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Federal Agricultural Mortgage Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 9, 2011 09:57PM
Federal Agricultural Mortgage Corp. (AGM) filed Quarterly Report for the period ended 2011-06-30.
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. Second quarter results included the addition of $608.1 million of new program business volume bringing total year-to-date new program volume as of June 30, 2011 to $1.6 billion. GAAP and core earnings also increased in second quarter 2011 compared to the prior year. Farmer Mac s GAAP net income available to common stockholders for second quarter 2011 was $5.2 million ($0.48 per diluted common share), compared to $1.8 million ($0.17 per diluted common share) in second quarter 2010. Farmer Mac s core earnings for second quarter 2011 were $10.0 million, up from $5.3 million in second quarter 2010. Second quarter 2011 results benefited from increased outstanding business volume compared to a year earlier, increased net interest income of $29.2 million, compared to $21.6 million in second quarter 2010 and net releases from the allowance for losses of $0.8 million as opposed to provisions of $1.2 million in the prior year. As of June 30, 2011, Farmer Mac s excess core capital above its statutory minimum capital requirement was $162.3 million.
Although approximately $976.4 million of AgVantage Securities in both the Farmer Mac I and Rural Utilities business segments matured during the first six months of 2011, Farmer Mac s new business volume during that period totaled $1.6 billion, compared to $637.9 million during the first half of 2010. Notably, the 2011 new business included the second quarter issuance by Rabo Agrifinance, Inc. of $300.0 million of AgVantage bonds and the first quarter issuance by Metropolitan Life Insurance Company (“MetLife”) of $500.0 million of AgVantage bonds, both of which are held on-balance sheet by Farmer Mac. The MetLife issuance coincided with the first quarter 2011 maturity of a prior $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 first half of 2011 along with the maturities of AgVantage securities and the regularly scheduled principal paydown of loans, Farmer Mac s total outstanding loans, guarantees and commitments was $12.2 billion as of June 30, 2011, effectively even with the $12.2 billion as of December 31, 2010 and an increase over the $10.8 billion outstanding as of June 30, 2010.
Farmer Mac s net income available to common stockholders for second quarter 2011 was $5.2 million or $0.48 per diluted common share, compared to net income of $1.8 million or $0.17 per diluted common share for second quarter 2010. For the six months ended June 30, 2011, Farmer Mac s net income available to common stockholders was $23.5 million or $2.20 per diluted common share, compared to $3.6 million or $0.34 per diluted common share for the six months ended June 30, 2010. Farmer Mac s core earnings were $10.0 million or $0.94 per diluted common share for second quarter 2011, compared to $5.3 million or $0.50 per diluted common share for second quarter 2010. Core earnings for the six months ended June 30, 2011 were $19.1 million or $1.79 per diluted common share, compared to $10.7 million or $1.02 per diluted common share for the six months ended June 30, 2010.
Farmer Mac excludes the after-tax effect of unrealized (losses)/gains 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, for the three and six months ended June 30, 2011, Farmer Mac recorded unrealized losses of $6.8 million ($4.4 million after-tax) and unrealized gains of $7.0 million ($4.5 million after-tax), respectively, for fair value changes on its financial derivatives, compared to unrealized losses of $6.2 million ($4.0 million after-tax) and $3.3 million ($2.1 million after-tax) for the same periods in 2010, respectively. Fair value gains on trading assets totaled $2.0 million ($1.3 million after-tax) and $3.3 million ($2.1 million after-tax) for the three and six months ended June 30, 2011, respectively, compared to gains of $5.1 million ($3.3 million after-tax) and $8.4 million ($5.5 million after-tax) for the three and six months ended June 30, 2010, respectively. 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 June 30, 2011, the cumulative fair value of after-tax losses recorded on financial derivatives was $42.4 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 $0.2 million ($0.1 million after-tax) and $1.0 million ($0.6 million after-tax) during the three and six months ended June 30, 2011, respectively. During the three and six months ended June 30, 2010, Farmer Mac recorded a gain of $90,000 ($58,000 after-tax) and a loss of $2.2 million ($1.4 million after-tax), respectively. The after-tax net effect of these gains and losses is omitted from Farmer Mac s core earnings.
Net Interest Income. Net interest income for the three and six months ended June 30, 2011 was $29.2 million and $56.2 million, respectively, compared to $21.6 million and $45.2 million, respectively, for the same periods 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 and six months ended June 30, 2011, these guarantee fees resulted in an increase in net interest income of $0.8 million and $1.7 million, respectively, and a decrease in the net interest yield of 7 basis points in both periods. For the three and six months ended June 30, 2010, these guarantee fees resulted in an increase in net interest income of $1.3 million and $2.7 million, respectively, and a decrease in the net interest yield of 18 basis points and 19 basis points, respectively. 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 127 basis points for the six months ended June 30, 2011, compared to 148 basis points for the six months ended June 30, 2010.
Stocks Discussed: AGM,