Q3 2024 Federal Agricultural Mortgage Corp Earnings Call
Good afternoon ladies and gentlemen and welcome to the Farmer Mac 3rd quarter 2021 earnings conference call.
Speaker Change: At this time, all lines are in listen only mode, following the presentation we will conduct a question and answer session. If with any time during this call you are required immediate assistance, please press stars you know for the operator.
This call is being recorded on Monday, November 4, 2024. I would now like to turn the conference over to our senior director of investor relations and finance strategy. Mr. Penazeret, please go ahead.
Speaker Change: i
Speaker Change: Good afternoon and thank you for joining us for a third quarter 2024 Arnex Conference call.
Speaker Change: and Jalpa Nazareth, a senior director of investor relations and finance strategy here at Pharma Mack. 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 these reforms and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farm Max 2023 Annual Report and Subsequently, SEC Filing's for a full discussion of the company's risk factors.
Speaker Change: On today's call, we will also be discussing for non-gap financial measures.
Speaker Change: Disclotosures and reconciliation of these non-gat measures can be found in the most recent form 10Q and earnings release posted on farmermax website farmermax.com. Under the financial information portion of the Investor section.
Speaker Change: Joining us from management this afternoon is our President and Chief Executive Officer, Brad Nordholm, who will discuss third quarter business and financial highlights and strategic objectives. And Chief Financial Officer, Aparna Ramesh, who will provide greater detail on our financial performance.
Speaker Change: 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 Nordholm: Thank you, Jalpa. Good afternoon everyone and thank you for joining us.
Speaker Change: A third quarter, 2024 results demonstrate that farm-and-mack remains well positioned to achieve sustainable earnings and profitability.
Speaker Change: The strength of our capital-based positions as well to continue investing in our long-term strategic initiatives to power our growth into the future.
Speaker Change: We continue to successfully navigate industry change and economic cycles while growing earnings underscoring the strength of our unique business model.
Speaker Change: Our total revenue is year-to-date, improved over $10 million to $270 million over the same period last year. From really due to higher net effect to spread.
Speaker Change: That increased reflects the shift of new business volume towards higher spread business, that is renewable energy, and the proactive management of our balance sheet and funding.
Speaker Change: Corp earnings year to date improved $1.8 million to $120 million compared to the prior year period.
Speaker Change: Excluding credit expense, or earnings has improved nearly $7 million, over 5% year over year.
Speaker Change: As we previously mentioned on prior calls, the nature of our credit events and our just have tended to be idiosyncratic. We believe that our credit profile remains strong overall and that we're well buffered given our strong levels of capital.
Speaker Change: Operating efficiency has been better than our long-term target, of 30% throughout 2024. A reflection of our Disabundra approach to expense management.
Speaker Change: We achieved this while implementing the Security's Treasury Accounting Reporting System, also known internally as stars.
Speaker Change: This platform is the largest systems and process implementation project in farmer max history.
Speaker Change: It is a comprehensive transformation of our core infrastructure that facilitates transactions for more than two-thirds of our balance sheet, included some of our largest loan exposures.
Speaker Change: This is a significant capital investment that will enable us to scale our business over the next decade.
Speaker Change: This platform was redesigned to support more complexity in our hedging and dead offerings. Modernized our $750 billion payment flow and unable new product offerings in a linebook with our multi-year growth objectives.
Speaker Change: The end-to-end streamlining of our legacy systems with the addition of seven commercial off-the-shelf core infrastructure platforms.
Speaker Change: Shed strengthens our business resiliency, enhance our security, safeguard our data and increase our efficiency.
Speaker Change: Thanks to the coordinated execution by teams across the enterprise working with capable industry partners.
Speaker Change: Faris went live just this past week.
Speaker Change: This is a testament to the company's expertise and dedication of bringing complex technology projects to fruition.
Speaker Change: and strengthening our competitive advantage of the marketplace.
Speaker Change: I mentioned that we have achieved operating efficiency of below our long-term target is 30% throughout the year. It's project-septuous stars that enable a company of our size and our balance sheet with fewer than 200 employees.
Speaker Change: To continue to utilize technology, to make us efficient and bring all the other benefits of resiliency, security, and safeguard of data to bear.
