AGM - NYSE

Good afternoon, ladies and gentlemen, and welcome to the Farmer Mac’s Third Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] 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, Ms. Jalpa Nazareth. Please go ahead.

Good afternoon, and thank you for joining us for our third quarter 2024 earnings conference call. I'm Jalpa Nazareth, Senior Director of Investor Relations and Finance Strategy here at Farmer Mac. As we begin, please note that the information provided during this call may contain forward-looking statements about the company's business, strategies and prospects, which are based on management's current expectations and assumptions. These statements are not a guarantee of future performance and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer Mac's 2023 annual report and subsequent SEC filings for a full discussion of the company's risk factors. On today's call, we will also be discussing certain non-GAAP financial measures. Disclosures and reconciliations of these 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. 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. 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?

Well, thank you, Jalpa. Good afternoon, everyone, and thank you for joining us. Our third quarter 2024 results demonstrate that Farmer Mac remains well positioned to achieve sustainable earnings and profitability. The strength of our capital base positions us well to continue investing in our long-term strategic initiatives to power our growth into the future. We continue to successfully navigate industry change and economic cycles while growing earnings, underscoring the strength of our unique business model. Our total revenues year-to-date improved over $10 million to $270 million over the same period last year, primarily due to higher net effective spread. That increase reflects the shift of new business volume towards higher spread business such as renewable energy and the proactive management of our balance sheet and funding. Core earnings year-to-date improved $1.8 million to $128 million compared to the prior year period. Excluding credit expense, core earnings has improved nearly $7 million or over 5% year-over-year. As we have previously mentioned on prior calls, the nature of our credit events and charge-offs 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. Operating efficiency has been better than our long-term target of 30% throughout 2024, a reflection of our disciplined approach to expense management. We achieved this while implementing the Securities Treasury Accounting Reporting System, also known internally as STARS. This platform is the largest systems and process implementation project in Farmer Mac's history. It is a comprehensive transformation of our core infrastructure that facilitates transactions for more than two-thirds of our balance sheet, including some of our largest loan exposures. This is a significant capital investment that will enable us to scale our business over the next decade. This platform was redesigned to support more complexity in our hedging and debt offerings, modernize our $750 billion payment flow and enable new product offerings in alignment with our multiyear growth objectives. The end-to-end streamlining of our legacy systems with the addition of seven commercial off-the-shelf core infrastructure platforms should strengthen our business resiliency, enhance our security, safeguard our data and increase our efficiency. Thanks to the coordinated execution by teams across the enterprise, working with capable industry partners, STARS went live just this past week. This is a testament to the company's expertise and dedication in bringing complex technology projects to fruition and strengthening our competitive advantage in the marketplace. I mentioned that we have achieved operating efficiency of below our long-term target of 30% throughout the year. It's projects such as STARS that enable a company of our size and our balance sheet with fewer than 200 employees to continue to utilize technology to make us efficient and bring all the other benefits of resiliency, security and safeguard of data to bear. Turning to business volume, we closed $2 billion of new business volume this quarter and $4.9 billion year-to-date, driven largely by loan purchase volume in the Renewable Energy and Farm & Ranch segments. 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 this segment in alignment with our long-term initiatives. Diversifying our loan portfolio into newer lines of business, such as Renewable Energy and Corporate AgFinance have been key priorities over the last several years. And that diversification is benefiting us through changing market cycles. 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. Within our Farm & Ranch segment, we closed nearly $1 billion of new Farm & Ranch loan purchase volume year-to-date compared to a total of $780 million in the full year 2023. We believe we will see this positive momentum continue in the fourth quarter as tightening bank liquidity and an adjustment to a higher rate environment with a near-term expectation of policy easing has taken hold. The forecasted decline in farm income relative to prior years is expected to drive more loan volume, including potential pool purchases similar to those acquired during 2024. We are incredibly pleased to see strong momentum in the Farm & Ranch segment. It is a segment that is so core to our mission and growth in this segment continues to propel our securitization program, where we have seen strong investor demand. Offsetting volume growth this year has been maturities with several large AgVantage counterparties, a trend we have seen over the last nine months as the overall slower market for loan growth and a tightening of credit market spreads have resulted in reduced liquidity needs, particularly for one of our larger Farm & Ranch counterparties. In early October, we acquired a $122 million pool of Farm & Ranch loans from a single agricultural lender. This acquisition underscores Farmer Mac's secondary market track record of providing agricultural lenders solutions for their capital planning, especially as there is uncertainty about how capital regulation will evolve over the next few years. We have consistently presented our product offerings as a capital-efficiency and liquidity tool for our customers in both the agricultural finance and rural infrastructure lines of business. We believe that this is because the relative value that Farmer Mac brings to our banking and financial services partners, and ultimately, the agricultural and rural borrowers is even greater when credit is a bit tighter. We're working towards our fifth overall Farm's series securitization transaction later this year and are continuing 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. While we are in the preliminary stages of development and broader market discussion, 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 with a set of securitization products that align with both our borrower and investor interest. 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 to help them grow and manage any capital and liquidity risks they might face in the future, including risks related to ongoing market uncertainty and potential regulatory policy change. Our ability to navigate all environments positions us well to continue to create more opportunities for enhanced shareholder value while at the same time fulfilling our mission. 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. Aparna?

