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Federal Agricultural Mortgage Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 10, 2011 05:22PM
Federal Agricultural Mortgage Corp. (AGM) filed Quarterly Report for the period ended 2011-03-31.
Highlight of Business Operations:
Following a successful 2010, Farmer Mac entered 2011 well positioned to continue to fulfill its congressional mission to provide capital and liquidity to rural America. First quarter results included the addition of $963.8 million of new program business volume and increased GAAP and core earnings compared to the prior year. Farmer Mac s GAAP net income available to common stockholders for first quarter 2011 was $18.3 million ($1.72 per diluted common share), compared to $1.8 million ($0.17 per diluted common share) in first quarter 2010. In addition, Farmer Mac s core earnings for first quarter 2011 were $9.1 million, up from $5.4 million in first quarter 2010. First quarter 2011 results benefited from increased outstanding business volume compared to a year earlier, increased net interest income of $27.0 million, compared to $23.6 million in first quarter 2010, and net releases from the allowance for losses of $0.7 million as opposed to provisions of $1.4 million in the prior year. As of March 31, 2011, Farmer Mac s excess core capital above its statutory minimum capital requirement was $168.7 million.
Although approximately $976.4 million of AgVantage Securities in both the Farmer Mac I and Rural Utilities business segments matured in first quarter 2011, Farmer Mac s new business volume for first quarter 2011 totaled $963.8 million, compared to $306.4 million during first quarter 2010. The increase in new business included the issuance by Metropolitan Life Insurance Company (“MetLife”) of a $500.0 million AgVantage bond held by Farmer Mac on-balance sheet. This issuance coincided with the maturity of another $500.0 million AgVantage bond issued by MetLife that had been held by third party investors and accounted for as an off-balance sheet guarantee by Farmer Mac. Although the new MetLife transaction did not increase the overall level of outstanding program volume, it effectively extended the duration of the MetLife AgVantage security that had matured and provides increased future profitability due to the net interest margin earned by Farmer Mac on the new bond being greater than the guarantee fee earned on the prior off-balance sheet guarantee. Taking into account all the new business volume for the quarter along with the maturities of AgVantage securities and the regularly scheduled principal paydown of loans during the quarter, Farmer Mac s total outstanding loans, guarantees and commitments was $11.8 billion as of March 31, 2011, compared to $12.2 billion as of December 31, 2010 and $10.7 billion as of March 31, 2010.
Farmer Mac s net income available to common stockholders for first quarter 2011 was $18.3 million or $1.72 per diluted common share, compared to net income of $1.8 million or $0.17 per diluted common share for first quarter 2010. Farmer Mac s core earnings were $9.1 million or $0.85 per diluted common share for first quarter 2011, compared to $5.4 million or $0.54 per diluted common share for first quarter 2010.
Farmer Mac excludes the after-tax effect of unrealized gains/(losses) resulting from changes in the fair values of financial derivatives and trading assets from core earnings. Changes in the fair values of financial derivatives and trading assets have historically contributed significant volatility to Farmer Mac s periodic GAAP earnings. Consistent with that trend, Farmer Mac recorded unrealized gains of $13.8 million ($9.0 million after-tax) for fair value changes on its financial derivatives in first quarter 2011, compared to unrealized gains of $2.9 million ($1.9 million after-tax) in first quarter 2010. Fair value gains on trading assets totaled $1.3 million ($0.9 million after-tax) for first quarter 2011, compared to gains of $3.4 million ($2.2 million after-tax) for first quarter 2010. While these volatile changes in fair values of derivatives and trading assets may at times produce significant income, they may also produce significant losses. Future changes in those values cannot be reliably predicted; however, as of March 31, 2011, the cumulative fair value of after-tax losses recorded on financial derivatives was $37.9 million. Over time, Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap contracts, which may on its own produce either income or expense, but is expected to generate positive effective net spread when combined with the interest received and paid on the assets and liabilities Farmer Mac holds on its balance sheet. This positive effective net spread will continue to build retained earnings and capital over time. Although the unrealized fair value fluctuations experienced throughout the term of the financial derivatives will temporarily impact earnings and capital, those fluctuations are not expected to have any permanent effect if the financial derivatives are held to maturity, as is expected.
Unrealized gains and losses recorded to adjust the carrying value of loans held for sale to the lower of cost or fair value are also excluded from core earnings. Farmer Mac recorded losses of $0.8 million ($0.5 million after-tax) in first quarter 2011, compared to losses of $2.3 million ($1.5 million after-tax) in first quarter 2010. The after-tax net effect of these losses is omitted from Farmer Mac s core earnings.
Net Interest Income. Net interest income for the three months ended March 31, 2011 was $27.0 million, compared to $23.6 million for the same period during 2010. Net interest income includes guarantee fees related to certain Farmer Mac Guaranteed Securities with beneficial interests owned by third party investors. For the three months ended March 31, 2011, these guarantee fees resulted in an increase in net interest income of $0.9 million and a decrease in the net interest yield of 7 basis points, compared to an increase of $1.5 million and a decrease in net interest yield of 22 basis points for the three months ended March 31, 2010. The decrease in the net interest yield is the result of the average rate earned on guarantee fees being lower than the net interest spread earned on assets Farmer Mac purchases and holds on-balance sheet. Excluding the impacts of these guarantee fees, the net interest yield was 125 basis points for the three months ended March 31, 2011, compared to 157 basis points for the three months ended March 31, 2010.
Stocks Discussed: AGM,