Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

form10-q.htm

As filed with the Securities and Exchange Commission on

August 9, 2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Commission File Number 0-17440

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

(Exact name of registrant as specified in its charter)

Federally chartered instrumentality of the United States		52-1578738
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

1133 Twenty-First Street, N.W., Suite 600
Washington, D.C.		20036
(Address of principal executive offices)		(Zip code)

(202) 872-7700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes T No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £

Accelerated filer T

Non Accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No T

As of August 1, 2007, the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,928,912 shares of Class C Non-Voting Common Stock outstanding.

PART I - FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

The following interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations and cash flows of Farmer Mac for the interim periods presented. Certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. The December 31, 2006 consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2006 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2006 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.

The following information concerning Farmer Mac’s interim unaudited condensed consolidated financial statements is included in this report beginning on the pages listed below:

Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006	4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	5
Notes to Condensed Consolidated Financial Statements	6

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share data)

	June 30,			December 31,
	2007			2006
Assets:
Cash and cash equivalents	$	572,261		$	877,714
Investment securities		2,464,097			1,830,904
Farmer Mac Guaranteed Securities		1,313,426			1,330,418
Loans held for sale		92,944			71,621
Loans held for investment		660,540			705,745
Allowance for loan losses		(1,681	)		(1,945	)
Loans held for investment, net		658,859			703,800
Real estate owned		1,799			2,097
Financial derivatives		19,884			9,218
Interest receivable		82,866			73,545
Guarantee and commitment fees receivable		57,026			40,743
Deferred tax asset, net		8,945			6,886
Prepaid expenses and other assets		5,001			6,727
Total Assets	$	5,277,108		$	4,953,673

Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year	$	3,594,063		$	3,298,097
Due after one year		1,279,250			1,296,691
Total notes payable		4,873,313			4,594,788

Financial derivatives		19,423			23,474
Accrued interest payable		54,986			36,125
Guarantee and commitment obligation		51,978			35,359
Accounts payable and accrued expenses		18,587			12,828
Reserve for losses		2,197			2,610
Total Liabilities		5,020,484			4,705,184

Stockholders' Equity:
Preferred stock:
Series A, stated at redemption/liquidation value, $50 per share, 700,000 shares authorized, issued and outstanding		35,000			35,000
Common stock:
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares issued and outstanding		1,031			1,031
Class B Voting, $1 par value, no maximum authorization, 500,301 shares issued and outstanding		500			500
Class C Non-Voting, $1 par value, no maximum authorization, 8,843,108 and 9,075,862 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively		8,843			9,076
Additional paid-in capital		88,904			85,349
Accumulated other comprehensive income/(loss)		(1,800	)		4,956
Retained earnings		124,146			112,577
Total Stockholders' Equity		256,624			248,489
Total Liabilities and Stockholders' Equity	$	5,277,108		$	4,953,673

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Interest income:
Investments and cash equivalents	$	41,530		$	30,298		$	80,522		$	56,996
Farmer Mac Guaranteed Securities		18,782			18,953			38,185			36,990
Loans		11,199			11,847			22,518			23,230
Total interest income		71,511			61,098			141,225			117,216
Total interest expense		63,032			51,020			123,664			96,471

Net interest income		8,479			10,078			17,561			20,745
Recovery/(provision) for loan losses		-			594			215			1,606
Net interest income after recovery/(provision) for loan losses		8,479			10,672			17,776			22,351

Non-interest income:
Guarantee and commitment fees		6,354			5,288			12,212			10,337
Gains on financial derivatives and trading assets		19,825			9,908			15,792			21,608
Gains on sale of available-for-sale investment securities		21			-			21			-
Gains on the sale of real estate owned		32			304			32			514
Representation and warranty claims income		-			718			-			718
Other income		42			58			451			227
Non-interest income		26,274			16,276			28,508			33,404

Non-interest expense:
Compensation and employee benefits		3,719			2,673			6,856			5,577
General and administrative		2,237			2,577			4,574			5,335
Regulatory fees		550			588			1,100			1,175
Real estate owned operating costs, net		-			22			-			137
Provision/(recovery) for losses		100			592			(313	)		(104	)
Non-interest expense		6,606			6,452			12,217			12,120

Income before income taxes		28,147			20,496			34,067			43,635

Income tax expense		9,218			6,559			10,656			14,046
Net income		18,929			13,937			23,411			29,589
Preferred stock dividends		(560	)		(560	)		(1,120	)		(1,120	)
Net income available to common stockholders	$	18,369		$	13,377		$	22,291		$	28,469