Speaker Change: Turning to business volume, the close $2 billion of new business volume this quarter, and $4.9 billion year-to-date.
Speaker Change: Driven largely by a lone purchase volume in the renewable energy and farm and rent segments.
Speaker Change: We surpassed $1 billion in total renewable energy volume in the third quarter, reflecting the continuing strong demand for renewable power generation and storage and the dedication and commitment from our organization to grow the segment in alignment with our long term initiatives.
Speaker Change: The first buying our loan portfolio into new airlines at business. That's just renewable energy and corporate aid finance have been key priorities over the last several years.
Speaker Change: And that diversification is benefiting us through changing market cycles.
Speaker Change: Our 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.
Speaker Change: with an AirFarm and Ratch segment, we closed nearly $1 billion of new farm and ranch loan purchase volume year to date compared to a total of $780 million in the full year 2023.
Speaker Change: We believe we'll see this positive momentum continued in the fourth quarter, as tightening bank liquidity and adjustment to a higher rate environment with a near-term expectation of policy using best taken hold.
Speaker Change: The forecast is declining and far in farm income relative to prior years is expected to strive more low in volume, including potential pool purchases similar to those acquired during 2024.
Speaker Change: We are incredibly pleased to see strong momentum in the Farming Ranch segment. It is a segment that is so core-tour mission and growth in the segment continues to propel our secureization program where we have seen strong investor demand.
Speaker Change: Offset in buying growth this year has been maturitys of several large egg vantage counterparts.
Speaker Change: A trend we have seen over the last nine months is the overall slower market for long growth and a tightening of credit market spreads of resulted in reduced liquidity needs, particularly for one of our larger farm and ranch counterparts.
Speaker Change: In early October, we acquired a $122 million pool of farm and ranch loans from single agricultural lender.
Speaker Change: and the FAC position under the course of Farmarmac Secondary Market Trot, Thracard of providing a cultural under the lootians for their capital planning, especially as there is uncertainty about how capital regulation will evolve over the next few years.
Speaker Change: We have consistently presented our product offerings.
Speaker Change: is a capital efficiency and liquidity tool for our customers in both the agricultural finance and rural infrastructure lines of business.
Speaker Change: We believe that this is because the relative value that Farna Mac brings to our banking and financial services partners and ultimately the agricultural and rural borrowers.
Speaker Change: There's even greater would credit as a bit tighter.
Speaker Change: We're working towards our fifth overall farms, various secure disation transactions.
Speaker Change: later this year, where I continue to explore the opportunity to introduce a new securitization product for our customers that has the potential to transform the agricultural mortgage market industry with new efficiencies that benefit both the lenders and the borrowers.
Speaker Change: While we are in the preliminary stages of development and broader market discussion,
Speaker Change: We are very pleased by the tremendous support we've seen from our customers and investors for this program and remain committed to being a regular issuer in the market for a set of securitization products that align with both our borrower and investor interests.
Speaker Change: As we look ahead, we are confident our underlying business model, strong capital position, and uninterrupted access to the debt capital markets will continue to uniquely position us to partner with our customers.
Speaker Change: Our ability to navigate all environments positions us well to continue to create more opportunities for enhanced shareholder value.
Speaker Change: while at the same time fulfilling our mission.
Brad Nordholm: And now I'd like to turn the call over to Aparna Ramesh, our Chief Financial Officer, to discuss our financial results in more detail.
Speaker Change: Aparna
Aparna Ramesh: Thank you, Brad, and good afternoon, everyone. Our third quarter 2024 results once again highlight our consistent financial and operational execution, coupled with proactive management of our balance sheet and funding sources.
Speaker Change: Our diversified streams of business revenue and our funding and hedging capabilities.
Speaker Change: Allow us to fulfill our mission and generate consistent shareholder returns through market cycles, while staying in tight alignment with our long-term strategic initiatives.
Speaker Change: Outstanding business volume was $28.5 billion as of September 30th, a net decrease of $290 million from June 30th, 2024, due to scheduled maturities and repayments in the agricultural finance line of business, primarily from a single large farm and ranch counterparty.
Speaker Change: reflecting counterparties evaluating their liquidity needs and overall slow loan growth.
