Q3 2020 Federal Agricultural Mortgage Corp Earnings Call
Good day and welcome to the farm in the third quarter 2020 Investor Conference call.
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I would now like to turn the conference over to Bradley.
Please go ahead.
Good afternoon, everyone I'm Bretaa Norte home and I'm very pleased to welcome you to the third quarter 2020 Investor Conference call.
We have an exciting a report for you today, but before I begin I'd like to first ask Steve Mullery, Our general counsel to comment on forward looking statements that management may have today as well as farmer Mac's use of non-GAAP financial measures Steve.
Thanks, Brad.
Some of the statements made on this conference call may be forward looking statements under the securities laws.
We make these statements based on our current expectations and assumptions about future events and business performance.
May not be obligated to update these statements after this call.
We caution you that forward looking statements are subject to risks and uncertainties.
Actual results may differ materially from the results expressed or implied by the forward looking statement.
In evaluating farmer Mac, you should consider these risks and uncertainties.
As well as those described in our 2019 annual report on form 10-K filed with the FCC in February.
Stated in our quarterly report on form 10-Q filed with the FCC today.
In analyzing its financial information farmer Mac, sometimes uses measures of financial performance.
That are not presented in accordance with generally accepted accounting principles in the United States.
Also known as non-GAAP measures.
Disclosures and reconciliations of farmer Mac's non-GAAP measures can be found in the most recent form 10-Q and earnings release posted on farmer Mac's website farmer Mac dot com under.
Under the financial information portion of the Investor section.
Recording of this call will be available on our website for two weeks starting later today.
Thanks, Steve and good afternoon, everyone and thank you very much for joining us.
We hope that you and your families remain safe and healthy during the pandemic.
Admits continuing uncertainty on many fronts farmer Mac delivered a quarter of record earnings growth strong net effective spread stable operating expense ratios and healthy credit metrics.
Our performance reflects the strength of our disciplined approach our resilient business model as well as our focus on a sector of the economy.
Let us among the most essential.
Our culture and the food that sustains us.
Core earnings were a record $27.7 million, reflecting an 18% year over year growth.
That affect the spread was 96 basis points in the third quarter and 92 basis points year to date, a modest increase compared to prior periods as we benefited from excellent funding an asset liability management.
And we're beginning to see.
Shift in the composition of our portfolio towards some higher spread loan purchase products.
We're also pleased with our overall credit quality as we have maintained our consistent and conservative underwriting guidelines for credit approvals and we're continuing to closely monitor the impact of Copa 19 on the portfolio.
Since March we have approved 465 payment deferral deferment requests from borrowers related to COVID-19.
That was through October Thirtyth, and that's what the total principal balance of $454 million or 1.7% of total outstanding credit.
As of October 15, $4.6 million, a farm and ranch covered deferments had been repaid in full.
And another $153.3 million and that's compared to that 454 million.
Farm and ranch, deferments or 35% of loans deferred.
[noise] ended their deferral period, and they are not delinquent.
It is a positive trend.
We continue focusing on serving the needs of our customers and our challenging ourselves to find more efficient and effective ways to provide our customers with the flexibility and assistance that they need to serve their borrowers.
In this new normal.
Although the environment remains particularly fluid we will remain steadfast in our commitment to maintain the availability and flow of credit American agriculture and rural communities.
Turning to business volume, we provided $1.3 billion, a new credit to rural America in the third quarter of 2020. This is a gross number.
However, maturities and repayments in our institutional credit line of business and net pay downs of loans under long term standby purchase commitments.
Modestly outpaced new business this quarter and our outstanding business volume decreased by $52 million from the second quarter to just under $22 billion at quarter end.
We continue to see very strong farm and ranch loan origination volume largely attributable to our continued focus on being proactive in reaching out to our customers and retaining their business.
We've provided $741 million and gross new farm and ranch loan purchases in the third quarter and $1.8 billion you're today.
This compares with $761 million in the first nine months of 2019.
Put another way, we purchased nearly as much farm and ranch.
Loan business in this quarter as we did in the first three quarters of 2019.