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. Our diversified streams of business revenue and our funding and hedging capabilities stemming from our disciplined approach to asset liability management 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. Outstanding business volume was $28.5 billion as of September 30, a net decrease of $290 million from June 30, 2024, due to scheduled maturities and repayments in the agricultural finance line of business, primarily from a single large Farm & Ranch counterparty. During the quarter, $460 million in Farm & Ranch AgVantage securities matured without refinancing, reflecting counterparties evaluating their liquidity needs and overall slower loan growth. Changes in the quarterly AgVantage securities volume are primarily driven by the larger transaction sizes for the product, scheduled maturity amounts for a particular quarter. The liquidity and loan growth opportunity needs of Farmer Mac's AgVantage counterparties, changes in the pricing and availability of wholesale funding and the relative value of our wholesale financing product versus other funding alternatives. Based on all of these factors, we expect AgVantage business volume in both lines of business to continue to be volatile as we navigate the evolving needs of our stakeholders and as the yield curve steepens and interest rates stabilize. While business volume declined on a net basis, we saw strong activity in our Renewable Energy and Farm & Ranch segments. The activity in these two business segments included strong loan purchase volume, which is generally more accretive and higher spread relative to the AgVantage product. 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. Turning to core earnings now. Core earnings were $44.9 million or $4.10 per share in third quarter 2024, and this reflects a $5.1 million increase sequentially and a $300,000 decrease year-over-year. 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. The sequential improvement in net effective spread from 114 basis points to 116 basis points this quarter was driven by the compositional shift I mentioned in new business volume towards higher-yielding loans and a decrease in our funding costs. As we've mentioned on prior calls, our treasury and funding desk has opportunistically taken advantage of favourable market conditions in the first half of this year by calling more expensive fixed rate debt to reissue those at lower rates. 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. 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. $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. Core earnings, net of credit, however, increased by 6% year-over-year, with 2023 being an exceptionally strong earnings and credit year. This growth is also very consistent with our long-term strategic plan target key metrics. Our liquidity and capital positions remain well in excess of all regulatory requirements. Our projections show minimal change in our profitability with limited exposure to movements in interest rates where the market rates go up or down. As of September 30, 2024, Farmer Mac had 309 days of liquidity, and we held approximately $850 million in cash and other short-term instruments in our investment portfolio. We expect to be well-positioned in the medium-term as we move into the anticipated Fed easing cycle, and we're confident in our resiliency against potential short- and medium-term market disruptions. We also project flat to higher earnings if rates decline in the future, and this is due to our proactive equity capital allocation strategy, where we are laddering and layering duration to minimize volatility. 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. Despite macro headwinds and widening credit spreads that have affected many primary issuers of debt securities, 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. Now turning to operating expenses. 