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Good day and welcome to the Farmer Mac Third Quarter 2020 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Brad Nordholm, President and CEO. Please go ahead.
Good afternoon. I’m Brad Nordholm and I’m very pleased to welcome you to the Third Quarter 2020 Investor Conference Call.
We have an exciting report for you today. But before I began, I would like to first ask Steve Mullery, our General Counsel to comment on forward-looking statements that management may have today, as well as on Farmer Mac’s use of non-GAAP financial measures. Steve.
Thanks Brad. Some of the statements made on this conference call maybe forward-looking statements under the securities laws. We make these statements based on our current expectations and assumptions about future events and business performance and we 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 statements.
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 SEC in February as updated to discuss risks related to COVID-19 pandemic and our quarterly report on Form 10-Q filed with the SEC 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 of 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, farmermac.com under the financial information portion of the Investors section.
A recording of this call will be available on our website for two weeks starting later today.
Thanks Steve and good afternoon and thank you very much for joining us. We hope you and your families remain safe and healthy during the pandemic.
Amidst 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 that is among the most essential, agriculture and the food that sustains us.
Core earnings were a record $27.7 million, reflecting an 18% year-over-year growth. Net effective 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 have benefited from excellent funding and asset liability management, and we are beginning to see a shift in the composition of our portfolio towards some higher spread loan purchase products.
We are also pleased with our overall credit quality as we have maintained our consistent and conservative underwriting guidelines for credit approvals, and we are continuing to closely monitor the impact of COVID-19 on the portfolio.
Since March, we have approved 465 payment deferment requests from borrowers related to COVID-19. That was through October 30th and that is with a total principal balance of $454 million or 1.7% of total outstanding credit.
As of October 15th, $4.6 million of farm and ranch COVID deferments have been repaid in full, and another $153.3 million and that is compared to that $454 million of farm and ranch deferments, or 35% of loans deferred have ended their deferral period and they are not delinquent. This is a positive trend.
We continue focusing on serving the needs of our customers and are 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 to American agriculture and rural communities.
Turning to business volume, we have provided $1.3 billion in 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 businesses quarter in 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 provided $741 million in gross new farm and ranch loan purchases in the third quarter, and $1.8 billion year-to-date. This compares with $761 million in the first nine months of 2019. To 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 builds upon our already strong foundation for growth in both wealth for the future as we continue to execute on significant growth objectives identified in our strategic plan.
To noteworthy examples from this quarter that reinforced our focus on our long-term strategic plan are the completion of two transactions. First Farmer Mac completed a syndication of a new purchased agricultural loan. And second, we completed our first wind 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 team’s dedication and execution of our mission and the strategic objectives and all this volume, especially in this challenging time.
Before I turn it over to Zach, I do want to take this opportunity to reiterate my thanks and appreciation to all the employees at Farmer Mac, who have 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 multi-year strategic plan. When do you consider the volume of farm and ranch this last quarter equals to the first three quarters of 2019, 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 would like to turn over to Zack, our Chief Business Officer to give you an update on customer and market developments. Zack?
Thanks, Brad. Our team delivered solid results during the quarter, despite the headwinds of the current environment. We have remained focused on moving forward key elements of our strategic plan as loan purchase volumes continue to grow and our capabilities line up well with market trends and opportunities.
As Brad mentioned, business volume 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 and off-balance sheet products, specifically long-term standby purchase commitments and loans held in trust of a combined $177.6 million.
Changes in quarterly volumes pertaining to these products are generally driven by market conditions and reflect our customer’s needs to manage the concentration levels of their asset base and certainly loan origination activity levels.
In addition, given the fee-based income, Farmer Mac receives on these products, the impact in quarterly volume sheet 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. Net volume growth was up $488.3 million, during the quarter, driven by significant growth in our core learn purchase products in farm and ranch, USDA securities and rural infrastructure. The sequential quarter and year-to-date growth rates and net loan purchases in these lines of business were 5.6% and 20.3% respectively.
