis points. Operating expenses increased 18% sequentially largely due to an increase in licensing fees, infrastructure technology costs and higher transactional legal fees that were associated with our broadband infrastructure and renewable energy portfolios. As Brad mentioned, we introduced new segment level reporting in fourth quarter 2024. That reporting framework includes the breakout of our broadband infrastructure portfolio which previously resided within the rural utilities portfolio and provides the direct operating expenses within each of our new segments. These enhanced segment disclosures reflect our commitment to providing transparency into our portfolios from both a volume and profitability perspective. Operational efficiency was 30% for fourth quarter 2024 and it was 28% for full year 2024. Both are in line with our long-term strategic plan target and this is a reflection of our disciplined approach to expense management and will continue to monitor and manage expense growth as we've done proactively against incoming revenue streams. As we discussed on our last call, we are very proud of the on-time and in-budget completion of our multi-year technology investment which modernized our treasury infrastructure positioning us well to mitigate risk, increase efficiency and enhance deal flow. As we look ahead, we remain committed to bringing cutting-edge technology and new capabilities to our customers and continuing to invest in ways to build innovative systems that are closely monitoring and managing our efficiency ratio. We expect that ratio to remain at or below a long-run average of 30% through our disciplined approach to keeping our efficiency ratios in line with our growth expectations. Turning to credit, our performance with respect to credit was largely driven by large loans with borrower-specific headwinds as the nature of our credit events in 2020. The large-off have historically tended to be idiosyncratic. For example, in 2024, we incurred an aggregate economic loss of $2.5 million and this was related to a single $14.5 million agricultural storage and processing borrower exposure. A portion of this was sold in second quarter 2024 and the remainder is currently under contract to be sold. Our total allowance for losses was $25.3 million as of December 31, 2024 and this reflects a $3.4 million increase from September 30, 2024. The increase was primarily attributable to new volume in the infrastructure finance line of business and a single renewable energy loan that was downgraded to substandard during the quarter. Based on our analysis, the issues involved with this substandard loan are borrower-specific and are not indicative of any broader systemic risk in our portfolio. Overall, substandard asset volume increased this quarter to $440.7 million from $402 million as of the year end 2024 compared to .4% of our total portfolio as of September 30, 2024 and .8% as of year end 2023. 90-day delinquencies were 37 basis points across our entire portfolio as of December 31, 2024 compared to 51 basis points at the end of September. A decrease in fourth quarter is a seasonal pattern of farmer max 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 quarter of each year. This seasonal pattern is due to the annual and semi-annual payment dates on the majority of farm and ranch loans. Although we had credit expenses in 2024 that were above historical levels, we have outperformed our peers in how we have navigated a slowing down in the agricultural cycle which reflects a strong underwriting and credit discipline. We believe that our total portfolio of loans is well diversified, our credit profile remains strong overall and that we are well buffered given our strong levels of capital. Let me turn to capital now. Farmer max 1.5 billion dollars of capital as of December 31, 2024 exceeded our statutory requirement by 583 million dollars or 64%. Our tier one capital ratio was .2% as of December 31, 2024 compared to .2% as of September 30, 2024 and .4% as of December 31, 2023. The -over-year decrease in core capital was primarily due to the redemption of the series C preferred stock in third quarter 2024 along with an expansion into more accretive lines of business such as energy. These lines of business do consume additional capital. This was offset by the efficiency that we gained from executing successfully on two securitization transactions in 2024. Our strong capital position has allowed us to continue to grow and diversify our revenue streams, remain resilient in volatile credit environments and allow us to offer a source of low-cost liquidity for our customers and borrowers even in difficult times. As you read in this morning's press release, we are very pleased to announce a 10-cent per share increase in our first quarter 2025 common stock dividends to $1.50, representing a 7% increase from the quarterly dividends paid in 2024. We believe that our strong earnings and consistent capital position support this dividend increase and our overall strategy to achieve a targeted payout that balances a reasonable growth of both previous and future earnings and our expectations for future business volume growth. We are also very pleased with the execution of our fifth farm series transaction in November, which is for the first time our second transaction in a year. We received more than three times the demand for this latest offering, which is really a testament to PharmaMax reputation with institutional investors, as well as the overall market appetite for the underlying agricultural asset class. Not only was demand strong, but we were once again able to successfully expand our investor base in both tranches. The consistent farm series issuances every year for the last four years have not only built a strong foundation for future market liquidity, but also led to continually improved execution economics and greater efficient servicing for the agricultural mortgage back securities market. The securitization program remains an important strategic initiative for PharmaMax, as it allows us to diversify our funding, enhance and optimize the balance sheet by efficient deployment of capital. Securitization also enables our growth strategy by targeting new asset opportunities that we might include in our conduit. We are very pleased with the tremendous support we've seen from our customers and investors for this program, and we remain committed to being a regular issuer in the market. 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 and interest rates, but the market rates go up or down. As of year end 2024, PharmaMax had 264 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 move into the anticipated Fed easing cycle, and we're confident in our resiliency against potential short and medium-term market disruptions. Once again, our team delivered strong, consistent quarterly results, maintaining key metrics that we highlight on each call while staying within our credit framework, which emphasizes loan to value and cash flow metrics. Notably, we delivered a 16% return on equity this quarter and an efficiency ratio of 30%, both in line with our strategic target of 30% and within the range for return on equity. We believe that our balance sheet is well positioned for market uncertainty, and we are more optimistic than ever to deliver on our long-term strategic plan objectives.