Exceptional growth in our farm and ranch and rural utilities loan purchase business over the last year built upon our already strong foundation for growth and bodes well for the future as we continue to execute on significant growth objectives identified in our strategic plan.
Two noteworthy examples from this quarter that reinforce our focus on our long term strategic plan or the completion of two transactions.
First farmer Mac completed a syndication of a new purchased agriculture alone.
And second we completed our first win project financing as part of our renewable Energy project Finance initiative.
These two transactions highlight our efforts to broaden and deepen our market share and are expected to be significant growth opportunities for us over the long term.
I'm extremely proud of our business development teams dedication and execution of our mission and the strategic objectives and all of us volume, especially in this challenging time.
Before I turn it over to Zack I do want to take this opportunity to reiterate my thanks and appreciation to all the employees at farmer Mac <unk>.
Worked tirelessly and have shown immense dedication and determination in unprecedented circumstances.
They have focused daily on executing on our strategies delivering exceptional service to our customers and carrying out our multiyear strategic plan.
What do you consider the volume of farm and ranch this last quarter equal to the first three quarters of 2019 I.
I think that puts in perspective, just how much work has been required to deliver what we have reporting today.
Our board and management are United around the opportunities that are ahead of us and our culture is growing in a healthy way that will only make us stronger in the years to come.
And now I'd like to turn it over to sack, our chief business Officer to give you an update on customer and market developments.
That.
Thanks, Rob.
Our team delivered solid results during the quarter, despite the headwinds of the current environment.
We remain focused on moving forward key elements first strategic plan as loan purchase volumes continue to grow and our capabilities line up well with market trends and opportunities.
As Brad mentioned business fall, you modestly decreased $52.8 million to $22.0 billion in the third quarter of 2020.
It is important to note that a driver of our quarterly volume decrease reflects continued decreases in certain pass through securitization in off balance sheet products, specifically long term standby purchase commitments and loans held in trust.
Combined $177.6 million.
Changes in quarterly volumes for two you need to these products are generally driven by market conditions and reflect our customers' needs to manage concentration levels of their asset base and certain loan origination activity levels.
In addition, given the fee based income farmer Mac receives on these products the impacting quarterly volume. She just does not affect our net effective spread and generally does not affect core earnings with the same degree as our higher spread loan purchase products.
Turning to our on balance sheet loan purchase products that volume growth was up $480.3 million during the quarter driven by significant growth in our corn purchase products in farm and ranch U.S.D. Securities and rural infrastructure.
The sequential quarter and year to date growth rate in that home purchases in these lines of business were 5.6% and 20.3% respectively.
This strong that volume growth over Q me large decrease in AG really securities of $335.3 million, which I will discuss in more detail later.
Loan purchase not volume growth in our foundational farm <unk> Ranch line of business was $399.5 million during the quarter over three times greater than the same period in 2019 and as Brad mentioned the single quarter exceeded the net volume growth during the first three quarters of 2090 combined by all.
Over a $160 million.
On a year to date basis loan purchase net volume growth in our farm and ranch line of business was $905.3 million compared to $239.0 million in 2019.
The consistent growth, we've seen in farm and ranch loan purchases over the last 12 months reflects the success of our customer acquisition and retention initiatives.
Our ability to provide competitive interest rates across our product set and our efficient and effective execution and the loan approval and purchase process.
Additionally, our strong business volume growth over the last year has outpaced the broader agricultural credit markets.
Specifically farmer Mac's agricultural mortgage loan portfolio grew 21.1% over the last 12 months.
Care to the year over year growth rate of the total agricultural mortgage loan market of approximately 3.5% through June 2020.
As part of our efforts to invest in infrastructure in order to become a more commercial organization.
We added a new capital markets function to help facilitate capital flows across our customers.
This team is responsible for developing and managing the syndication functions for commercial lines of business, which also includes cultivating enhancing strategic relationships with the farm credit system.
As Brad mentioned the team completed a milestone for farmer Mac this quarter, completing a $15 million syndication of a newly purchased 59.2 billion dollar agricultural alone.
The syndication sell down was made to a key partner and the farm credit system.
Well the team is still ramping up to an integrated into our business model. We are excited about the prospects of broadening our relationships across the agricultural and rural utilities, London spectrum.