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. Operating efficiency was 26% for third quarter 2024 and 27% year-to-date. That is better than our long-term strategic plan target, 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. I, too, am very pleased to announce the substantial completion of our multiyear technology investment in our treasury and cash management systems to enhance our trading, hedging and reporting platforms. 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. We embarked on this journey 19 months ago to set the foundation for Farmer Mac to scale its portfolio and continue to introduce diversified rate and product offerings that are enabled by a modern treasury, capital markets and cash management infrastructure. 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. But given our disciplined approach to expense management and our capable teams, we wanted to compress the time line and cost structure. We were able to accomplish that without compromising on functionality. We do have other technology initiatives ahead, such as modernizing our loan purchase platforms. We remain committed to bringing cutting-edge technology and new capabilities to our customers, and we'll continue to invest in finding ways to build innovative systems that accelerate growth while adding process efficiencies for all of our customers and markets. 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% and be disciplined in keeping our efficiency ratios in line with our growth expectations. Let's turn to credit. Our total allowance for losses was $21.9 million as of September 30, 2024, and this reflects a $3.3 million increase from the prior quarter. Increase was primarily attributable to new business volume in the higher-yielding telecommunications and renewable energy products and the previously mentioned single permanent planting loan that is currently delinquent. 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. While this loan was placed into a nonaccrual status, we did receive payoffs from a prior nonaccrual loan that more than favorably offset the revenue decline from this one during the quarter. 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. 90-day delinquencies were 51 basis points across the entire portfolio as of September 30, 2024, compared to 22 basis points at the end of June 30, 2024. 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. Also contributing to the increase in the third quarter is the seasonal pattern of Farmer Mac's 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. This seasonal pattern is due to the annual and semiannual payment dates on the majority of Farm & Ranch loans. Our overall credit profile, in summary, continues to be stable across our agricultural and rural infrastructure portfolios through third quarter '24 and is reflective of our rigorous credit policies and our diligent underwriting practices. Turning to capital. Farmer Mac's $1.5 billion of core capital as of September 30, 2024, exceeded our statutory requirement by $580 million or 66%. Our Tier 1 capital ratio was 14.2% as of September 30, 2024, compared to 15.3% as of June 30, 2024. 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 point sequential decline in the Tier 1 capital ratio. We considered several factors prior to the decision to redeem the $75 million of Series C Preferred Stock, including our robust capital position, securitization program that provides capital efficiency, a dividend strategy and recapitalization that has come from consistent earnings growth. 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. 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. Notably, we delivered a 17% return on equity this quarter and an efficiency ratio of 26%, which is below our strategic target of 30%. We believe that our 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.