Speaker Change: The Liquidity and Loan Growth Opportunity Needs of Pharmamax Advantage Counterparties Changes in the Pricing and Availability of Wholesale Funding and the Relative Value of our Wholesale Financing Product vs. Other Funding Alternatives
Speaker Change: Based on all of 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.
Speaker Change: and as the yield curve steepens and interest rates stabilize.
Speaker Change: While business volume declined on a net basis, we saw strong activity in our renewable energy and farm and ranch segments.
Speaker Change: The activity in these two business segments included strong loan purchase volume, which is generally more accretive and higher spread relative to the advantage product.
Speaker Change: This shift in business composition to higher spread business has been one of the drivers of the increase in net effective spread quarter over quarter.
Speaker Change: Turning to core earnings now.
Speaker Change: The sequential increase in core earnings was primarily due to a $1.8 million increase in net effective spread, a decrease in preferred dividends as a result of the redemption of the Series C preferred stock in July, and a $2.8 million decrease in credit expense.
Speaker Change: As we've mentioned on prior calls, our Treasury and Funding Desk has opportunistically taken advantage of favorable market conditions in the first half of this year.
Speaker Change: by calling More Expenses Fixed Rate Debt to reissue those at lower rates.
Speaker Change: We've seen now the benefits of this dynamic play out in the third quarter and we expect to continue to see more of this benefit playing out throughout the rest of 2024 and likely into the first quarter of 2025 as well.
Speaker Change: The modest decline in core earnings year-over-year was primarily due to a provision in the third quarter of 2024 compared to a recovery in the prior year period.
Speaker Change: The $3.3 million provision to the allowance for losses this quarter was attributable to overall volume growth in telecommunications and renewable energy and a large permanent planting loan that is currently delinquent.
Speaker Change: Coal earnings, net of credit however, increased by 6% year-over-year.
Speaker Change: with 2023 being an exceptionally strong earnings and credit year.
Speaker Change: This growth is also very consistent with our long-term strategic plan target key metrics.
Speaker Change: Our liquidity and capital positions remain well in excess of all regulatory requirements.
Speaker Change: Our projections show minimal change in our profitability, with limited exposure to movements and interest rates where the market rates go up or down.
Speaker Change: As of September 30, 2024, PharmaMac had 309 days of liquidity, and we held approximately $850 million in cash and other short-term instruments in our investment portfolio.
Speaker Change: 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 disruption.
Speaker Change: where we are laddering and layering duration to minimize volatility.
Speaker Change: These are all practices that are consistent with our disciplined asset liability management approach, which is designed to help minimize earnings volatility over the medium to long term.
Speaker Change: Despite macro headwinds and widening credit spreads that have affected many primary issuers of debt securities,
Speaker Change: We continue to see strong access to debt capital markets and a flight to quality investments. All of these factors, coupled with opportunistic debt issuances, allow us to be very well positioned to accretively fund new asset opportunities as they arise.
Speaker Change: Now turning to Operating Expenses.
Speaker Change: These have been relatively flat sequentially as the increased headcount and increased stock compensation expenses were largely offset by a decrease in consulting costs related to our various strategic initiatives.
Speaker Change: Operating efficiency was 26% for third quarter 2024 and 27% year-to-date.
Speaker Change: That is better than a long-term strategic plan target.
Speaker Change: And it's a reflection of our disciplined approach to expense management, as Brad noted. And we continue to monitor and manage our expense growth very proactively against incoming revenue streams.
Speaker Change: I, too, am very pleased to announce the substantial completion of our multi-year technology investment in our treasury and cash management systems to enhance our trading, hedging, and reporting platforms.
Speaker Change: This large-scale investment to modernize our treasury infrastructure and our front-end loan platform systems positions us well to mitigate risk, increase efficiency, and enhance deal flow.
Speaker Change: We embarked on this journey 19 months ago to set the foundation for PharmaMac to scale its portfolio and continue to introduce diversified rate and product offerings that are enabled by modern Treasury capital markets and cash management infrastructure.
Speaker Change: We are very proud of the many teams across the organization that executed on this initiative. Many organizations, I'll note, take several years to complete such a large-scale and complex initiative.
Speaker Change: But given our disciplined approach to expense management and our capable teams, we wanted to compress the timeline and cost structure. We were able to accomplish that without compromising on functionality.