Earnings per common share:
Basic earnings per common share	$	1.79		$	1.21		$	2.15		$	2.57
Diluted earnings per common share	$	1.74		$	1.18		$	2.10		$	2.50
Common stock dividends per common share	$	0.10		$	0.10		$	0.20		$	0.20

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

	Six Months Ended
	June 30, 2007			June 30, 2006
Cash flows from operating activities:
Net income	$	23,411		$	29,589
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of premiums and discounts on loans and investments		(803	)		(1,237	)
Amortization of debt premiums, discounts and issuance costs		62,956			58,220
Proceeds from repayment and sale of trading investment securities		5,091			1,001
Purchases of loans held for sale		(27,222	)		(31,316	)
Proceeds from repayment of loans held for sale		4,201			5,344
Net change in fair value of trading securities and financial derivatives		(14,654	)		(22,420	)
Amortization of SFAS 133 transition adjustment on financial derivatives		209			298
Gain on sale of available-for-sale securities		(21	)		-
Gains on the sale of real estate owned		(32	)		(514	)
Total (recovery)/provision for losses		(528	)		(1,711	)
Deferred income taxes		(2,231	)		1,527
Stock-based compensation expense		1,508			955
(Increase)/decrease in interest receivable		(9,321	)		3,857
Increase in guarantee and commitment fees receivable		(16,283	)		(3,614	)
Decrease in other assets		2,502			24,734
Increase/(decrease) in accrued interest payable		18,861			(216	)
Increase/(decrease) in other liabilities		20,716			(5,026	)
Net cash provided by operating activities		68,360			59,471

Cash flows from investing activities:
Purchases of available-for-sale investment securities		(2,238,930	)		(1,913,573	)
Purchases of Farmer Mac II Guaranteed Securities and AgVantage Farmer Mac Guaranteed Securities		(122,122	)		(108,600	)
Purchases of loans held for investment		(34,278	)		(25,058	)
Purchases of defaulted loans		(1,483	)		(4,565	)
Proceeds from repayment of investment securities		1,567,668			1,524,967
Proceeds from repayment of Farmer Mac Guaranteed Securities		131,609			117,990
Proceeds from repayment of loans		84,931			68,426
Proceeds from sale of available-for-sale investment securities		32,109			-
Proceeds from sale of Farmer Mac Guaranteed Securities		1,324			3,033
Proceeds from sale of real estate owned		230			2,819
Net cash used in investing activities		(578,942	)		(334,561	)

Cash flows from financing activities:
Proceeds from issuance of discount notes		56,058,511			37,272,236
Proceeds from issuance of medium-term notes		795,000			117,200
Payments to redeem discount notes		(56,100,859	)		(37,100,394	)
Payments to redeem medium-term notes		(537,083	)		(114,000	)
Tax benefit from tax deductions in excess of compensation cost recognized		346			348
Proceeds from common stock issuance		5,589			2,112
Purchases of common stock		(13,186	)		(8,974	)
Dividends paid		(3,189	)		(3,339	)
Net cash provided by financing activities		205,129			165,189
Net decrease in cash and cash equivalents		(305,453	)		(109,901	)

Cash and cash equivalents at beginning of period		877,714			458,852
Cash and cash equivalents at end of period	$	572,261		$	348,951

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1.

Accounting Policies

(a)

Cash and Cash Equivalents

Farmer Mac considers highly liquid investment securities with maturities of three months or less at the time of purchase to be cash equivalents. Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows. The following table sets forth information regarding certain cash and non-cash transactions for the six months ended June 30, 2007 and 2006.

	Six Months Ended
	June 30, 2007		June 30, 2006
	(in thousands)
Cash paid for:
Interest	$	49,164	$	40,360
Income taxes		7,000		4,500
Non-cash activity:
Real estate owned acquired through foreclosure		-		-
Loans acquired and securitized as Farmer Mac Guaranteed Securities		1,324		3,033

(b)

Allowance for Losses

As of June 30, 2007, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held, real estate owned, and loans underlying long-term standby purchase commitments (“LTSPCs”) and Farmer Mac I Guaranteed Securities issued after the Farm Credit System Reform Act of 1996 (the “1996 Act”) in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS 5”) and Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended (“SFAS 114”).

The allowance for losses is increased through periodic provisions for loan losses that are charged against net interest income and provisions for losses that are charged to non-interest expense and is reduced by charge-offs for actual losses, net of recoveries. Negative provisions for loan losses or negative provisions for losses are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.