Turning to our U.S.D.A. Securities line of business, we achieved record gross loan purchase volume this quarter up $225 million, resulting in net volume increase of $73 million.
Year to date net volume growth of $188.9 million reflects our focus on customer acquisition and retention strategies.
The consistent and reliable liquidity were able to provide and the increased U.S.D.A. loading the amounts authorized by the 2018 bundles.
That loan purchases in our rural utilities line of business increased modestly by $7.8 million during the quarter, reflecting 62.3 million in new loan purchases offset by scheduled amortization and maturities.
As part of our renewable energy project Finance strategic initiative Farmer Mac purchased a 10 million dollar loan in connection with a wind project financing.
Pipeline in the renewable energy sector remains strong as our rural utilities team is doing an outstanding job of enhancing our foundation and infrastructure to build its reputation as a key player in the renewable energy market.
Our institutional credit line of business.
This experienced a net decrease of $335.3 million during the quarter.
A large part of the decrease reflects the unwinding of incremental liquidity provided to counterparties. During the first quarter of 2020 students significant volatility experienced in the capital markets.
As the need for incremental liquidity has lessened as markets have returned to a less volatile state you.
These counterparties chose to let bonds mature.
We continue to see significant liquidity court in the market, which is a direct result of the federal reserve actions to continue to facilitate the functioning of the capital markets.
As such investment grade credit spreads for large financial institutions remain at historically low levels.
Looking ahead, our pipeline remains strong for the remainder of the year, although some financial institutions may have paused capital deployment to the sectors. We serve given the impacts associated with the pandemic, which has helped facilitate increased volume growth for farmer Mac.
Core agricultural utilities lenders continue to compete for transactions, which in many cases, you're talking competitive pressures in terms of price structure and execution.
We will continue to work alongside our growing customer base and build upon our more dynamic in response to a business model that has led to improved customer satisfaction volume retention and penetration in existing and new markets. He transformed the way we deliver upon our mission.
During this pandemic, we're traveling and face to face interaction there's limited pharma.
Farmer Mac has benefited from the investments we've made in our infrastructure products that in relationship strategies in an effort to continually assess enhancements that will better support our customers.
I'm proud to say, we recently launched a doubling of the eligible loan size that sellers can offer their borrowers for our AG Express scorecard product from $750000 to $1.5 million.
I've expressed is our flagship scorecard product with a simplified application and underwriting process as well as generally same day credit decision.
That's that's something that's been launched we have seen a record month of AG Express application volume with an increased average loan size.
Lastly, we continually survey our customers to better understand how we as an organization can enhance our products processes and interactions.
I'm thrilled to say that our most recent customer survey indicated record results pertaining to farmer Mac customer in relationships focus as well as processes and product enhancements.
We believe our focus on becoming a more relationship oriented institution, it's helping drive these significantly positive results and we look forward to continuing to integrate that focus into our business model.
I'm proud of the results this quarter and optimistic about the many opportunities before us.
We are focused on executing a straightforward customer focused strategy and we believe continued execution of this strategy will enable long term growth profitability and create value for all of our stakeholders.
With that I'll turn it back to you Brad.
Yeah. Thank you very much for that and now I'd like to turn to Jackson package, our chief economist care Farmer Mac Jackson is going to provide you with an update on current economic and credit conditions Jackson.
Thanks, Brad while general uncertainty remains elevated many economic indicators improved in the third quarter, improving consumer spend and increases in inventories helped to boost inflation adjusted third quarter U.S. gross domestic product or GDP at historic pace of 33.1% on an annualized basis, the strong quarter put the U.S.
On track to close the year approximately 4% below 2019 levels. According to data released by the U.S. Bureau of economic analysis.
The U.S. Bureau of Labor Statistics reports that the national unemployment rate improved to 6.9% in October and continuing unemployment claims fell across 49 states and the four weeks leading up to their October 16th data release.
Finally data from the Federal Reserve Bank of Saint Louis indicates that financial credit spreads have stabilized since July 2020 assigned that financial stress is more muted in the second half of the year Kobe.