This strong net volume growth overcame a large decrease in aggravated securities of $335.3 million, which I will discuss in more detail later. Loan purchase net volume grow in our foundational farm and 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 2019, combined by over $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 have seen in farm and ranch and on 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 in 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, compared 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 become a more commercial organization, we added a new capital markets function to help to facilitate capital flows across our customers. This team is responsible for developing and managing the syndication functions for our commercial lines of business, which also includes cultivating and 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 million agricultural loan. This syndication sell-down was made to a key partner in the farm credit system. While the team is still ramping up and integrating it into our business model, we are excited about the prospects of broadening our relationships across the agricultural and rural utilities lending spectrum.
Turning to our USDA securities line of business. We issued director gross loan purchase volume this quarter of $225 million, resulting in net volume increase of $73 million. A 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 USDA loan limits authorized by the 2018 Farm Bill.
Net 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 loan in connection with a wind project financing.
The pipeline in the renewable energy sector remains strong as a rural utilities team has been 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 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 due to significant volatility experienced in the capital markets.
As the need for incremental liquidity has lessened, as markets have returned to a less volatile state, these counterparties chose to let bonds mature. We continue to see significant liquidity flow 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 spread from 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 to facilitate increased volume growth for Farmer Mac, the core agricultural and rural utilities miners continue to compete for transactions, which in many cases is causing competitive pressures in terms of price, structure and execution.
We will continue to work alongside our growing customer base and build upon a more dynamic and responsive business model that has led to an improved customer satisfaction, volume retention and penetration in existing and new markets. It transformed the way we deliver upon our mission.
During this pandemic where travel and face-to-face interaction is limited, Farmer Mac has benefited from the investments we have made in our infrastructure, product set and relationship strategies in an effort to continually assess enhancements that will better support our customers.
I’m proud to say, we have recently launched the doubling of the eligible loan size that sellers can offer their borrowers for our Ag Express scorecard product from $750,000 to $1.5 million, Ag Express as our flagship or product with a simplified application and already process, as well as generally same day credit decision. Since it has 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 and relationships focus, as well as processes and product enhancements.
We believe our focus on becoming a more relationship oriented institution is helping drive these significantly positive results. And we look forward to continue 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 will turn it back to you Brad.
Thank you very much for that. And now I would like to turn to Jackson Takach, our Chief Economist here, 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 for 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 US Bureau of Labor Statistics reports that the national unemployment rate improved to 6.9% in October, and continuing Unemployment Claims fell across 49 states in the four weeks leading up to their October 16th data release.
Finally, data from the Federal Reserve Bank of St. Louis indicates that financial credit spreads has stabilized since July 2020. Assignment financial stress is more muted in the second half of the year. COVID-19 continues to create a haze around current and future economic conditions as a widespread and maintain resurgence of the coronavirus could unwind some of this healing that was experienced in the third quarter. Furthermore, a lack of clarity on additional fiscal stimulus as city uncertainty heading into the fourth quarter.
Conditions in the agricultural economy also improved during the quarter led by improvements in grain commodity prices. USDA data shows that overseas commitments for corn, soybean and wheat purchases increased significantly over the summer, driving up grain prices in August and September. U.S. consumers continue to spend at food and beverage stores and levels 10% above 2019 levels.
Protein processing plants are operating at typical pre-pandemic levels. And then the major end of the major industry is tracked by the U.S. Bureau of Labor Statistics, the agricultural industry exhibited the lowest increase in unemployment between October 2019 and October 2020, which further demonstrates the essential nature of the U.S. food sector and its millions of employees across the rural landscape.
Once again, although conditions have improved, the rural economy is not without challenge. COVID-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 outside the home dining.
To combat these unique challenges farmers, ranchers and rural electric cooperatives have had access to several stimulus programs throughout 2020. Continuing into the fourth quarter, USDA distributed over $10.3 billion in direct payments to farmers and ranchers from June to October through its first coronavirus food assistance program or CFAP 1.