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Farmer Mac’s methodology for determining its allowance for losses incorporates the Corporation’s proprietary automated loan classification system. That system scores loans based on criteria such as historical repayment performance, loan seasoning, loan size and loan-to-value ratio. For the purposes of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs have been scored and classified for each calendar quarter since first quarter 2000. The allowance methodology captures the migration of loan scores across concurrent and overlapping 3-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of Farmer Mac’s portfolio to estimate inherent losses, on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future. Management evaluates this assumption by taking into consideration factors including:

economic conditions;

geographic and agricultural commodity/product concentrations in the portfolio;

the credit profile of the portfolio;

delinquency trends of the portfolio;

historical charge-off and recovery activities of the portfolio; and

other factors to capture current portfolio trends and characteristics that differ from historical experience.

Management believes that its use of this methodology produces a reliable estimate of probable losses, as of the balance sheet date, for all loans held, real estate owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs in accordance with SFAS 5 and SFAS 114.

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The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three and six months ended June 30, 2007 and 2006:

	June 30, 2007

	Allowance			REO			Reserve			Total
	for Loan			Valuation			for			Allowance
	Losses			Allowance			Losses			for Losses
	(in thousands)
Three Months Ended:
Beginning balance	$	1,730		$	-		$	2,197		$	3,927
Provision/(recovery) for losses		-			100			-			100
Charge-offs		(49	)		(100	)		-			(149	)
Recoveries		-			-			-			-
Ending balance	$	1,681		$	-		$	2,197		$	3,878

Six Months Ended:
Beginning balance	$	1,945		$	-		$	2,610		$	4,555
Provision/(recovery) for losses		(215	)		100			(413	)		(528	)
Charge-offs		(49	)		(100	)		-			(149	)
Recoveries		-			-			-			-
Ending balance	$	1,681		$	-		$	2,197		$	3,878

	June 30, 2006

	Allowance			REO						Total
	for Loan			Valuation			Reserve			Allowance
	Losses			Allowance			for Losses			for Losses
	(in thousands)
Three Months Ended:
Beginning balance	$	3,883		$	-		$	2,931		$	6,814
Provision/(recovery) for losses		(594	)		5			587			(2	)
Charge-offs		(900	)		(5	)		-			(905	)
Recoveries		345			-			-			345
Ending balance	$	2,734		$	-		$	3,518		$	6,252

Six Months Ended:
Beginning balance	$	4,876		$	-		$	3,777		$	8,653
Provision/(recovery) for losses		(1,606	)		155			(259	)		(1,710	)
Charge-offs		(900	)		(155	)		-			(1,055	)
Recoveries		364			-			-			364
Ending balance	$	2,734		$	-		$	3,518		$	6,252

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The table below summarizes the components of Farmer Mac’s allowance for losses as of June 30, 2007 and December 31, 2006:

	June 30,		December 31,
	2007		2006
	(in thousands)
Allowance for loan losses	$	1,681	$	1,945
Real estate owned valuation allowance		-		-
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities		857		982
Off-balance sheet Farmer Mac I Guaranteed Securities		683		679
LTSPCs		657		949
Total	$	3,878	$	4,555

No allowance for losses has been made for loans underlying Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”). Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed first loss subordinated interests, which are expected to exceed the estimated credit losses on those loans. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible mortgage loans. As of June 30, 2007, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the high credit quality of the obligors, as well as the underlying collateral. The guaranteed portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the United States Department of Agriculture (“USDA”). Each USDA guarantee is an obligation backed by the full faith and credit of the United States. As of June 30, 2007, Farmer Mac had not experienced any credit losses on any Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, any AgVantage securities or any Farmer Mac II Guaranteed Securities and does not expect to incur any such losses in the future.

As of June 30, 2007, Farmer Mac individually analyzed $14.7 million of its $45.7 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $31.0 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics. All of the $14.7 million of assets analyzed individually were adequately collateralized. Accordingly, Farmer Mac did not record any specific allowances as of June 30, 2007. Similarly, as of December 31, 2006, Farmer Mac did not record any specific allowances related to its $56.9 million of impaired assets as of that date.

Farmer Mac recognized interest income of approximately $0.8 million and $1.7 million on impaired loans during the three months and six months ended June 30, 2007, respectively, compared to $1.2 million and $1.9 million, respectively, during the same periods in 2006. During the three months and six months ended June 30, 2007, Farmer Mac’s average investment in impaired loans was $50.4 million and $51.3 million, respectively, compared to $68.4 million and $71.2 million, respectively, for the same periods in 2006.

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(c)

Financial Derivatives

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts principally to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term mortgage and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and also to derive an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market. Farmer Mac is required also to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative as promulgated by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”).

Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet purchased and permanently funded, through the use of forward sale contracts on mortgage-backed securities and the debt of other government-sponsored enterprises (“GSEs”) and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both Treasury rates and spreads on Farmer Mac debt and Farmer Mac Guaranteed Securities. The notional amounts of these contracts are determined based on a duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses generated by these hedge transactions should offset changes in funding costs or Farmer Mac Guaranteed Securities sale prices that occur during the hedge period.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability in accordance with SFAS 133. Farmer Mac does not designate its financial derivatives as fair value hedges or cash flow hedges; therefore, the changes in the fair values of financial derivatives are reported as gains or losses on financial derivatives and trading assets in the condensed consolidated statements of operations.

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The following table summarizes information related to Farmer Mac’s financial derivatives as of June 30, 2007 and December 31, 2006:

	June 30, 2007					December 31, 2006
	Notional		Fair			Notional		Fair
	Amount		Value			Amount		Value
	(in thousands)
Interest rate swaps:
Pay-fixed	$	1,183,798	$	9,341		$	803,436	$	(9,982	)
Receive-fixed		1,167,482		(10,470	)		810,482		(7,111	)
Basis		181,422		2,019			335,065		2,531
Treasury futures		900		(1	)		-		-
Agency forwards		63,250		(428	)		71,045		306
Total	$	2,596,852	$	461		$	2,020,028	$	(14,256	)

As of June 30, 2007, Farmer Mac had approximately $0.6 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive income related to the SFAS 133 transition adjustment. These amounts will be reclassified into earnings in the same period or periods during which the hedged forecasted transactions (either the payment of interest or the issuance of discount notes) affect earnings or immediately when it becomes probable that the original hedged forecasted transaction will not occur within two months of the originally specified date. Over the next twelve months, Farmer Mac estimates that $0.3 million of the amount currently reported in accumulated other comprehensive income/(loss) will be reclassified into earnings.

As of June 30, 2007, Farmer Mac had outstanding basis swaps with a related party with a notional amount of $181.4 million and a fair value of $2.0 million. Those swaps hedge the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant Maturity Treasury-based rate and the Discount Notes Farmer Mac issues to fund the loan purchases. Under the terms of those basis swaps, which are not in designated hedge relationships, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. See Note 3 “Related Party Transactions” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007, for additional information on these related party transactions. As of December 31, 2006, these swaps had an outstanding notional amount of $193.0 million and a fair value of $2.8 million. Accordingly, Farmer Mac recorded an unrealized loss of $0.3 million and $0.8 million for the three months and six months ended June 30, 2007.

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(d) Earnings Per Common Share

Basic earnings per common share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share are based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options. The following schedule reconciles basic and diluted earnings per common share (“EPS”) for the three and six months ended June 30, 2007 and 2006:

	June 30, 2007						June 30, 2006
	Basic EPS		Dilutive stock options		Diluted EPS		Basic EPS		Dilutive stock options		Diluted EPS
	(in thousands, except per share amounts)
Three Months Ended:
Net income available to common stockholders	$	18,369			$	18,369	$	13,377			$	13,377
Weighted-average shares		10,287		255		10,542		11,083		256		11,339
Earnings per common share	$	1.79			$	1.74	$	1.21			$	1.18

Six Months Ended:
Net income available to common stockholders	$	22,291			$	22,291	$	28,469			$	28,469
Weighted average shares		10,377		216		10,593		11,095		287		11,382
Earnings per common share	$	2.15			$	2.10	$	2.57			$	2.50

During fourth quarter 2005, Farmer Mac established a program to repurchase up to 10 percent, or 958,632 shares, of the Corporation’s outstanding Class C Non-Voting Common stock. The aggregate number of shares repurchased by Farmer Mac under that program reached the maximum number of authorized shares during first quarter 2007, thereby terminating the program according to its terms. At that time, Farmer Mac announced the establishment of an additional program to repurchase up to one million additional shares of the Corporation’s outstanding Class C Non-Voting Common Stock. The authority for this new stock repurchase program expires in November 2008. Repurchases under that program commenced in accordance with its terms upon termination of the previous program. During the three months and six months ended June 30, 2007, Farmer Mac repurchased 133,500 and 493,982 shares, respectively, of its Class C Non-Voting Common Stock at an average price of $27.75 and $26.65 per share, respectively, pursuant to both of the Corporation’s previously announced stock repurchase programs. These repurchases reduced the Corporation’s stockholders’ equity by approximately $3.7 million and $13.2 million, respectively.

All of the shares repurchased under Farmer Mac’s stock repurchase programs were purchased in open market transactions and were retired to become authorized but unissued shares available for future issuance.