COVID-19 continues to create a haze around current and future economic conditions, that's a widespread and maintain resurgence of the krona virus could unwind some of the ceiling that was experienced in the third quarter. Furthermore, a lack of clarity on additional fiscal stimulus adds to the uncertainty heading into the fourth quarter.
Conditions in the agricultural economy also improved during the quarter led by improvements in grain commodity prices USAA data shows that oversees commitments for corn soybean and wheat purchases increased significantly over the summer driving up green prices in August and September.
U.S. consumers continue to spend at food and beverage doors at levels, 10% above 2019 levels protein processing plants are operating at typical pre pandemic levels and image and the major end of the major industries tracked by the U.S. Bureau of Labor statistics, the agricultural industry exhibit the lowest increase in unemployment between October 2019.
In October 2020, which further demonstrates the essential nature of the U.S. food sector and its millions of employees across the world landscape.
Once again, although conditions have improved the real economy is not without challenge.
So the 19 case rates have researched in counties with high levels of farm output and food processing and the restaurant industry has yet to fully recover from the dark of outside the home dining.
To combat these unique challenges farmers ranchers enroll electric cooperatives have had access to several stimulus programs throughout 2002 and continuing into the fourth quarter.
The U.S.D.A. distributed over $10.3 billion direct payments to farmers and ranchers from June to October through its first Corona virus skied assistance program or CCEP one.
And the small business administration has distributed more than $8.1 billion in paycheck protection program or PPP loans to businesses involved in agriculture, forestry fishing and hunting.
In September the U.S.J. announced the second round a seat that payments and through October 25th U.S.J. has distributed an additional $7.6 billion and payments across the country of their allocated $14 billion set aside for this program.
The patchwork of government support is one of the reasons that the U.S.J. forecast an increase in net cash farm income and stable land values in 2020.
Credit quality and farmer Mac loan portfolio continues to be strong with no realized losses generated during the quarter loan.
Loans past due by 90 days or more increased in the third quarter of 2020% to 1.07% of the outstanding farm and ranch portfolio or 0.4% across all four lines of business.
The increase is typical of the seasonal patterns and scheduled loan payments as most loans have July 1st the payment due date and he ended the third quarter marks 90 days from that payment date there.
There were no delinquencies in any of the other lines of business.
Individual loan risk ratings held steady in the third quarter of 2020 with substandard loans totaling $326 million across all loans and guarantees this.
This volume is spread across 50 different commodities and over 200 counties in 38 states.
These metrics remain at historical averages as a percentage of farm and ranch as well as total loans and guarantees the.
The American food fuel and fiber supply chain remained stalwart in the face of heightened ambiguity as to.
Basically the food and infrastructure sectors have been supported in all political and economic climates, a testament to the critical nature of the industries that we are here to support with that I will turn it back to you Brad.
Thanks, Jackson now I'd like to turn the call over to apartheid to discuss our financial results in more detail apart huh.
Thank you Brad and good afternoon, everyone. We're pleased to report another quarter of strong earnings growth accompanied by stable credit performance and uninterrupted access to debt capital markets.
He said the pandemic.
I think the quarter were extremely strong and driven by growth in highest spread business while you.
Continued disciplined expense control.
And substantially lower funding costs.
Our access to capital markets has remained strong.
We have issued debt on a daily basis as continued to maintain a disciplined asset liability management policies and practices.
Continue to issue debt across all price points and Tennessee.
Oh, it's priced within historical ranges other GNC issuances.
Oh, that's funding costs have also dropped significantly over the past few months.
We have been effective in using a callable debt instruments to mitigate the ongoing rate prepayments that resulted from the low rate environment, and thereby we've maintained or actually widened our overall spread.
Net effect.
This approach of using cognizant that allows us to continue a very disciplined match funded approached the portfolio.
Secondly, giving us an opportunity to increase spreads on an opportunistic basis.
We continue to make in spreads in the range of 90 basis points, plus or minus a few basis points.
Well capitalized, but strong liquidity and maintained it total cash position of over $900 million as of September thirtyth.
You will also note that's even has a capital position once again this quarter through the issuance of $120 million of non cumulative perpetual series F preferred stock, we used $16 million up in net proceeds to redeem the outstanding Noncumulative Cds.