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, USDA announced a second round of CFAP payments, and through October 25th, USDA has distributed an additional $7.6 billion in 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 USDA forecast an increase in net cash farm income and stable land values in 2020. Credit quality in Farmer Mac loan portfolio continues to be strong with no real life losses generated during the quarter. 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 in scheduled loan payments, as most lines have a July 1st payment due date and the end of the third quarter marks 90-days from that payment date. 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 volume is spread across 50 different commodities and over 200 counties and 38 states. This metrics remain at historical averages as a percentage of farm and ranch, as well as total loans and guarantees. The American food, fuel and fiber supply chain remain stalwart in the face of heightened ambiguity. Historically, the food and rural infrastructure sectors have been supported in all political and economic climate 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 would like to turn the call over to Aparna to discuss our financial results in more detail. Aparna.
Thank you, Brad and good afternoon, everyone. We are pleased to report another quarter of strong earnings growth accompanied by stable credit performance and uninterrupted access to debt capital markets in the face of the pandemic. Our earnings this quarter were extremely strong and driven by growth in highest spread business volume, 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 and continued to maintain our disciplined asset liability management policies and practices. We continue to issue debt across all price points and tenants, and our spreads are within historical ranges of other GSE issuance.
Callable debt funding costs have also dropped significantly over the past few months, and we have been effective in using our callable debt instruments to mitigate the ongoing rate prepayments that have resulted from the low rate environment.
And thereby we have maintained or actually widened our overall spread in our net effective. This approach of using callable debt, allows us to continue a very disciplined match funded approach to portfolio while selectively giving us an opportunity to increase spreads on an opportunistic basis.
We continue to meet in spreads in the range of 90 basis points plus or minus a few basis points. We remain well capitalized with strong liquidity and maintained a total cash position of over $900 million as of September 30th.
You will also note that, we have enhanced our capital position once again this quarter through the issuance of $120 million of non-cumulative perpetual Series F preferred stock. We used $60 million of the net proceeds to redeem the outstanding non-cumulative Series A preferred stock that has been outstanding.
This issuance strengthened up to one capital position, which increased in total by 83 basis points going from 13.42% to 14.25%. And positions as well for various growth initiatives, but also buffers us, in case of unforeseen stress.
Use of the timing of the preferred stock issuance, Farmer Mac info dividends on both CVC and CVS preferred stocks for 30-days during the third quarter, and recognized deferred issuance costs of $1.7 million related to the redemption of the Series 8 preferred stock.
Turning to financials, core earnings increased $4.3 million to $27.7 million for third quarter 2020, as compared to $23.4 million in third quarter 2019. Our net effective spread was $51.8 million in third quarter 2020 compared to $42.5 million in the same period last year - spread in percentage terms of 96 basis points this project exceeded our previously disclosed target range of plus or minus 5 basis points of 90 basis points.
And this is primarily due to a decrease in funding costs and from higher spread business volume. The increase in core earnings was primarily due to $7.4 million after tax increase in net effective spread. And this is partially offset by a $1.7 million increase in preferred stock dividends $8.8 million after tax increase in operating expenses, and $2.5 million after tax increase in the total provision for credit losses.
Operating expenses increased by 7% in third quarter 2020 compared to third quarter 2019. And this was primarily due to increased compensation and benefits expenses that were related to increase headcount through the year to support our growth. This increase though, was offset by lower gentlemen administrative or G&A expenses related to the low travel and training that we incurred related to the current pandemic environment.
There are also other lower variable costs, such as printing utilities, and deferments have consulting fees for certain projects. However, this reduction in expenses this year 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, enhance our technology platforms 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 grow and modernize our capabilities. These investments will also enable Farmer Mac to more efficiently meet and exceed customer needs, and thereby enable greater revenue retention over time.
All the sense going forward, we expect operating expenses to increase commensurately with revenue growth. Even as we make these investments, we plan to keep our expenses to revenue ratios within range that is consistent with our historical averages.