And with that, Brad, let me turn it back to you.

Thank you very much, Aparna.

As I hope you've heard, we are very pleased with our 2024 results and believe that we're well positioned to deliver on our multi-year strategy as we head into 2025 with good momentum, strong liquidity and capital levels, a diversified business mix, highly effective risk management practices, and most importantly, a talented team of dedicated professionals. Before I turn to your questions, I do want to comment on the change in administration here in Washington, D.C. As a publicly traded financial services firm and a government-sponsored enterprise, we are crystal clear on our enduring mission to increase the accessibility of financing to provide vital liquidity for American agriculture and rural infrastructure, essential parts of the U.S. economy. We closely monitor regulatory and statutory developments and messaging, and as of right now, we do not anticipate material changes to our business as a result of the change in administration. We will continue to strive to deliver on our mission throughout the agriculture economic cycles as reflected by our financial results over the last several years. Our loan pipeline and capital base are strong and growing, and our revenue is well diversified, providing capacity for further growth and creating more opportunities for us to enhance shareholder value. Put another way, we are optimistic about our future and will maintain our singular focus on fulfilling our mission efficiently, innovatively, and profitably as we navigate the backdrop of a broader market uncertainty attributable to interest rates, regulation, and policy change. This is how we believe we can continue to differentiate ourselves and deliver value to our customers and the end-buyers of rural America.

And now, operator, I'd like to see if we have any questions from anyone on the line today.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Bill Ryan with Seaport Research Partners. Your line is now open.

Thank you. Good morning, Brad and Aparna. A couple of questions, one starting off at a high level and then one more number specific. But last quarter, you mentioned that there might be a informational securitization product coming out and I think we kind of figured out it might be some form of a mortgage conduit. Could you maybe provide us an update on where that stands right now, how you see the TAM, what the interest level is in the product as well and what kind of fee structure it might have?

Yeah,

good morning, Bill. And very nice to hear from you. We're always looking at opportunities to develop new uses for the securitization machine that we've really built at Farmer Mac. I think during the last call, we were suggesting that we were working on the possibility of securitizing loans that look a lot like our farm and ranch loans but might be originated by others. And that exploration work, that feasibility work continues with Mara's market participants being the primary focus of that work. We also are doing some exploration of the feasibility of securitizing some of our renewable energy loans. At the end of the day, in all cases, we're going to look at the impact on notional profitability as well as return on allocated equity capital in making any final decisions. And so stay tuned. It's something that you'll continue to hear about during 2025, but there are no pending announcements.

And when I turn to Aparna to address your second question?

Hi, good morning, Bill. I think you said you had a numbers-related

question as well.

Oh, yes, just a numbers question. In terms of the GNA expenses, obviously a little bit elevated this quarter. And you talked about deployment of the treasury cash management system and some transactional legal fees. Could you talk about, maybe unpack it a little bit, like what were the specific components? And is this a new level that we should think about going forward?