Preferred stock that had been outstanding.
[laughter] issuance Trenton Appeals on capital position, which increased in total by 83 basis points going from 13.42% to 14.25% and positions us well for us.
Various growth initiatives, but also buffers us.
Of unforeseen.
Due to the timing of the preferred stock issuance farmer, Mac and cut dividends on both Phebe I see these as preferred stock photography days during the third quarter and recognized deferred issuance cost of $1.7 million related to the redemption of the series E preferred stock.
Turning to financial core earnings increased $4.3 million to $27.7 million for the third quarter, 2020 as compared to $23.4 million and pet Quanta 29.
Net effective spread with $51.8 million and good quarter 2020 compared to $42.5 million in the same period last year.
Net effective spread in percentage terms 96 basis points. This quarter exceeded our previously disclosed disclosed target range of plus or minus five basis points of 90 basis points and this is primarily due to a decrease in funding costs I'm from higher spread business volume.
The increase in core earnings.
Mainly due to a $7.4 million after tax increase in net effective spread.
This was partially offset by a $1.7 million increase in preferred stock dividends.
Point $8 million after tax increase in operating expenses at a point $5 million after that increase the total provision for credit losses.
Operating expenses increased by 7% in third quarter, Twentytwenty compared to third quarter 2019 and.
This was primarily due to increased compensation and benefits expenses.
Related to increased headcount through the year to support our growth.
This increase though was offset by lower general and administrative law judge any expenses related to the lower travel and training that we incurred related to the parts pandemic environment, but also other low variable cost.
Printing utilities, and deferment of consulting fees for certain projects.
However, this reduction in expenses the CEO is temporary and we do expect that these will normalize in the future.
We plan to continue such investments as I noted for the foreseeable future and this will be primarily to modernize our infrastructure enhancing technology platform to support our revenue strategies and we also plan to add relevant talent to fill gaps across the organization.
We are a lean organization and as we enter new markets, we need to also grew and modernize our capabilities.
These investments will also enable falling back to more efficiently meet I think.
So you've got the money and thereby enable greater revenue retention over time.
Oh, the said going forward, we expect operating expenses to increase commensurately with revenue growth even.
Even as we make these investments we plan to keep our expenses to revenue of issues within a range that is consistent with our historical averages.
Now turning to the provision for loan losses.
Provision this quarter for loan losses of $1.2 million was largely attributable to continued net cruise and to really get to the portfolio.
Credit downgrades into farm and ranch long term standby purchase commitment portfolio.
Increase was partially offset by improving economic factors that can easily in profit.
Farm and ranch portfolio as well as scheduled maturities in the advantage portfolio.
The economic factors that positively impacted the farm and ranch portfolio, well, improving commodity prices and lower expected volatility in land values.
Turning to our sequential results.
Couponing increased by $1.3 million on an after tax basis compared to second quarter Twentytwenty.
This increase was driven by higher net effective spread of $4.2 million after that and this is partially offset by $8.9 million after tax increase in the total provision for credit losses $1.2 million increase in preferred stock dividends I mean.
$4 million after tax increase in operating expenses.
Hi, net effective spread was attributable to net Balkan crude in the farm and ranch loan purchases.
Accompanied by substantially lower funding costs in the third quarter.
As I mentioned previously we continue to remain extremely well capitalized.
Well, the Max $984 million of core capital as of September Thirtyth, Twentytwenty exceeded a statutory requirement that $314 million or 47%.
This compares to $916 million of core capital as of June Thirtyth, which exceeded our statutory requirement by $248 million up 37%.
This brings our tier one capital ratio to 14.25% from 13.45% an increase of 83 basis points from the prior.
The increase in capital from the prior quarter is primarily due to the previously mentioned issuance of series a preferred stock as well as a 10 million dollar increase in retained earnings in the third quarter of Twentytwenty.
Our liquidity remains extremely strong.
Yeah thought exceeding regulatory requirements.
As we head into the fourth quarter, we continued to maintain a higher than required level of cash and liquidity.
Believed that this elevated position will allow us to weather any unexpected cashed flu shots given the continuing economic uncertainty it.