Now turning to the provision for loan losses. The provision this quarter for loan losses of $1.2 million was largely attributable to continued net growth in the rural utilities portfolio, and credit downgrades in the Farm & Ranch, long-term standby purchase commitment portfolio.
The increase was partially offset by improving economic factors that uniquely impacted the Farm & Ranch, portfolio, as well as scheduled maturities in the advantage portfolio. The economics factors that positively impacted the farm and ranch portfolio were improving commodity prices and lower expected volatility in land value.
Turning to our sequential results. Our core earnings increased by $1.3 million on an after-tax basis, compared to second quarter 2020. This increase was driven by higher net effective spread of $4.2 million after tax, and this was partially offset by $0.9 million after tax increase in the total provision for credit losses a $1.2 million increase in preferred stock dividends and the $0.4 million after tax increase in operating expenses. The higher net effective spread was attribute double to net volume growth and 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. Farmer Mac’s $984 million of core capital as of September 30th, 2020 exceeded a statutory requirement by $314 million or 47%. This compares to $916 million of core capital as of June 30th, which exceeded a statutory requirement by $248 million or 37%. This brings our Tier 1 capital ratio to 14.25% from 13.45%, an increase of 83 basis points from the prior quarter.
The increase in capital from the prior quarter is primarily due to the previously mentioned issuance of Series F preferred stock as well as a $10 million increase in retained earnings in the third quarter of 2020. Our liquidity remained extremely strong and we are far exceeding our regulatory requirements.
As we head into the fourth quarter, we will continue to maintain a higher than required level of cash and liquidity. We believe that this elevated position will allow us to weather any unexpected cash flow shocks, given the continuing economic uncertainties. It will also adequately fund the fund to meet customer needs, but it will also allow us to retain the flexibility that we need to maintain lower, but ample levels of liquidity as market conditions change.
In conclusion, Farmer Mac underlying fundamentals reflect a well-capitalized balance sheet, stable core earnings and disciplined asset liability management. Our capital markets access at competitive levels, our use of callable bonds positions us to successfully continue to deliver and expand our mission.
We have strong liquidity and capital positions, as I previously mentioned, and these should enable us to navigate these uncertain times very effectively. More complete information about Farmer Mac’s third quarter 2020 performance is in the 10-Q we filed today with the SEC.
And with that Brad, I will turn it back to you.
Thanks, Aparna. In closing, we remained well-positioned for success in the current economic environment as we have built upon resilient business model with increased focus on our customers and their needs. We have generated consistent, strong core earnings against not only a tough COVID backdrop, investing environment with benchmark interest rates around the world at near 0%.
While the timeline and trajectory of an economic recovery remains somewhat uncertain, I remain very optimistic about the future, even in these uncertain times, and that is 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 have said on prior calls, Farmer Mac was created in response to a crisis, and is 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 would like to see if we have any questions from anyone on the line today. Operator.
Speakers, your lines are now open. We will now begin the question-and-answer session. [Operator instructions] Our first question today will come from Greg Pendy with Sidoti. Please go ahead.
Just a couple. First one, can you just touch on the win deal that you that you did. And is that similar for solar where you can lock in a spread? I believe that is something that was attracted maybe 20-years type spread? And then second, could you just kind of give us I guess, some context, just on the 90-day delinquencies as well as the deferred loans. I mean is this something that you think will kind of rise over 2021 as there still is some delinquencies outstanding? How should we be thinking about that? I got this rookie year out.
Yes. Hey, Greg, Brad here. And thanks very much for joining us today, Greg. I will have Jackson give you some additional color on the delinquencies and deferred, but it is important to recognize that right now, the deferred loans are not included in the delinquency numbers. So, they are separate.
I think it is also important to note that, we have had a large slog between 25. And between a quarter and a third of those loans on deferment schedules that have gotten back on schedule already. A lot of the remaining ones are scheduled to resume payments after the after the first of the year, but we will give you some more color on that as it relates to wind and solar.