Yeah, I think you're right in that we did have an elevated level of operating expenses in Q4 when you compare that to the prior quarters. Also resulted in a slightly elevated level of efficiency ratio, all the same within our target of 30%. I think it's important to just look at our operating expenses given some seasonality that we see, particularly in the fourth quarters. I think looking at it annually is probably a better metric. But very specifically, and as you note, we did have an elevation in our GNA expenses in particular. And one big factor associated with that had to do with our expansion into some of these newer lines of business, especially our telecom, as well as our renewable energy. As we continue to grow in these segments, you know, we, at least at the startup level, we did experience some additional legal fees. I wouldn't say that that is expected to be an endemic level, but you could expect a little bit of volatility there. So that was one of the drivers. I would say the vastly larger driver, which I think will moderate over time, has to do with the culmination of our program. As we announced in Q4, we successfully completed our STARS initiative, accompanying that with some, what I would call one-time or lumpy expenses that were associated with the completion of that program that we have to pay contracted for. So these were the two singular drivers of a slightly elevated, what I would call general and administrative expenses. But what I would note, is all the compensation expenses went up just a tad bit. And again, that is associated with some level of seasonality. We've actually held our headcount, as well as our operating expenses, as it pertains to compensation at extremely manageable levels, including our headcount for

Q4.

Okay, thank you. I'll get back in the queue.

Your next question comes from Boz George with KBW. Your line is now open.

Hey, everyone. Good morning. Actually, I wanted to ask first just about the outlook for spreads. And assuming it looks like rates have hopefully found a range here and the Fed might be on hold, and if that is what happens with rates, can you just talk about what you'd expect for spreads this year?

Yeah, good morning, Boz. And again, very nice to

see

you too. I'll offer a few high-level comments and then ask both Aparna from a funding standpoint and Zach Garpenter from a business segment standpoint to provide some additional color. But my observation is that as we're going into 2025, we're seeing a little bit of almost like a competition between the rate of growth on a notional basis of some of the wider spread businesses, segments such as renewable energy, and what we're seeing is some accelerated growth in our farm and ranch product, which is lower capital consuming but also a bit lower in spread. I think in past years, we have provided some caution about net effective spread being sustained in the high teams, 115 to 120%. I think we've suggested that it could drop down into the 112, 113. You kind of see that it's held up remarkably well, and that's been because in that competition, those higher margin segments experienced a lot of growth this last year. But Zach, maybe you can comment on just how you're saying the development of that between a farm and ranch and these other segments going into 2025.

Yeah, absolutely happy to. First and foremost in farm and ranch, the one thing I will note is two things. Farmers are getting used to the higher rate environment. Maybe there was an expectation heading into 2024 that the rates would come down. Clearly given the economic environment, that's not the case. Coupled with a tight agricultural economy, farmers are needing additional liquidity, and they've gotten a little bit used to the higher rate environment and needing to support working capital and potential growth. And so we're seeing that increased demand in farmer ranch, even though I'd say overall rates remain higher than 2021 and we think that's going to be a key pace in 2025. I'd say in our newer lines of business, we had significant growth in the fourth quarter across corporate ag, broadband infrastructure, and renewable energy. Those spreads in the businesses maintained and in many instances increased in the fourth quarter. And given that growth and given the pipeline that we see in these newer lines of business, we anticipate those spreads to maintain around those levels, plus or minus a couple basis points here or there. But we don't see any deterioration in the creativeness of those newer lines of business heading into 2025. The one thing I would comment on pertains to ag advantage. Credit spreads for investment grade counterparties continue to be extremely tight, which is part of the reason we've seen some declines in volumes in 2024. We've seen some widening out recently, but nothing significant. So unless we see some more market volatility, we'd anticipate the credit spreads and ag manage to remain relatively tight and could be volatile to volumes heading into 2025.

Yeah, apart from anything at funding or how we're managing our balance sheet that has implications for that NES in response to Bo's question.