(e)

Stock-Based Compensation

In 1997, Farmer Mac adopted a stock option plan for directors, officers and other employees to acquire shares of Class C Non-Voting Common Stock. Upon stock option exercise, new shares are issued by the Corporation. Under the plan, stock options awarded vest annually in thirds, with the first third vesting one year after the date of grant. If not exercised, any options granted under the 1997 plan expire 10 years from the date of grant, except that options issued to directors since June 1, 1998, if not exercised, expire five years from the date of grant. Of the 3,750,000 shares authorized to be issued under the plan, 31,333 remain available for future issuance as of June 30, 2007. For all stock options granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on or immediately preceding the date of grant.

-12-

Farmer Mac recognized $0.4 million and $0.8 million of compensation expense during the three-month and six-month periods ended June 30, 2007, respectively, and $0.4 million and $0.9 million of compensation expense during the three-month and six-month periods ended June 30, 2006, respectively, related to the non-vested portion of stock option awards that were outstanding as of December 31, 2005. Additionally, Farmer Mac recognized $0.4 million and $0.7 million of compensation expense related to stock options awarded subsequent to December 31, 2005, for the three-month and six-month periods ended June 30, 2007, respectively, compared to no compensation expense and $0.1 million of similar compensation expense recognized for the three-month and six-month periods ended June 30, 2006, respectively.

As of June 30, 2007, Farmer Mac had $1.1 million of total unrecognized compensation cost related to stock options outstanding and unvested as of December 31, 2005. Of that cost, $0.6 million and $0.5 million is expected to be recognized in the remainder of 2007 and 2008, respectively.

The following table summarizes stock option activity for the three and six months ended June 30, 2007 and 2006:


	June 30, 2007					June 30, 2006
				Weighted-					Weighted-
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Three Months Ended:
Outstanding, beginning of period		2,133,965		$	23.85		2,091,208		$	22.68
Granted		456,427			29.33		358,928			26.35
Exercised		(253,459	)		21.44		(75,111	)		17.26
Canceled		(31,334	)		27.11		(75,091	)		28.82
Outstanding, end of period		2,305,599		$	25.15		2,299,934		$	23.23

Six Months Ended:
Outstanding, beginning of period		2,145,705		$	23.83		2,153,008		$	22.41
Granted		457,427			29.32		358,928			26.35
Exercised		(262,864	)		21.44		(136,911	)		15.40
Canceled		(34,669	)		26.76		(75,091	)		28.82
Outstanding, end of period		2,305,599		$	25.15		2,299,934		$	23.23

Options exercisable at end of period		1,408,361		$	24.04		1,431,465		$	23.28

The cancellations of stock options during the six months ended June 30, 2007 and June 30, 2006 were due either to unvested options terminating in accordance with the provisions of the applicable stock option plans upon directors’ or employees’ departures from Farmer Mac or vested options terminating unexercised on their expiration date. For the three-month and the six-month periods ended June 30, 2007, the additional paid-in capital received from stock option exercises was $5.1 million and $5.3 million, respectively, compared to $1.2 million and $2.0 million for the comparable periods in the prior year. For the three-month and the six-month periods ended June 30, 2007, the reduction of income taxes to be paid as a result of the deduction for stock option exercises was $0.7 million and $0.8 million, respectively, compared to $0.3 million and $0.7 million for the comparable periods in the prior year.

-13-

The following table summarizes information regarding options outstanding as of June 30, 2007:

	Options Outstanding		Options Exercisable
		Weighted-		Weighted-
		Average		Average
Range of		Remaining		Remaining
Exercise	Number of	Contractual	Number of	Contractual
Prices	Shares	Life	Shares	Life

$10.00 - $19.99	217,777	6.9 years	216,109	6.9 years
20.00 - 24.99	884,628	5.6 years	696,690	5.0 years
25.00 - 29.99	1,013,026	7.8 years	305,394	6.1 years
30.00 - 34.99	189,668	3.9 years	189,668	3.9 years
35.00 - 39.99	-	-	-	-
40.00 - 44.99	-	-	-	-
45.00 - 50.00	500	4.8 years	500	4.8 years
	2,305,599		1,408,361

The weighted-average grant date fair values of options granted in 2007 and 2006 were $11.25 and $9.91 per share, respectively. The fair values were estimated using the Black-Scholes option pricing model based on the following assumptions:

	2007		2006
Risk-free interest rate		4.8%		5.0%
Expected years until exercise	6 years		6 years
Expected stock volatility		35.9%		36.9%
Dividend yield		1.4%		1.6%

(f)

Reclassifications

Certain reclassifications of prior period information were made to conform to the current period presentation.