Thank you, Aparna. Well, we are very pleased with our third quarter results and also of the significant milestone we've reached in our infrastructure modernization journey. We believe our performance provides yet another example of the dynamic and enduring nature of Farmer Mac's business model, which continues to be well-positioned for earnings growth going forward. We have a solid long-term strategic plan that we're executing on consistently and a proven track record of delivering strong financial results. We continue to deliver on our mission throughout the agricultural economic cycles as reflected by our financial results over the last few years. Our capital base is strong and growing, providing capacity for further growth and creating more opportunities for us to enhance shareholder value. Before turning to Q&A, I'd like to add that we will be closely monitoring the election results tomorrow. We have ongoing efforts to assess how any administration policy may affect Farmer Mac's business, 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. And now, operator, I'd like to see if we have questions from anyone on the line today.

[Operator Instructions] Our first question comes from the line of Bose George from KBW. Please go ahead.

Everyone, good afternoon. I wanted to start with a question just on the spread. What drove the increase in the Farm & Ranch, the yields there? And then on the Corporate AgFinance side, was the decline that one loan you mentioned or anything else that we need to think about? Thanks.

Well, it's Brad here. Very nice to hear from you. I'm going to turn to

Yes. Specifically on the Farm & Ranch spread information, if you recall, last quarter, we did purchase a pool of loans, about $60 million. Those had very strong accretive spreads as it pertains to the Farm & Ranch loan purchase segment. As we highlighted in the prepared remarks, we are seeing a greater increase in loan purchase opportunities, specifically in Farm & Ranch, reflecting the tightening ag cycle and the need for bank to focus on liquidity and capital. And our Farm & Ranch product is one of our more accretive products. And so, as we look to be competitive and provide strong opportunities and products for our customers, we are seeing the opportunity to take advantage of some increasing spreads in the right environment, especially with some of these one-off strategic initiatives that we've been working on, such as the pool purchase opportunities. As it pertains to the Corporate AgFinance 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.

Can I just add one point on the Farm & Ranch pools. All of the factors hold. And then in addition, we did see a reversal of nonaccruals that hit our Farm & Ranch portfolio. So that did actually give us that a little bit of a pop, I would say, in terms of the sequential increase in NES.

Okay. Great. And then, 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?

Yeah, absolutely. I think if rates are generally sort of trending down. And obviously, we’ve seen a little bit of volatility as rates settle. But

Okay. |Great. That’s helpful. Thank you.

Our next question comes from the line of Bill Ryan from Seaport Research Partners. Please go ahead.

Thank you and good afternoon. A couple of questions. First, following your comments, Brad, about the politics. In 2018, there were some tariffs on various products. I know I believe China retaliated putting some tariffs on, I believe, it was soybeans. I obviously, wasn't found the company back then, but could you talk about if tariffs do come back into play in the next couple of years. How did that play out in 2018?

Well, 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. And 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. I think at this point, Bill, it's difficult to speculate about the probability of tariffs or the exact effect that they will have because keep in mind that another factor with U.S. agricultural trade is the strong dollar. 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. 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 where that lands, but I also would note that there are also proposed federal policies that actually enjoy broad bipartisan support that would increase demand for agricultural commodities, include sustainable aviation fuel and other types of fiber to 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.

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?

So, Bill, I think absolutely. So, something we've consistently talked about with respect to our securitization program is 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. But as we sort of make this pivot, it's also an excellent capital efficiency tool that can benefit not just Farmer Mac, but really takes us back more fundamentally to our mission around liquidity and why we were put in place when you go all the way back to when we were created. And so that’s an aspect of our mission. Given that we’ve cultivated this market, we do think that, 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 a number of us across the organization, led by

Okay. Thank you for taking my questions.

Our next question comes from the line of Brendan McCarthy from Sidoti. Please go ahead.

Thanks. Good afternoon, everybody. Just wanted 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?

Yeah, Brendan. Great question. Thanks for asking. Yes, 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. I think your question resonates internally at Farmer Mac on a consistent basis. How do we 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. Frankly, given the tailwinds we see in this space, given the significant amount of renewable energy products in the queue waiting for transmission hookups and to be built, 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 in 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.

Great. Thanks,

Yeah, 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. So, when we look at that, we also look at the need for supporting additional resource commitments. For example,

Got it. One more question just on Farm & Ranch volume. I know you've discussed the benefit of lower farm net income driving liquidity needs of farmers and ultimately driving loan volume growth. 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 potential conflicts between the two?

Yeah, absolutely. I think a combination of many factors that we believe are going to contribute to increasing opportunities in Farm & Ranch. I mean, first and foremost, the tightening in the ag space is requiring liquidity for working capital and other needs. 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 farmers and ranchers, especially in this volatile cycle to take out 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. 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 had. 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 Farmer Mac to free up some liquidity and capital. And as Aparna mentioned on the call, the new loan purchase pool that we executed in October, that’s a direct example of a counterparty needing to free up liquidity for capital reasons, and we see more of that potentially coming into the future.