Yeah, absolutely. Bo's, let me just tackle your question a little bit retrospectively, so you've noted just how we manage balance sheet and our net effective credit on the funding standpoint. I'll just highlight a couple of things that we think will persist in terms of just how we strategically optimize the balance sheet. Over this past year, we've certainly seen a very interesting yield curve environment, something a little bit more typical in Q3 that allowed us to redeem some of our callable issuances, and that really helped us actually smoothen out our net effective spread. That was offset by some volatile floating rate funding that we experienced in the first quarter of this year. But again, I highlight these two dynamics because it gives you a sense of just how well hedged our funding strategies are. And as we head into 2025, I think the markets were certainly expecting a more rapid easing cycle than what has been communicated by the Fed as we head into 2025, but perhaps one rate cut gets you to the second half of the year. So as we think about our funding strategy, we mirror that very, very closely with how our businesses and our business segment outlook, and you just heard that from Zach. We expect to be able to deploy a number of the tools that we have at our disposal, whether it's our fixed rate callable instruments. So let's just say we see an easing, a faster easing than anticipated, that should actually give us a little bit of an asymmetric benefit relative to rates staying flat or trend a little bit higher. And that has to do with the fact that we took advantage and crumpled off a little bit of net effective spread while rates remained high by bringing in more fixed rate callables. So as we head into what I would call a medium term easing cycle, you should really start to see our net effective spread, everything else remaining equal benefit from that hedging strategy that arises from our fixed rate callable strategy. The only other point that I would make, and I think you alluded to this initially, is what happens if rates stay pretty high. I would say that assuming a flat to perhaps 100 basis point shock on our existing portfolio, you can expect the effect on our net effective spread coupled with just how we think about our loan portfolio to result essentially in a flat net effective spread projection.

Yeah, that's great. That's very good detail. Appreciate that. And then actually, in terms of on the credit side, you're moving into higher product spread over time. Is there a way to think about the impact of that on credit over time, the credit loss content, relative to your historic content on the farm and ranch? Core side has obviously been minimal. Is there kind of a way to think about what's, you know, I mean, you've noted that a lot of this stuff is idiosyncratic, but is there a way to think about, you know, where the run rate could be versus your core farming ranch where, you know, the run rate was so close to zero?

Yeah, with the,

with the, with the credits that we're focused on right now that require a bit more attention substandard, it continues to be pretty idiosyncratic. I think on prior calls last year, we were talking about some of the stresses with permanent crops and specifically almonds in California. Well, we have a situation where actually almond prices have rebounded quite nicely. That will kind of play through the system over the next year. It doesn't immediately result in a pickup because of contracts and other factors. And another one in the partner mentioned this, we have a renewable energy project that requires some additional attention. That had to do with some failure of equipment during construction. It's a situation where we expect that between insurance and contractors, it'll get back on track just fine. But in an abundance of caution, we have downgraded that and, and have special provisions. So that's a situation where we could see some reversal. So it continues to be very difficult to project a systemic or sector problem, credit problem for us. It tends to be kind of one asset at a time. And while the numbers say that we have, we're in a more challenging part of the credit cycle, both 96-day delinquencies, as well as some standards are up. At the same time, the situations that we see continue to be kind of related to very special situations. So I'm reluctant to provide any guidance on how that very favorable historic experience will be trending up in the future. It, it, there's not current evidence to say, yes, we're going to have a problem here or there. It tends to be one at a time.

Okay, that's definitely helpful. So

we're good.

If I might just add one comment to what Brad said, which will likely help you if you think about this. And, you know, it does point to the fact that we tend to have a more conservative outlook in terms of credit. And this has to do with the way our expected loss models work. So when we start to see volume shifting towards our more recreative lines of business, that also draws more expected loss estimates of projections. And so that tends to smooth out over time. So that's just something to keep in mind as you're thinking about, you know, modeling some of this, but it sort of all gets booked at once. And then, you know, then we don't have to worry about it, the volume. There's a little bit of a.

Yeah. Okay, great. Thanks. And then actually one political question, obviously a lot of noise and things happening in DC, but specifically in terms of the renewable energy business, the Inflation Reduction Act, you know, obviously provide a lot of funds for that. Are there any indication that, you know, there could be changes in, you know, how the level of support for projects there or just any color, you know, in terms of what could be changing in DC relative to that?

Sure.