It'll also adequately fund to fund.
To meet customer needs.
But it will also allow us to retain the flexibility that we need to maintain low but at the levels of liquidity as market conditions change.
In conclusion solid underlying fundamentals reflect a well capitalized balance sheet.
Core earnings and disciplined ask liability management.
Capital markets access at competitive levels, our use of callable bonds.
Listen to us to successfully continue to deliver.
Found that mission.
We have strong liquidity and capital positions as I previously mentioned.
These should enable us to navigate these uncertain times study effect.
Well complete information about farmer Mac's third quarter Twentytwenty performance. It's in the 10-Q, we filed today with the FCC.
And did that drive I've done at that.
Thanks Apart huh.
In closing, we remain well positioned for success in the current economic environment as we built upon a resilient business model with increased focus on our customers and their needs. We have generated consistent strong core earnings against not only a tough cobot backdrop, but also a miss and investing environment.
With benchmark interest rates around the world at near Zero percent.
Well, the timeline and trajectory of an economic recovery remains somewhat uncertain.
I remain very optimistic about the future even these uncertain times and that's primarily.
Because of the abilities of our team the strength of our balance sheet and the power of our core operations.
We will continue to remain diligent strategic and focused on the future.
As I've said on prior calls farmer Mac was created a response to a crisis and its intended to be a resource for financial institutions, serving Rural America and this is especially true during these times of economic pressure and uncertainty.
So now I'd like to see if we have any questions from anyone on the line today.
Later.
Speakers. Your lines are now open we will now begin the question and answer session tough question Press Star then one on your Touchtone phone.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Our first question today will come from Greg Pendy with Sidoti.
Please go ahead.
Hi, guys. Thanks for taking my question just a couple of first of all can you just touch on the when the.
The window that you that you did and is that similar to solar where you can lock in Brad.
I believe that you know something that was attracted to the 20 year Brad.
And then second could you just kind of.
Give us a I've got some contacts just on they are denied.
Thank you Greg delinquencies.
As well as the defer the deferred loans I mean is this something that you think will kind of rise over.
2021 or is there still is some delinquencies outstanding how should we be thinking about that I guess as we look a year out right.
Yeah, Hey, Greg Brad here, and thanks, very much for joining us today Greg.
I'll have Jackson give you some additional color on the delinquencies in deferred but it's important to recognize that right. Now that are for loans are not included in the delinquency numbers. So they are separate I think it's also important to note that you know we've had oh large slog between 25 in between.
A quarter and a third of those loans on different schedules that have gotten back on schedule already Oh, a lot of the remaining ones are scheduled to resume payments after that after the first of the year, but we'll give you some more color on that as it relates to.
Wind and solar yes, the revenue contracts for wind projects have a fixed pricing.
They also in many cases have production tax credits a those are both a function of production the more when there is the more revenue from.
Fixed price power purchase contracts.
As well as the tax value the ptcs it goes up and Conversely, the wind blows unless it goes down what you find over you know a multi year period of time as that those projections are.
Our fairly level and fairly consistent although candidly not quite as consistent as solar so there's less variation was solar production.
Then there is with wind up but this is a portfolio of operating projects. So we had the payment history. It wasn't performs history it wasn't based.
So much on projections is a historical operating performance.
And they were underwritten on on that basis. So a we have a high degree of uncertain. We have a high degree of certainty of the cash flow and the ability of those projects to cover.
Cover there very well padded a debt.
That service coverage ratios.
We're excited about that going forward just an additional comment we do have a good pipeline of solar deals.
Looking out over the next year I think we probably anticipate that we'll be doing more solar then we will be doing wind up.
And that's just because well when does it become incredibly economic.
In many places in the U.S., particularly kind of Texas through the Dakotas in the Midwest.
The use of project finance debt for solar projects is more common and so we expect both opportunities, but probably more from solar going forward.
So going back to where we are with kind of delinquency trends as it relates to overall portfolio performance Jackson can you add a little bit of color there.
Sure I'm happy to.
Delinquency trends tend to follow a seasonal pattern. So we've got that pop in the third quarter. Following the July 1st payment. There's typically a lot of curing that'll happen out of that in the fourth quarter. That's a very typical seasonal pattern in the payments.