(g)

New Accounting Standards

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140 (“SFAS 155”), which resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155, among other things, permits the fair value re-measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 was effective for all financial instruments acquired or issued in a fiscal year beginning after September 15, 2006. Farmer Mac’s adoption of SFAS 155 on January 1, 2007 did not have a material effect on Farmer Mac’s results of operations or financial position.

-14-

In March 2006, FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for subsequent measurement. SFAS 156 was effective on January 1, 2007. Farmer Mac’s adoption of SFAS 156 on January 1, 2007 did not have a material effect on Farmer Mac’s results of operations or financial position.

Farmer Mac adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As part of the implementation of FIN 48, Farmer Mac evaluated its tax positions for its open tax years, 2003 through 2006, to identify and recognize any liabilities related to uncertain tax positions in its federal income tax returns. As of January 1, 2007, Farmer Mac recorded a liability for uncertain tax positions of $1.5 million with a corresponding $1.5 million increase in deferred tax assets. There were no significant changes in the components of the liability in first quarter 2007. During second quarter 2007, both the recorded liability for uncertain tax positions and the corresponding deferred tax asset were reduced to $1.0 million.

Farmer Mac’s policy for recording interest and penalties associated with uncertain tax positions is to record them as a component of income tax expense and the FIN 48 liability. Under the provisions of FIN 48, Farmer Mac will continue to evaluate its tax positions for potential liabilities related to unrecognized tax benefits at least quarterly, but does not expect any significant changes to its unrecognized tax benefits during the next 12 months. There are no income tax examinations of Farmer Mac in process.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under other accounting pronouncements that permit or require fair value measurements, changes the methods used to measure fair value and expands disclosures about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities, the inputs used to develop measurements and the effects of certain of the measurements on earnings or changes in net assets. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption, as of the beginning of an entity’s fiscal year, is also permitted, provided interim financial statements have not yet been issued. Farmer Mac is currently evaluating the potential impact, if any, that the adoption of SFAS 157 will have on its financial statements.

-15-

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is also permitted as of the beginning of an entity’s fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. Farmer Mac is currently evaluating the potential impact that SFAS 159, if adopted, would have on its financial statements.

Note 2.

Farmer Mac Guaranteed Securities

The following table sets forth information about on-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2007 and December 31, 2006.

		June 30, 2007									December 31, 2006
		Available-			Held-to-						Available-			Held-to-
		for-Sale			Maturity			Total			for-Sale			Maturity			Total
	(in thousands)
Farmer Mac I		$	367,418		$	27,296		$	394,714		$	404,938		$	28,489		$	433,427
Farmer Mac II			-			918,712			918,712			-			896,991			896,991
Total		$	367,418		$	946,008		$	1,313,426		$	404,938		$	925,480		$	1,330,418

Amortized cost		$	365,340		$	946,008		$	1,311,348		$	395,786		$	925,480		$	1,321,266
Unrealized gains			4,685			72			4,757			11,980			214			12,194
Unrealized losses			(2,607	)		(14,375	)		(16,982	)		(2,828	)		(6,715	)		(9,543	)
Fair value		$	367,418		$	931,705		$	1,299,123		$	404,938		$	918,979		$	1,323,917

The temporary unrealized losses presented above are principally due to changes in interest rates from the date of acquisition to June 30, 2007 and December 31, 2006, as applicable. The available-for-sale unrealized losses were on 18 and 12 individual securities as of June 30, 2007 and December 31, 2006, respectively.

As of June 30, 2007, 9 of the available-for-sale Farmer Mac Guaranteed Securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $2.6 million. As of December 31, 2006, 6 of the available-for-sale Farmer Mac Guaranteed Securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $2.8 million. The unrealized losses on those securities are due to overall increases in market interest rates. As of June 30, 2007, all of the available-for-sale securities with unrealized losses aged greater than 12 months have losses that are less than 3 percent of the amortized security cost. All aged unrealized losses are recoverable within a reasonable period of time by way of changes in market interest rates. Accordingly, Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities represent other-than-temporary impairment as of June 30, 2007. Farmer Mac has the intent and ability to hold its on-balance sheet Farmer Mac Guaranteed Securities until either the market value recovers or the securities mature.

-16-

The table below presents a sensitivity analysis for the Corporation’s on-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2007.