A couple thoughts on that. First of all, you've had some reports, for example, of grants being frozen by USDA for renewable energy projects and those things. The projects that we're financing are really not grant dependent. They're more investment tax credit dependent. And so it's important to start out by making that distinction. Where exactly the administration and Congress, because it'll take a change in tax law, go to the tax benefits associated with these projects remains to be seen. But a couple points. First, the projects that we have financed, those credits are locked in and in their credits, they're not grants. Second, that when you look at congressional support for the tax credit elements of the Inflation Reduction Act, particularly as it relates to some of the projects for construction of new energy infrastructure and certain types of renewable energy, a lot of that money has been spent in traditional Republican districts and is quite popular. So I think we're taking a wait and see attitude. We are very much comforted by the fact that what we have in our books is locked in. And if things change, we can adjust our origination accordingly. The final point I would make is that these remain huge addressable markets for us. So when you look at the increase in our renewable energy segment, on a percentage basis, it's pretty impressive. On a notional basis, it's becoming quite impressive. But relative to the addressable market, it's still but a drop. And so we're going to continue to be very disciplined in what we originate. We're going to continue to leverage the relationships that our key professionals have with other industry players to focus on quality projects. And if there are changes in tax law, we will adjust accordingly. We're not in a position where we can't make those adjustments in a nanosecond if we see something unexpected or negative coming out of tax legislation, for example.

Okay, great. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Gary Gordon. Your line is now open.

Okay, thank you. So I had several questions. Most are asked. Just one last one on the loan reserve. So you described the credit issues last year as idiosyncratic. And those were dealt with with specific reserves and chargeoffs. Overall, though, the reserve was up by about $7 million. So the question is, where do we go from here? Are there does this introduce a period of steady increases or not? I guess maybe I'd put the question as, once you've discovered some idiosyncratic issues, is the expectation that that's part of your business going forward? Or was this sort of a catch up in the reserve to reflect that things can happen? Just trying to think about the extent of the reserve built up last year and what that means going forward.

Yeah, I'm going to turn to Mark Crady to give you some additional color on this. But let me just first start by saying that for a $30 million balance sheet, a $7 million additional reserve is nothing compared to other financial institutions. And it kind of sticks out because it's maybe a bit more for us, but relative to other institutions and relative to our credit, our capital, pardon me, relative to our capital. It's extremely minimal. And I also know that it's very difficult to provide more specific because these situations do continue to be pretty idiosyncratic. But let me just turn to Mark. Mark, maybe you can come off mute and let me turn to you to provide a little bit more color to help address Gary's question.

Yeah, good morning, Gary. First off, I would say the increasing allowance did not reflect any sort of catch up. I'll talk about the allowance in terms of the entire year of 2024. So the allowance increased by about $11 million. $2 million was a farm and ranch loan we talked about in the second quarter, third quarter. We increased the allowance by about a million on another farm and ranch loan. And then earlier in the opening remarks, and Brad mentioned the renewable energy loan that we took a million for provision in the fourth quarter. So those three together represented $6.5 million of the $11 million increase for the year. And the remainder represented various other downgrades, primarily the results of the agricultural cycle. And then volume growth. We had significant volume growth in our new corporate segments, which kind of require a bit more capital than farm and ranch. So again, I'll just emphasize it wasn't a catch up in 2024. Really, it continued to be sort of idiosyncratic loans that we saw during the year.

If we got, let's say, zero idiosyncratic issues this year, presumably the reserve wouldn't have to change materially.

I think that's right. Yeah, keep

in mind, Gary, that loan growth is one of the the other things though that I want to mention in response to your question of whether there's a catch up. You know, there was a time in my career, a long time ago when management had significant discretion on how those allowances were funded.

That

is not the case today. These allowances are highly challenged and scrutinized by both our auditors and our regulators. And so we follow very strict formulas that are aligned with the classifications of the loans and the models that we use for allocating allowances when we do new business. And there's very little discretion in there.

So

what you see is what you get. And if something reverses, we've suggested that you could see a reversal in this renewable energy loan, for example. If something reverses, it'll go down. And if something comes on, it'll go up. But we can always point to very specific situations

that are the cause of that. Okay, thank you.

There are no further questions at this time. I will now turn the call over to Brad Nordam for closing remarks.

Thank you, operator. And thank you all for participating. I really do appreciate it. We learned something hearing the questions and what's on your mind. And to that end, there are follow-up questions. Please reach out to Jalba. We want to be very transparent and thorough in our responses to you. We will host our next regularly scheduled call in May. At that time, we'll be reporting our first quarter 2025 results. And as I said earlier in my comments, we are very optimistic about 2025. And for that reason, look forward to having that call with you. In the meantime, all the best for a little bit warmer weather for most of you. And thanks again for your participation.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.