Speaker Change: We do have other technology initiatives ahead, such as modernizing our loan purchase platforms.
Speaker Change: We remain committed to bringing cutting-edge technology and new capabilities to our customers and will continue to invest in finding ways to build innovative systems that accelerate growth while adding process efficiencies for all of our customers and markets.
Speaker Change: As we look ahead, we will continue to closely monitor our efficiency ratio and manage it such that we expect to remain at or below a long-run average of 30%.
Speaker Change: Based on our analysis, it's important to note that the issues involved with this delinquent loan are borrower-specific and are not indicative of any broader systemic risk in our portfolio.
Speaker Change: While this loan was placed into a non-accrual status, we did receive payoffs from a prior non-accrual loan that more than favorably offset the revenue decline from this one during the quarter.
Speaker Change: This illustrates the strength and resiliency of our business model and how our long-term orientation with our customers allows us to fulfill our mission but also maintain our profitability.
Speaker Change: 90-day delinquencies were 51 basis points across the entire portfolio as of September 30th, 2024, compared to 22 basis points at the end of June 30th, 2024.
Speaker Change: Approximately half of the sequential increase in 90-day delinquencies is driven by the single permanent planting loan mentioned above, due to factors that we noted that we believe are borrower-specific and not endemic across our portfolio. We also believe that we are adequately collateralized on this exposure.
Speaker Change: Also contributing to the increase in the third quarter is the seasonal pattern of pharma max 90 days of delinquencies with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarters of each year.
Speaker Change: This seasonal pattern is due to the annual and semi-annual payment dates on the majority of farm and ranch loans.
Speaker Change: Our overall credit profile, in summary, continues to be stable across our agricultural and rural infrastructure portfolios through third quarter 24, and it's reflective of our rigorous credit policies and our diligent underwriting practices.
Speaker Change: Our Tier 1 Capital Ratio was 14.2% as of September 30, 2024 compared to 15.3% as of June 30, 2024.
Speaker Change: The sequential decrease in core capital was primarily due to the redemption of the Series C preferred stock in July, which drove 71 basis points of the 110 basis points sequential decline in the Tier 1 capital ratio.
Speaker Change: We considered several factors prior to the decision to redeem the $75 million of Series C preferred stock, including a robust capital position, securitization program that provides capital efficiency,
Speaker Change: a dividend strategy and recapitalization that has come from consistent earnings growth.
Speaker Change: We remain confident that our strong capital position will allow us to continue to grow, 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.
Speaker Change: So 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.
Speaker Change: Notably, we delivered a 17% return on equity this quarter and an efficiency ratio of 26%, which is below our strategic target of 30%.
Speaker Change: We believe that a balance sheet is well-positioned for market uncertainty, and we are more optimistic than ever to continue to deliver on our long-term strategic priorities. And with that, Brad, let me turn it back to you.
Brad Nordholm: Thank you, Aparna.
Brad Nordholm: We believe our performance provides yet another example of the dynamic and enduring nature of Pharmamax's business model, which continues to be well-positioned for earnings growth going forward.
Brad Nordholm: We have a solid long-term strategic plan that we're executing on consistently and a proven track record of delivering strong financial results.
Speaker Change: We continue to deliver on our mission throughout the agricultural economic cycles.
Speaker Change: Our capital base is strong and growing, providing capacity for further growth and creating more opportunity.
Speaker Change: More opportunities for us to enhance shareholder value.
Speaker Change: Before turning to Q&A, I'd like to add that we will be closely monitoring the election results tomorrow. We have ongoing efforts.
Speaker Change: to assess how any administration policy may affect pharma-max business.
Speaker Change: And we don't currently foresee any material changes from either changes in administration, but we certainly will be monitoring and providing any relevant updates on our future earnings calls.
Speaker Change: I would like to remind everyone, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Our first question comes from the line of Boss George from KBW. Please go ahead.
Boss George: Hey everyone, good afternoon. I wanted to start with a question just on the spread. You know, what drove the increase in the farm and ranch, the yield there, and then on the corporate ag finance side was the decline, that one loan you mentioned, or anything else that we need to think about? Thanks.