	June 30, 2007
		(dollars in thousands)

Fair value of beneficial interests retained in Farmer Mac Guaranteed Securities		$	1,299,123

Weighted-average remaining life (in years)			4.9

Weighted-average prepayment speed (annual rate)			9.8	%
Effect on fair value of a 10% adverse change		$	(124	)
Effect on fair value of a 20% adverse change		$	(205	)

Weighted-average discount rate			5.9	%
Effect on fair value of a 10% adverse change		$	(21,929	)
Effect on fair value of a 20% adverse change		$	(43,872	)

These sensitivities are hypothetical. Changes in fair value based on 10 percent or 20 percent variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In fact, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might amplify or counteract the sensitivities.

-17-

The table below presents the outstanding principal balances as of the periods indicated for Farmer Mac Guaranteed Securities, loans, and LTSPCs.

	June 30,		December 31,
	2007		2006
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	744,092	$	770,236
Guaranteed Securities		391,763		423,624
Farmer Mac II:
Guaranteed Securities		915,151		892,667
Total on-balance sheet	$	2,051,006	$	2,086,527

Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	1,644,413	$	1,969,734
AgVantage		2,500,000		1,500,000
Guaranteed Securities		2,151,635		1,649,895
Farmer Mac II:
Guaranteed Securities		27,292		33,132
Total off-balance sheet	$	6,323,340	$	5,152,761

Total	$	8,374,346	$	7,239,288

When particular criteria are met, such as the default of the borrower, Farmer Mac becomes entitled to purchase the defaulted loans underlying Farmer Mac Guaranteed Securities (commonly referred to as “removal-of-account” provisions). Farmer Mac records these loans at their fair values in the consolidated financial statements during the period in which Farmer Mac becomes entitled to purchase the loans and therefore regains effective control over the transferred loans. Fair values are determined by current collateral valuations or management’s estimate of discounted collateral values, and represent the cash flows expected to be collected. Farmer Mac records, at acquisition, the difference between each loan’s acquisition cost and its fair value, if any, as a charge-off to the reserve for losses. Subsequent to the purchase, such defaulted loans are treated as nonaccrual loans and, therefore, interest is accounted for on the cash basis. Any decreases in expected cash flows are recognized as impairment. No impairment was recognized during the three and six months ended June 30, 2007 and 2006. The following table presents information related to Farmer Mac’s acquisition of defaulted loans for the three and six months ended June 30, 2007 and 2006 and the outstanding balances and carrying amounts of all such loans as of June 30, 2007 and December 31, 2006, respectively.

-18-

		Three Months Ended				Six Months Ended
		June 30, 2007		June 30, 2006		June 30, 2007		June 30, 2006
	(in thousands)

Fair value at acquistion date		$	650	$	511	$	1,483	$	4,565
Contractually required payments receivable			659		515		1,530		4,635

	As of
	June 30,		December 31,
	2007		2006
	(in thousands)

Outstanding balance	$	40,029	$	45,330
Carrying amount		35,711		42,687

Net credit losses for the six months ended June 30, 2007 and 2006 and 90-day delinquencies as of June 30, 2007, December 31, 2006 and June 30, 2006 for Farmer Mac Guaranteed Securities, loans and LTSPCs are presented in the table below. Information is not presented for loans underlying Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed first loss subordinated interests, which are expected to exceed the estimated credit losses on those loans. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible mortgage loans. As of June 30, 2007, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the high credit quality of the obligors, as well as the underlying collateral. The guaranteed portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the USDA. Each USDA guarantee is an obligation backed by the full faith and credit of the United States. As of June 30, 2007, Farmer Mac had not experienced any credit losses on any Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed Securities and does not expect to incur any such losses in the future.

-19-

	90-Day
	Delinquencies (1)						Net Credit Losses
	As of		As of		As of		For the Six Months Ended
	June 30,		December 31,		June 30,		June 30,
	2007		2006		2006		2007		2006
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	13,561	$	18,457	$	18,599	$	49	$	536
Guaranteed Securities		-		-		-		-		-
Total on-balance sheet	$	13,561	$	18,457	$	18,599	$	49	$	536


Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	1,202	$	1,198	$	2,409	$	-	$	-
Guaranteed Securities		-		-		-		-		-
Total off-balance sheet	$	1,202	$	1,198	$	2,409	$	-	$	-

Total	$	14,763	$	19,655	$	21,008	$	49	$	536

(1)

Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, or in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

Note 3.

Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments

Overview

Farmer Mac offers approved agricultural and rural residential mortgage lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through either the Farmer Mac I program or the Farmer Mac II program; and (2) LTSPCs, which are available only through the Farmer Mac I program. Both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac in the ordinary course of its business.

