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Federal Agricultural Mortgage Corp. Reports Operating Results (10-Q)

November 09, 2009 | About:
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10qk

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Federal Agricultural Mortgage Corp. (AGM) filed Quarterly Report for the period ended 2009-09-30.

The Federal Agricultural Mortgage Corporation `Farmer Mac` is a federally chartered instrumentality of the United States that was created to establish a secondary market for agricultural real estate and rural housing mortgage loans. Federal Agricultural Mortgage Corp. has a market cap of $94.3 million; its shares were traded at around $9.3 with a P/E ratio of 8.3 and P/S ratio of 2.3. The dividend yield of Federal Agricultural Mortgage Corp. stocks is 2.2%. Federal Agricultural Mortgage Corp. had an annual average earning growth of 17.3% over the past 5 years.

Highlight of Business Operations:

Overview. Farmer Mac s net income available to common stockholders for third quarter 2009 was $17.9 million or $1.74 per diluted common share, compared to a net loss of $106.1 million or $10.55 per diluted common share for third quarter 2008. Net income available to common stockholders for the nine months ended September 30, 2009 was $76.8 million or $7.54 per diluted common share, compared to a net loss of $93.0 million or $9.33 per diluted common share for the nine months ended September 30, 2008. Farmer Mac s results for both the three and nine month periods ended September 30, 2008 were severely adversely impacted by losses on investment securities that were subsequently liquidated during 2009. Subsequent to those events and a change in management, Farmer Mac revised its investment portfolio guidelines and revamped its funding strategies with the intent to reduce Farmer Mac s exposure to adverse financial market volatility and to preserve and rebuild capital. Farmer Mac s excess capital above its statutory minimum capital requirement, which had fallen to as low as $13.5 million as of December 31, 2008, was $126.3 million as of September 30, 2009.

Farmer Mac s non-performing assets were $84.8 million (1.94 percent) as of September 30, 2009, compared to $97.1 million as of June 30, 2009 (2.17 percent). This decrease was due to the third quarter sale of three of Farmer Mac s four ethanol facilities that had been classified as REO as of June 30, 2009 (the fourth facility was sold in October 2009). REO properties are included in Farmer Mac s non-performing assets but not in 90-day delinquencies. Farmer Mac s 90-day delinquencies increased from $42.3 million (0.95 percent) as of June 30, 2009 to $59.4 million (1.36 percent) as of September 30, 2009.

During third quarter 2009, Farmer Mac recorded a provision to its allowance for losses of $3.2 million, compared to a provision of $0.6 million during third quarter 2008. For the nine months ended September 30, 2009, offsetting provisions and releases related to the allowance for losses resulted in net provisions of $3.0 million, compared to net provisions of $0.6 million for the nine months ended September 30, 2008. As of September 30, 2009, the total allowance for losses was $12.5 million, compared to $16.4 million as of December 31, 2008.

Changes in the fair values of financial derivatives and trading assets have historically contributed significant volatility to Farmer Mac s periodic earnings. Consistent with that trend, Farmer Mac s third quarter loss on financial derivatives was $7.7 million, compared to a loss of $19.0 million during third quarter 2008. For the nine months ended September 30, 2009, the gain on financial derivatives was $15.5 million, compared to a loss of $29.7 million for the nine months ended September 30, 2008. Fair value gains on trading assets totaled $25.0 million for third quarter 2009, compared to losses of $14.5 million for third quarter 2008. For the nine months ended September 30, 2009, the gains on trading assets totaled $56.7 million, compared to losses of $21.7 million for the nine months ended September 30, 2008. While these volatile changes in fair values may at times produce significant income, as has been the case in 2009, they may also produce significant losses, as has been the case in previous reporting periods. Future changes in those values cannot be reliably predicted; however, as of September 30, 2009 the cumulative fair value after-tax losses recorded on financial derivatives was $69.2 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 earned 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 will have no permanent effect upon maturity.

During third quarter 2009, Farmer Mac recorded an other-than-temporary impairment loss of $1.6 million to write down the Corporation s $49.9 million investment in the unsecured debt of HSBC Finance to its fair value of $48.3 million as of September 30, 2009. Subsequent to September 30, 2009, Farmer Mac sold $20.0 million of the HSBC Finance debt for $19.5 million. That sale resulted in a loss of $0.5 million on Farmer Mac s initial investment, but a gain of $0.1 million during fourth quarter 2009 because the sale proceeds exceeded the carrying value that reflected the other-than-temporary impairment loss recorded during third quarter 2009. To mitigate the credit exposure related to Farmer Mac s remaining $28.9 million investment in HSBC Finance debt, during fourth quarter 2009 Farmer Mac entered into a credit default swap covering the balance. The credit default swap protects Farmer Mac against any future default by HSBC Finance and provides an offset to further fluctuations in the fair value of the remaining investment.

Farmer Mac s year-to-date 2009 results benefited from two first quarter transactions. The first was the conversion of certain Farmer Mac Guaranteed Securities into loans and the subsequent sale of a pool of loans consisting of a portion of the loans previously underlying those securities and other loans previously classified on the balance sheet as loans. The total principal balance of loans sold was $354.5 million. The sale resulted in a gain of $1.6 million and a recovery of previously charged off losses of $0.8 million. The second transaction was the sale of Lehman Brothers Holdings Inc. senior debt securities that had been written down to $5.4 million as of December 31, 2008. The sale of the securities during first quarter 2009 for $8.6 million resulted in a $3.2 million recovery of previously written off losses.

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