That makes sense. Thanks, everybody. That’s all from me.

Our next question comes from the line of Gary Gordon. Please go ahead.

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 big or important. And I could see it helping the spread, reducing capital requirements, and I heard the -- become a -- not just a financing, but a product tool, maybe take market share. One, are the benefits in all 3 of those lines? And maybe two, if you could give a sense for financing pool of loans on balance sheet and securitization, what's the difference in capital requirements?

Yeah. 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, this does come down to us -- I would just say, as an enterprise, we're aiming pretty high here because we do think that securitization is a terrific opportunity for Farmer Mac as a whole to essentially take what is a fairly capital-efficient tool and offer that to borrowers to reduce ultimately the cost of borrowing for the end borrower. And this is true in the Farm & Ranch segment. And the only way we can really accomplish that is if we have -- when we have tested the market, and we've seen that investors 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 around market share. We try not to think about this so much in terms of market share as we try to think about this in terms of providing that low-cost liquidity and creating an opportunity to work in partnership with other entities that could use some of that same measure of capital efficiency because this is a very capital-efficient tool. So, there's many ways to sort of slice this, but we aren't trying to take 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 or by any other entity to offer capital relief so that ultimately, investors are able to invest in a security that's backed by these pools of agricultural loans. And the more demand that there is from investors, will result to a lower price and ultimately, a low cost of borrowing to the end borrower. So, what does this mean for Farmer Mac? I think what it means for Farmer Mac, and I think this gets to the second part of your question, is it converts the revenue stream from net effective spread to fee income. 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. 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, for example, in a securitized trust. So that's really the pivot that we're trying to make. And maybe just a more specific point, the 4 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. We now think that we're at a point to actually offer this as a securitization program for other customers or other financial institutions that could be seeking capital efficiency, and they can actually offer this program to their borrowers, perhaps at a lower rate, which could essentially increase the amount of volume that flows into the conduit. So that would convert from net effective spread for us into guaranteed fee income. And absolutely, that would also result in an increase in market share, but it would be more assets under management.

Okay. Thanks very much. Okay, one question on capital. So, I never know exactly which capital ratios to use, but let's say your excess capital ratio, which you said is 66%, without the preferred buyback, it would have been 73%. So, at least I'm thinking was over 70% more than an adequate cushion so you could afford to buy back the preferred? Is a number in that sort of 70% range 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?

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 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. So, in this particular measure, nothing is risk-weighted, and that's where we're getting to that over $550 million in excess capital. 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. So, what you saw, Gary, in this particular quarter was essentially a redemption that caused our risk-based capital ratio to fall 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. But why do we still think that north of 14% is a good number for us? Well, the other 66 basis points of decline that we saw come through this quarter, a large portion of that had to do with the fact 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. 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 as opportunities that we can bring on balance sheet. And we do not have to go into the market 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.

Okay. So, if I could sort of summarize that, from where the capital ratios are today, so the earnings that you're generating, it could go to the more capital-intensive but bigger spread businesses. If for whatever reason you're still growing faster, then you can consider further preferred buybacks, higher dividends, something along those lines. Is that fair to say?

Absolutely. And I think that's the third component 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 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.

Okay. Gary, I'd just also note with the preferreds, those are very nicely structured for us because they're perpetuals, so we're locked in. And yet when they hit that period, usually 5 years out, where we can redeem without penalty, that becomes our option at that point. So, it's a very kind of one-way option that is very favorable to us. And we can make that decision based on circumstances at that time.

Okay. Thanks very much.

[Operator Instructions] There are no questions at this time. Presenters, please continue.

Well, thank you, operator, and thank you all for joining us today. We always enjoy and appreciate your participation and the questions that we get from you. If you do have follow-up questions, please get in touch with Jalpa. And we will be in touch if there are any material developments before our next quarterly call. None are anticipated at this time. We’re very confident and excited about the fourth quarter for 2024. With that, we’ll adjourn this call. Thank you.