Yes, the revenue contracts for wind projects have fixed pricing. They also, in many cases, have production tax credits, those are both a function of production, the more win there is the more revenue from fixed price, power purchase contracts, as well as the tax value of the PTCs goes up. And conversely, the wind blows as it goes down.
But you find that over, you know, a multiyear period of time is that those projections are fairly level and fairly consistent. Although carefully not quite as consistent. As solar, there is less variation with solar production than there is with wind. But this is the portfolio of cooperating projects.
So, we had the payment history. It wasn’t performance history, it wasn’t based, so much on projections is historical operating performance, and they were underwritten on that basis. So, we have a high degree of certainty of the cash flow and the ability of those projects to cover there, very well padded, debt service coverage ratios.
We are excited about that. Going forward, just additional comment, we do have a good pipeline of solar deals. Looking out over the next year, I think we probably anticipate that we will be doing more solar than we will be doing wind.
And that is just because, while wind has become incredibly economic in many places in the U.S. particularly kind of Texas through to 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 have got that pop in the third quarter, following the July 1st payment. There is typically a lot of curing that will happen out of that in the fourth quarter, that is a very typical seasonal pattern in the payments. This year there is some additional us government funds coming out in throughout the fall.
So, the CFAP 1, CFAP 2 payments are helping to offset some of the disruptions to the markets throughout the year. You have 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 is a lot of market support. And traditionally you see a drop in the fourth quarter delinquency rates. But it is highly volatile period. We have got coronavirus still in the backdrop. So, we can’t say with any certainty, but if the fourth quarter will follow that seasonal trend, but it is a highly seasonal trend.
And one of the data points that we released, that I will kind of just point you to is just a high percentage of loans that are coming out of that deferral period that are paying and making their payments and coming off and not being transitioned into delinquency, speaks very, very well about the quality of those assets and their ability to continue playing once they’re through that deferral period.
Great. That is helpful. Thanks a lot.
Our next question will come from [Gary Gordon with Gary Gordon Investments] (Ph). Please go ahead.
Hi. Thank you. Thanks for taking my call. A couple of questions, one, at least my calculation is that, your charge-offs were actually zero this quarter, and $400,000 year-to-date. So yes, here are the delinquency trends, but right and calculating that they didn’t result in a single loss in the third quarter.
Yes. That is correct, Gary and Brad here. Very nice to hear your voice. Here We do quite a bit of migration analysis. When does the 30-day delinquency become a 90-day and then does a 90-day become real estate owned and one does a real estate on become a loss. You are correct, there is absolutely statistically insignificant amount of loans migrating from those 90-day delinquencies to real estate owned and to charge-offs. We really have none to speak of.
Okay, good. Thanks. On the capital ratio, you said now is about 14.3% and your sort of target range for the capital ratio. Does this current ratio, is that falls sort of in the middle at the high end, at the low-end?
That is at the high end of the range. I will let Aparna jump in here with some comments about how we think about our minimums, our regulatory minimums, our Board minimums and in our overall target range.
But it is at the high end right now. And when we had an opportunity to do that preferred, a few 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 is a cost to doing that.
We did so, in recognition of the fact that we are in the middle of the pandemic, well, our performance is remarkably consistent, there is still a little additional level of uncertainty out there. We also did so recognizing that we have been hitting some solid growth 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 create a capitalization cushion to support growth, has been an important consideration.
Aparna maybe you can add to that on talking a little bit more about in our ranges and where we are with our excess regulatory capital and in our thinking about that.
Absolutely, we got you covered it and found the reasons why we undertook this, it was opportunistic. It was the right timing, and we really weren’t able to get additional capital, but also called more expensive capital. So really, on the neck pieces, we added about 60 million extra, and then we were also able to self capitalized at a pretty good clip.
So, all of that really resulted in that 83 basis points increase from, from the second quarter to the third quarter that we that we highlighted, which is to be think about our statutory minimum capital, and where we need it to be just in dollar terms, that needs to be at about 670 million, and we far exceeded it were at 984 million. So, we are almost 300 million above that statutory minimums.