Speaker Change: It's Brad here, very nice to hear from you. You know I'm going to turn to Zach Carpenter to give you that color on those portfolio matters.
Speaker Change: Thanks.
Zach Carpenter: Specifically on the farm and ranch spread information, if you recall, last quarter we did purchase a pool of loans, about $60 million.
Zach Carpenter: those have very strong accretive spreads as it pertains to the farm and ranch loan purchase segment. As we highlighted on their prepared remarks we are seeing a greater increase in loan purchase opportunities specifically in farm and ranch reflecting the tightening ag cycle and the needs for bank to focus on liquidity and capital and you know our farm and ranch product is you know one of our more accretive products and so as we look to be competitive and provide
Speaker Change: opportunities and products for our customers. We are seeing the opportunity to take take advantage of some increasing spreads in the right environment especially with some of these one-off strategic initiatives that
Speaker Change: We've been working on such as the pool purchase opportunities. As it pertains to the corporate ag finance spreads that you noted in our queue, the impact of that is solely related to the single permanent planting loans we mentioned in our prepared remarks.
Speaker Change: Can I just add one point in the farm and ranch polls? All of the factors hold and then in addition we did see a reversal of non-accruals that hit our farm and ranch portfolio so that did actually give us that little bit of a pause I would say in terms of the sequential increase in NDS.
Speaker Change: Aparna, you noted that you expect flat to higher earnings with lower rates. If rates remain more range-bound, do you expect a similar sort of earnings profile?
Aparna Ramesh: Yeah, absolutely. I think, you know, if rapes...
Aparna Ramesh: Rates are generally sort of trending down, and obviously we've seen a little bit of volatility, you know, as rates settle. But Zach noted that we're starting to see an increase in loan purchase volume, and we're seeing that mainly in anticipation of the fact that the yield curve is deepening and borrowers are, you know, one, just getting a little bit more used to an elevated rate cycle. And so you're seeing sort of that borrower activity increase.
Aparna Ramesh: As rates start to come down, you know, we also have an opportunity to call a lot of the bonds that we'd issued during the peak of the rate cycle.
Aparna Ramesh: And, you know, you saw a little bit of that effect come to play both this quarter in particular.
Aparna Ramesh: For example, you saw a widening of our NES when you just look sequentially, and a good portion of that widening, you know, was related to the business compositional shift to NES that's more accretive when you think about business volume. But the other 50% is really related to the fact that we were able to very proactively call.
Aparna Ramesh: Some of the issuances that we had done, you know, callable bonds that were at much higher rates, and we were able to rephrase downwards while the asset side of the house was able to bring in loan volume at higher rates. So that that actually led to a little bit of margin expansion.
Speaker Change: Okay, great. That's helpful. Thank you.
Speaker Change: Our next question comes from the line of Bill Ryan from Seaport Research Partner. Please go ahead.
Bill Ryan: Thank you and good afternoon. A couple of questions. First, following your comments, Brad, about the politics, you know, in 2018 there were some tariffs put on various products. I know, I believe, China retaliated putting some tariffs on, I believe, it was soybeans.
Aparna Ramesh: You know, I don't, I obviously wasn't following the company back then, but could you talk about, you know, if Terrace 2 come back into play in the next couple of years?
Aparna Ramesh: You know, how did that play out in 2018?
Speaker Change: In 2018, there were tariffs and there were also some supplemental price and income support programs that the Trump administration put in place about the same time. That really began a cycle towards ever higher net income for the U.S. agricultural sector. As we've noted over the last two years, there has been some reduction in the aggregate net income of the sector.
Speaker Change: I think at this point, Bill, it's difficult to speculate about the probability of tariffs.
Speaker Change: or the exact effect that they will have because keep in mind that another factor with U.S. agricultural trade
Speaker Change: is the strong dollar.
Aparna Ramesh: And we've had a situation in the last two days where the agricultural balance of trade has actually been negative for the U.S. for the first time in decades.
Aparna Ramesh: and a good part of that is also attributable to the strong dollar. So you put together kind of the strong dollar, the possibility of tariffs. It's hard to say exactly.