-20-

Off-Balance Sheet Farmer Mac Guaranteed Securities

Agricultural mortgage loans and other mortgage assets may be placed into trusts that are used as vehicles for the securitization of the transferred assets and the Farmer Mac-guaranteed beneficial interests in the trusts are sold to investors. The following table summarizes cash flows received from and paid to these trusts:

	Six Months Ended
	June 30, 2007		June 30, 2006
	(in thousands)
Proceeds from new securitizations	$	1,324	$	3,033
Guarantee fees received		4,923		2,079
Purchases of assets from the trusts		247		506
Servicing advances		104		10
Repayment of servicing advances		95		8

The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2007 and December 31, 2006, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans.

Outstanding Balance of Off-Balance Sheet
Farmer Mac Guaranteed Securities
	June 30,		December 31,
	2007		2006
	(in thousands)

Post-1996 Act Farmer Mac I Guaranteed Securities	$	4,651,635	$	3,149,895
Farmer Mac II Guaranteed Securities		27,292		33,132
Total Farmer Mac I and II	$	4,678,927	$	3,183,027

For those securities issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the condensed consolidated balance sheet. This liability approximated $30.8 million as of June 30, 2007 and $13.6 million as of December 31, 2006. As of June 30, 2007, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 12.1 years.

Long-Term Standby Purchase Commitments (LTSPCs)

An LTSPC is a commitment by Farmer Mac to purchase eligible loans from a segregated pool of loans, either for cash or in exchange for Farmer Mac I Guaranteed Securities, on one or more undetermined future dates. As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly in arrears in an amount approximating what would have been the guarantee fee if the transaction were structured as a swap for Farmer Mac Guaranteed Securities.

-21-

As of June 30, 2007 and December 31, 2006, the maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans, was $1.6 billion and $2.0 billion, respectively.

As of June 30, 2007, the weighted-average remaining maturity of all loans underlying LTSPCs was 15.3 years. For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the condensed consolidated balance sheet. This liability approximated $21.2 million as of June 30, 2007 and $21.8 million as of December 31, 2006.

Note 4.

Comprehensive Income

Comprehensive income represents all changes in stockholders’ equity except those resulting from investments by or distributions to stockholders, and is comprised primarily of net income and unrealized gains and losses on securities available-for-sale, net of related taxes. The following table sets forth Farmer Mac’s comprehensive income for the three and six months ended June 30, 2007 and 2006:

		Three Months Ended						Six Months Ended
		June 30,			June 30,			June 30,			June 30,
		2007			2006			2007			2006
	(in thousands)

Net income		$	18,929		$	13,937		$	23,411		$	29,589

Unrealized losses on available for sale securities, net of tax			(11,653	)		(6,679	)		(6,965	)		(15,721	)
Amortization of SFAS 133 transition adjustment on financial derivatives, net of tax			118			167			209			298

Change in accumulated other comprehensive loss, net of tax			(11,535	)		(6,512	)		(6,756	)		(15,423	)

Comprehensive income		$	7,394		$	7,425		$	16,655		$	14,166

-22-

The following table presents Farmer Mac’s accumulated other comprehensive income/(loss) as of June 30, 2007 and December 31, 2006 and changes in the components of accumulated other comprehensive income/(loss) for the six months ended June 30, 2007 and the year ended December 31, 2006.

	June 30,			December 31,
	2007			2006
	(in thousands)
Available-for-sale securities:
Beginning balance	$	5,802		$	16,637
Net unrealized gains/(losses), net of tax		(6,965	)		(10,835	)
Ending balance	$	(1,163	)	$	5,802

Financial derivatives:
Beginning balance	$	(846	)	$	(1,390	)
Amortization of SFAS 133 transition adjustment on financial derivatives, net of tax		209			544
Ending balance	$	(637	)	$	(846	)

Accumulated other comprehensive income/(loss), net of tax	$	(1,800	)	$	4,956

-23-

Note 5.

Investments

The following table presents the amortized cost and estimated fair values of Farmer Mac’s investments as of June 30, 2007 and December 31, 2006.

		As of June 30, 2007
		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate asset-backed securities		$	380,495	$	-	$	-		$	380,495
Fixed rate asset-backed securities			365,650		-		(6,680	)		358,970
Floating rate corporate debt securities			518,277		401		(1,103	)		517,575
Fixed rate corporate debt securities			519,006		-		(3,539	)		515,467
Floating rate preferred stock			53,102		-		(305	)		52,797
Fixed rate preferred stock			182,486		7,169		-			189,655
Floating rate commercial paper			50,143		-		-			50,143
Fixed rate commercial paper			248,938		-