So, that puts us in a pretty good position, both, as Brad noted, to make sure that we don’t dilute that capital as we continue to grow. And secondly, we are still in a fairly uncertain economic environment. And while credit remains extremely strong, we think it is the right thing to do both from a liquidity standpoint, as well as from a capital standpoint to be pretty well capitalized.
The level that we really target for is somewhere between 12% to 14%. That is really an internal metric. And we certainly can’t go below 10% on Tier one capital. So those are some additional comments, and I hope that is helpful.
Yes, thanks. Okay. One last question. It sounds like you are trying to migrate your asset mix more toward the Farm & Ranch loans and the renewable energy loans. My impression is those are, higher yielding wider spreads. And maybe a little more credit risk net-net headers, which you would view as the return on equity of a Farm & Ranch, loan compared to let’s say, the institutional business?
Yes, a couple comments on this, Gary, and I do want to Jack jump in here on this too, but Farm & Ranch is, very important definition of, what Farmer Mac does and why we are here. Providing that first mortgage, agricultural loans secondary market, to the Ranchers and Farmers large and small all across the United States.
So, we have 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 a creative, it is profitable and above average, profitability for what we do. So Zack provided a couple highlights of what we are doing to improve customer service and 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 is about 18-months ago that we announced that, we were going to start making commitments to purchase loans, solar and wind as we just talked about in the market and slowly but surely we are getting off to a good start there.
I think for this year we thought maybe we could do about a hundred million. I think we are going to probably come in that 80 million, 90 million, something like that. But then can we can, maybe double that every year for the next couple of years. I think that is our expectation.
And as we do, it could help to drive some incremental accretion to earnings. And also what, Zack talked about, the lower margin, some of the lower margin institutional business, especially when those customers have alternative costs of borrowing, particularly with fed center and the pension in the debt capital markets that may be even lower than in the past.
We are asking ourselves a question, 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. Does it hurt our mission. And if the answers to those are no, we are willing to let that business go.
With the expectation that some of it will come back, once we get past this period of fed intervention in the debt capital markets. Zack, but maybe you can add some more color here Zack and kind of round out how we are seeing this slightly changed mix in assets.
Yes. Absolutely, Brad. I think this quarter highlights a relative shift. In many instances market forces kind of drove that shift. As Brad indicated, our managed securities had a fairly sizeable decreases this quarter, and that was primarily attributable to the incremental liquidity that was put on earlier this year.
We saw some significant volatility in the capital markets. As things have somewhat improved, we have seen a reversal of that. Hence the decline which were slightly down on a year-to-date basis, but more notables this quarter given the unwinding of the liquidity.
In addition, I made comments in the prepared remarks about our pass through securitization, and stand by purchase commitments. Again market driven a lot focused on concentration risks and as those come down, it really makes it noticeable that the increase this quarter was loan purchases on our own balance sheet.
And I think Brad highlighted a couple of key points in terms of us focusing on broadening our seller base, broadening our product base as well. I noted in there that we did a syndicated transaction with the farm credit system partner.
You know broadening those products and markets that we are in, does help to diversify our product base, our risk base and our return base, and I think that starting to make more important impact on our balance sheet and income state going forward.
Thanks a lot.
This will conclude our question-and-answer session. I would like to turn the conference back over to Brad Nordholm for any closing remarks.
Certainly Operator thank you, and thanks to all of you for jumping on at 5 o’clock on a Monday evening. Spent quite a day in the in the markets today for financials and really across the board. So, I hope that you have been on the right side of this rapidly moving markets.
But thanks again and is always the case. If you have follow-on questions, please get in touch with [indiscernible]. We want to be very responsive to you and to your questions and are happy to jump on a call, impromptu or scheduled in the next days to follow-up with additional questions that you may have.
That said I’m very proud of how things are going at Farmer Mac, I’m very pleased with how things are going in Farmer Mac, I hope you can hear in the voices of the executives from the team who are on this call today that there is both confidence and excitement about what is going on. And we will be doing our very, very best 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 may now disconnect.