Aparna Ramesh: where that lands, but I also would note
Aparna Ramesh: Broad Bipartisan Support
Aparna Ramesh: that would increase demand for agricultural commodities, include sustainable aviation fuel and other types of
Aparna Ramesh: 5 or 2 fuel conversion factors. We keep a close eye on all this but our crystal ball does not really allow us to sort out the absolute net effect of that convergence of those potential policies.
Speaker Change: Okay, thanks for that answer and one follow-up for Aparna. You kind of mentioned a new securitization program or type of product that you might be putting out later this year into next year. Any details you might be able to share with us?
Aparna Ramesh: You know we're at an inflection point now where we've done four transactions pretty successfully, we've cultivated the market with investors, it's been incredibly well received. We're poised to do a fifth transaction this year.
Aparna Ramesh: But as we sort of make this pivot, it's also an excellent capital efficiency tool.
Aparna Ramesh: that can benefit not just PharmaMac.
Aparna Ramesh: It really takes us back more fundamentally to, you know, our mission around liquidity and why we were put in place, you know, when you go all the way.
Aparna Ramesh: back to when we were created, and so that's an aspect of our mission.
Aparna Ramesh: And given that we've cultivated this market, we do think that, you know, as Brad noted in his prepared remarks, this creates an opportunity for us to pivot from a solely financing strategy to also a product strategy. And this is something that, you know, a number of us across the organization led by Zach and others on his team are working actively towards.
Aparna Ramesh: thinking through how we could make this pivot from a financing strategy to a product strategy.
Speaker Change: Okay, thank you for taking my questions.
Speaker Change: Our next question comes from the line of Brandon McCarthy from CIDHOTI. Please go ahead.
Brandon McCarthy: Thanks. Good afternoon, everybody. I just want to ask a couple of questions. I wanted to start off with the renewable energy loan portfolio. The growth there looks really strong, and I think it's roughly on pace to triple in 2024 compared to the end of 2023, but just curious as to what kind of pace can we expect going forward, maybe looking out the next year or two?
Speaker Change: Brendan, great question. Thanks for asking. Our renewable energy segment has seen tremendous growth. We eclipsed the $1.1 billion total business volume in the third quarter with a very strong pipeline.
Speaker Change: And I think your question resonates internally at PharmaMac on a consistent basis.
Speaker Change: think about resources, how do we think about our infrastructure to be able to support and scale this business unit consistently into the future. Clearly we want to support our customers and be there through the cycle as a significant amount of investment takes place for these projects. And so we are constantly thinking and proactively looking for appropriate resources, appropriate infrastructure to be able to meet that demand. You know, frankly, given the tailwinds we see in this space, given the significant amount of
Speaker Change: renewable energy products in the queue.
Speaker Change: waiting for transmission hookups and to be built.
Speaker Change: We don't see a slowdown in this space, and frankly, with the growth in data centers, which is a key component of our growth in telco, power generation assets are going to be sought after demand across all types of power generation assets. So, we see a lot of opportunities here. We will continue to invest in infrastructure and resources to be able to meet that demand, and we're optimistic about continued strong growth into the next year.
Speaker Change: Great. Thanks, Zach. That's helpful.
Speaker Change: I want to ask a question on the operating efficiency ratio, the 30% target. Just considering some of the larger treasury investments are behind the company.
Speaker Change: Within your prepared remarks, do you still think that 30% target is prudent or do you see a run rate below that number?
Speaker Change: for the foreseeable future.
Speaker Change: Brendan, keep in mind that for the STARS project and other large infrastructure projects, a portion of that will be capitalized and amortized and part of it is current expense.
Speaker Change: So, when we look at that, we also look at the need for supporting additional resource commitments. For example, Zach just talked about
Speaker Change: Renewable Energy, a growth area, you have to spend money to grow that business.
Speaker Change: We don't think that...
Speaker Change: There's not much we can do to properly support all of our businesses. It's going to continue to be something in the 30 percent or possibly slightly under range. But we do not currently foresee an opportunity to really ratchet that down. We think that would be imprudent.
Speaker Change: for the overall organization.
Speaker Change: Got it, thanks Brad. One more question just on farm and ranch volume. I know you've discussed the benefit of, you know, lower farm net income, you know, driving liquidity to farmers and ultimately driving loan volume growth.