This year there is some additional U.S. government funds coming out in throughout.
Throughout the fall so the cheap that wanted to fab two payments are helping to offset some of the disruption to the markets throughout the year. You've also got good commodity prices heading into the end of the year. So fourth quarter commodity prices are elevated compared to prior parts of the year. So there's a lot of markets imports and traditionally we.
You see a drop in the fourth quarter delinquency rates.
Right into it the highly volatile period, we've got crude by are still in the backdrop. So we can't say with any certainty what it's the fourth quarter will follow that seasonal trend, but it is a highly seasonal trend and one of the data points that we relieved but I'll I'll kind of just once you do is just a high percentage of loans that are coming out of that deferral period that are paying.
Making their payments and coming off and not being transitioned into delinquency speaks very you know speaks very well about the quality of those assets and their ability to continue playing once they're true that deferral period.
Great. That's helpful. Thanks, a lot.
Our next question will come from Terry Gordon with Gary Gordon Investors. Please go ahead.
Hi, Thanks to a thanks for taking my call a couple of questions. One at least my calculation is that your charge offs were actually to zero this quarter.
400000, a year to date, so here the delinquency trends, but my right and calculating that they didn't result in a single loss in the third quarter.
Yes, that's correct, Gary and Brad here very nice to hear your voice you know, we do quite a bit of migration analysis, what when does the 30 day delinquency become a 90 day want is a 90 day become you know <unk> real estate owned and one is a real estate owned become a loss.
You're correct, there's absolutely statistically insignificant amount of loans migrating from those 90 day delinquencies to us.
Real estate owned and two charge offs, we we really have none to speak of.
Okay. Good.
Thanks on the capital ratio to sit now is about 14.3% and your sort of target range for the capital ratio does.
Is this the current ratio does that fall sort of in the middle at the high end at the low end.
[laughter] that's at the high end of the range I'll, let upon a jump in here with some some comments about how we think about our our minimums, our regulatory minimums, our board minimums and in our overall target range, but it's at the high end right now and when we had an opportunity to do the preferred <unk> you know if you.
Months ago or retire more expensive one that was a pretty easy financial decision, but to put a little additional capital on the balance sheet, recognizing there's a cost to doing that we.
We did so in recognition of the fact that we're in the middle of the pandemic well are.
Performance is remarkably consistent.
You know, there's still a little additional level of uncertainty out there.
We also did so recognizing that Oh, we have been hitting some.
Solid gross numbers and we want to make sure that our growth does not dilute our target capitalization ratios below that which we want.
And so when the markets are wide open as they have been for us the preferred markets.
Putting a little additional on our balance sheet to grow.
Great capitalization cushion to support growth.
It has been and.
An important consideration.
A part or maybe you have you can add to that though and talking a little bit more about you.
You know arrangers and where we are with our excess regulatory capital in and how we're thinking about that I know absolutely Brad you you've covered it sometimes its you know some of the reasons why we undertook this it was opportunistic you know it was a it was the right timing and you know, we really were able to get.
Get additional capital, but also a call.
That's a capital spend really on a net basis, we added about 50 million extra and then we were also able to self capitalize it a pretty good clip. So all of that really resulted in that 83 basis points increased from a you know from the second quarter to the third quarter that'd be that'd be highlighted but just as we think about our statutory minimum capital and where are we.
We need it to be you know just in dollar terms that needs to be at about 670 million and weve far exceeded it were 984 million.
On the 300 plus million above that statutory minimum so that puts us in a pretty good position you know both.
Well it does as Brad noted too to make sure that we don't dilute our capital as we continue to accrue.
And secondly, you know we're still in a fairly uncertain economic environment.
And you know a lot about credit remains extremely strong we think it's the right thing to do both from a liquidity standpoint, as well as from a capital standpoint to be pretty well capitalized.
You know that the level that we really target for somewhere between 12% to 14% that's really an internal metric and he certainly can go below 10% on tier one capital. So those are those are some additional comments and I hope that's helpful.
Yes. Thanks, Okay. One last question it sounds like you're trying to migrate your asset mix more toward the farm and ranch loans and the renewable energy.