Speaker Change: But do you just kind of look at a lower interest rate environment as a boost to loan volume growth as well or do you see, you know, potential conflicts between the two?
Speaker Change: Yeah, absolutely. I think a combination of many factors that we believe are going to contribute to increasing opportunities in farm and ranch. I mean, you know, first and foremost, the tightening in the ag spaces.
Speaker Change: You know, requiring liquidity for working capital and other needs.
Speaker Change: We have seen lower rates. I mean, as Aparna mentioned, we expect a steepening of the yield curve. And our rate products have decreased this year, albeit volatile, and that is providing increased demand for
Speaker Change: you know farmers and ranchers especially in this volatile cycle to you know take out some some new farm loans to support their facilities and I think the other piece that's important is to remember that our customers are financial institutions.
Speaker Change: They need to continually manage their liquidity and their capital needs. Many of those organizations, which we commented on past calls, were holding loans on their balance sheet in the last couple of years, just given the significant amount of capital they have.
Speaker Change: that tide has reversed and we're seeing the need for more capital efficiency, more liquidity for our customers, the financial institutions, and thus they may want to, at this point in time, as these loans reset, to sell to PharmaMac to free up some liquidity and capital, and as Aparna mentioned on the call,
Speaker Change: the new loan purchase pool that we executed in October. That's a direct example of a counterparty needing to free up a liquidity for capital reasons and we see more of that potentially coming into the future.
Speaker Change: That makes sense. Thanks, everybody. That's all for me.
Speaker Change: Aparna Ramesh, Bradford Nordholm, Aparna Ramesh, Bradford Nordholm
Speaker Change: Our next question comes from the line of Gary Gordon. Please go ahead.
Gary Gordon: Okay, thank you. Two questions. First, I want to follow up on Bill Ryan's question about the securitizations. Brad used the term transformative or transform related to this, so that suggests to me that this is...
Gary Gordon: big or important, and I could see it helping to spread, reducing capital requirements, and I heard the
Gary Gordon: Pool of loans on balance sheet and securitization, what's the difference in capital requirements?
Speaker Change: Thank you, Gary. There's a lot to unpack there but let me just try to simplify. I think both your questions really relate pretty well to each other. So, you know, this does come down to us, I would just say, you know, as an enterprise we're aiming pretty high here because we do think that securitization is a terrific opportunity for PharmaMac as a whole.
Speaker Change: to essentially take what is a fairly capital-efficient tool.
Speaker Change: for the end borrower. And this is true in the farm and rent segment.
Speaker Change: And the only way we can really accomplish that is if we, you know, have, when we have tested the market,
Speaker Change: And we've seen that investors.
Speaker Change: do see this as an incredible opportunity to own a slice of American agriculture. So we've tested this, we know that it exists. So this gets right to the heart of your question, you know, around market share.
Speaker Change: You know, we try not to think about this so much in terms of market share as we try to think about this in terms of, you know, providing that low cost liquidity and creating an opportunity to work in partnership.
Speaker Change: with other entities.
Speaker Change: that could use some of that same measure of capital efficiency because this is a very capital efficient tool.
Speaker Change: So there's many ways to sort of slice this, but we aren't trying to take.
Speaker Change: these loans and put them on our balance sheet but we're trying to create a frictionless way to finance loans that could be made by us but or by any other entity to offer capital relief so that ultimately investors are able to invest.
Speaker Change: in a security that's backed by these pools of agricultural lawns, and the more demand that there is from investors will result to a low price and ultimately a low cost of borrowing to the end borrower.
Speaker Change: So, what does this mean for PharmaMac? I think what it means for PharmaMac, and I think this gets to the second part of your question, is it converts?
Speaker Change: The Revenue Stream from Net Effective Spread to Fee Income.
Speaker Change: And when we think about our balance sheet or the financing capability that we offer the market, I think we're pretty agnostic about whether it's an asset that we hold on balance sheet or whether it is a stream of fee income that would be akin to something like assets under management.
Speaker Change: So when we think about market share, I think we think about market share as either loans held on balance sheet or fee income that's generated by holding assets under management, you know, for example, in a securitized trust.
Speaker Change: So that's really the pivot that we're trying to make, and maybe just a more specific point, the four transactions that we've done so far are loans that have been originated that we had held on our balance sheet that we've then securitized, and they've been a little bit of a market test to see how investors perceive this opportunity.
Speaker Change: We now think that we're at a point
Speaker Change: to actually offer this as a securitization program.
Speaker Change: for other customers or other financial institutions that could be seeking capital efficiency and they can actually offer this
Speaker Change: and absolutely that would also result in an increase in market share but it would be more assets under management.
Speaker Change: Thanks very much. One question on capital. I never know exactly which capital ratios to use, but let's say your excess capital ratio, which you said is 66%,
Speaker Change: So without the preferred buyback, it would have been 73%.
Speaker Change: So, at least I'm thinking, was over 70% more than an adequate cushion, so you could afford to buy back the preferred.
Speaker Change: is a number in that sort of 70% range.
Speaker Change: little enough and if that capital ratio drifts back above the 70% that gives you more flexibility is that a reasonable way to think about it?
Speaker Change: Yeah that's absolutely a great way to think about it. Let me just decompose this for you a little bit. We have two measures that we follow. One is really you know akin to sort of a leverage ratio so for every asset that we hold on balance sheet we have to hold 275 basis points of capital for on balance sheet assets and 75 basis points for anything that's off balance sheet.
Speaker Change: So, in this particular measure, nothing is risk-weighted, and that's where we're getting to that over $550 million in excess capital.
Speaker Change: The second measure that we follow is the Basel measure for Tier 1 capital ratios that follows a very traditional measure of risk-weighted assets.
Speaker Change: So what you thought, Gary?
Speaker Change: in this particular quarter was essentially a redemption.
Speaker Change: from 15.3% to 14.2%. Lots of numbers there. But essentially, I'm trying to get to the heart of your question, which is, well, what's a good cushion? If in one quarter, we can fall by about 110 basis points, you might ask, well, 50% of that is a result of that preferred redemption that we did do, because we do have excess capital. That is true.
Speaker Change: But why do we still think that north of 14% is a good number for us? Well,
Speaker Change: that we are now in businesses like renewable energy and telecom that consume more risk-based assets. They're also more accretive, but they also consume more capital.
Speaker Change: So, I think you implied this in your question, but absolutely, having that buffer gives us more degrees of freedom because we can grow in a pretty unconstrained way, provided we see assets that fit our credit box.
Speaker Change: as opportunities that we can bring on Bound Sheet.
Speaker Change: and we do not have to go into the market.
Speaker Change: and raise capital when we need it, because we already have this existing cushion. So this allows us to grow in a fairly unconstrained way. That, coupled with the securitization strategy that we just talked about, gives us many degrees of freedom, and we can rely a lot less on the preferred market.
Speaker Change: Okay, so if I could sort of summarize that.
Speaker Change: You know, from where the capital ratios are today, so the other...
Speaker Change: that you're generating, it could go to the more capital-intensive.
Speaker Change: but bigger spread businesses.
Speaker Change: If, for whatever reason, you're still growing faster, then...
Speaker Change: You can consider, you know, further preferred buybacks, higher dividends, something along those lines.
Speaker Change: Fair to say.
Speaker Change: Absolutely and you know I think that's the third component you know that I didn't mention which is our dividend strategy. It allows us to be very measured in how we offer dividend growth to our shareholders so that's not the only
Speaker Change: reward, I would say that we would offer our shareholders, it's also the inherent growth that's fundamental to our business. So, I think it's both. Being able to sustain that level of dividend growth is absolutely important. And we can't do that if we don't have a good cushion of capital for both safety and soundness, but also to really enable the growth strategies that we've outlined for you.
Speaker Change: Gary, I'd just also note with the preferreds...
Speaker Change: Those are very nicely structured for us because they're perpetuals, so we're locked in, and yet when they hit that period, usually five years out, where we can redeem without penalty, that becomes our option at that point.
Speaker Change: So it's it's a very kind of one-way option that is very favorable to us.
Speaker Change: and we can make that decision based on circumstances at that time.
Speaker Change: Okay, thanks very much.
Speaker Change: There are no questions at this time. Presenters, please continue.
Speaker Change: With that, we'll adjourn this call. Thank you.
Speaker Change: This concludes today's conference call. Thank you, and you may now disconnect.