Ah loans my impression is those are you know higher yielding wider spreads.
And maybe a little more credit risk net net how does would you would view as the return on equity of a farm and ranch loan compared to let's say the institutional business. Yeah. Okay. A couple of comments on that scary or not and I do want to talk to jump in here on on this too, but you know farm and ranch is as you know Oh.
Very important definition of you know what farmer farmer Mac does and why we're here you know providing that first mortgage agricultural loan secondary market to the ranchers and farmers are large and small all across the United States.
So we've put a huge amount of emphasis on that over the last year because it is so core to our mission of why we exist. It also is accretive it is profitable and above average profitability for what we do so you know Zach provided a couple of highlights of what we're doing to improve customer.
Service make our products more flexible more competitive and he may be able to elaborate on that a bit more for you.
Renewable energy, we do see that as also being kind of accretive to our overall returns.
It's about 18 months ago that we announced that we were going to start to making commitments to purchase loan solar.
And when it does we just talked about in.
In the market and slowly, but surely we're getting off to a good start there I think you know for this year. We thought maybe we could do about 100 million I think we're going to probably come in in the 80 90 million something like that but then can we you know maybe double that every year for the next couple of years, you know I think that's our expectation and as we do.
You know it could help drive some incremental accretion to earnings.
And also what you know as I talked about you know the lower margin some of the lower margin institutional business, especially when that when those customers have alternative Casa borrowing, particularly with the fed center and a pension in the debt capital markets that maybe even lower than.
In the past.
You know, we're asking ourselves. The question you know if we choose not to roll over this bond if we choose not to renew this deal going forward.
Does it hurt our relationship with this important customer or does it hurt our mission and if the answers to those are no. We're willing to let that business go a with the expectation that some of it will come back a once we get past this period of fed intervention in the debt capital markets.
Exactly but maybe you can add some more color here as I can and kind of round out you.
You know how we're seeing this change.
Change the slightly changing mix and assets.
Yeah, absolutely Brad I think this quarter.
Hi, I'd say, it's a relative shift.
In many instances a market forces kind of drove that shift you know as Brad indicated our agvantage securities at a fairly sizeable decrease this quarter and that was primarily attributable to the incremental liquidity that was put on earlier. This year, we saw significant volatility in the capital markets. It's things have somewhat improved we've seen it.
Reversal that and the decline, which you know were slightly down on a year to date basis, an advantage by more notable this quarter given the unwinding that liquidity. In addition, I made comments in the prepared remarks about our pass through securitization then let's.
Standby purchase commitments again market driven a lot focused on concentration risks and that those come down it really makes it noticeable that the increase this quarter was long loan purchases on our on balance sheet.
I think Brad highlighted a couple of key points in terms of us focusing on.
On broadening our seller base, a bottle broadening our product base as well I noted in there that we did a syndicated transaction at the farm credit system partner no problem with those products in markets that were in does help diversify or you know our product base or risk base and are a return base and I think that's starting to make UBS.
More importantly, the impact on our its balance sheet and income state going forward.
Okay. Thanks, a lot.
This will conclude our question and answer session.
I would like to turn the conference back over to Brad normal for any closing remarks.
Certainly operator, thank you and thanks to all of you for for jumping on.
Five o'clock on a on a Monday evening [laughter], it's been quite a day in a in the markets today.
For financials and really across the board. So I I hope that you you've been on the right side of.
This rapidly moving market, but thanks, again, and it's always the case.
If you have follow on questions. Please get in touch with Joppa, we want to be very responsive.
To you and to your questions and are happy to jump on the call.
You know.
Impromptu.
Or scheduled in the next days to to follow up with additional.
Questions that you might have that's sad.
I'm very proud of how things are going at farmer Mac I'm very pleased with how things are going at farmer Mac I Hope you can hear in the voices of of the executives Oh from the team who are on this call today that there is both confidence and excitement about what's go.
Moving on and we are we will be doing our very very best a tick.
To keep this going and are very optimistic that we will.
So thank you.
The conference has now concluded. Thank you for attending today's presentation you.
You may now disconnect.
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