Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

Unassociated Document

As filed with the Securities and Exchange Commission on

May 12, 2009

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 March 31, 2009

Commission File Number 001-14951

	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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer x

Non-accelerated filer	o	Smaller reporting company o

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

Yes

As of May 1, 2009 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,606,617 shares of Class C Non-Voting Common Stock outstanding.

PART I - FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

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 March 31, 2009 and December 31, 2008	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008	4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008	5
Notes to Condensed Consolidated Financial Statements	6

-2-

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,			December 31,
	2009			2008
	(in thousands)
Assets:
Cash and cash equivalents	$	283,801		$	278,412
Investment securities:
Available-for-sale, at fair value		867,942			1,072,096
Trading, at fair value		178,752			163,763
Total investment securities		1,046,694			1,235,859
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value		1,564,907			1,511,694
Trading, at fair value		925,747			939,550
Total Farmer Mac Guaranteed Securities		2,490,654			2,451,244
Loans:
Loans held for sale, at lower of cost or fair value		590,343			66,680
Loans held for investment, at amortized cost		80,338			718,845
Allowance for loan losses		(13,228	)		(10,929	)
Total loans, net of allowance		657,453			774,596

Real estate owned, at lower of cost or fair value		606			606
Financial derivatives, at fair value		24,545			27,069
Interest receivable		46,939			73,058
Guarantee and commitment fees receivable		56,339			61,109
Deferred tax asset, net		72,668			87,793
Prepaid expenses and other assets		91,178			117,561
Total Assets	$	4,770,877		$	5,107,307

Liabilities, Mezzanine Equity and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year	$	3,286,336		$	3,757,099
Due after one year		1,005,981			887,999
Total notes payable		4,292,317			4,645,098

Financial derivatives, at fair value		163,666			181,183
Accrued interest payable		34,821			40,470
Guarantee and commitment obligation		51,790			54,954
Accounts payable and accrued expenses		15,576			20,532
Reserve for losses		8,025			5,506
Total Liabilities		4,566,195			4,947,743

Mezzanine Equity:
Series B redeemable preferred stock, par value $1,000,
150,000 shares authorized, issued and outstanding		144,216			144,216
Stockholders' Equity:
Preferred stock:
Series C, stated at redemption/liquidation value,
$1000 per share, 75,000 shares authorized, 20,000 and 9,200 issued and
outstanding as of March 31, 2009 and December 31, 2008, respectively		20,000			9,200
Common stock:
Class A Voting, $1 par value, no maximum authorization		1,031			1,031
Class B Voting, $1 par value, no maximum authorization		500			500
Class C Non-Voting, $1 par value, no maximum authorization		8,604			8,601
Additional paid-in capital		95,073			95,572
Accumulated other comprehensive loss		(45,609	)		(47,412	)
Accumulated deficit		(19,133	)		(52,144	)
Total Stockholders' Equity		60,466			15,348
Total Liabilities, Mezzanine Equity and Stockholders' Equity	$	4,770,877		$	5,107,307

See accompanying notes to condensed consolidated financial statements.

-3-

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended
	March 31, 2009			March 31, 2008
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	8,909		$	41,508
Farmer Mac Guaranteed Securities		27,759			18,770
Loans		10,485			11,831
Total interest income		47,153			72,109
Total interest expense		23,713			54,171
Net interest income		23,440			17,938
Provision for loan losses		(3,534	)		-
Net interest income after provision for loan losses		19,906			17,938

Non-interest income/(loss):
Guarantee and commitment fees		7,410			6,634
Gains/(losses) on financial derivatives		1,711			(41,720	)
Gains on trading assets		31,625			10,111
Impairment losses on available-for-sale investment securities		(81	)		-
Gains on sale of available-for-sale investment securities		3,150			1
Gains on sale of loans and Farmer Mac Guaranteed Securities		1,581			-
Other income		234			460
Non-interest income/(loss)		45,630			(24,514	)

Non-interest expense:
Compensation and employee benefits		4,025			3,650
General and administrative		2,914			2,028
Regulatory fees		513			513
Real estate owned operating costs, net		21			49
Provision for losses		2,519			-
Non-interest expense		9,992			6,240
Income/(loss) before income taxes		55,544			(12,816	)
Income tax expense/(benefit)		18,090			(5,119	)
Net income/(loss)		37,454			(7,697	)
Preferred stock dividends		(3,936	)		(560	)
Net income/(loss) available to common stockholders	$	33,518		$	(8,257	)

Earnings per common share and dividends:
Basic earnings/(loss) per common share	$	3.31		$	(0.84	)
Diluted earnings/(loss) per common share	$	3.31		$	(0.84	)
Common stock dividends per common share	$	0.05		$	0.10

See accompanying notes to condensed consolidated financial statements.

-4-

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Three Months Ended
	March 31, 2009			March 31, 2008
	(in thousands)
Cash flows from operating activities:
Net income/(loss)	$	37,454		$	(7,697	)
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums and discounts on loans and investments		1,228			1,141
Amortization of debt premiums, discounts and issuance costs		4,826			28,538
Proceeds from repayment and sale of trading investment securities		268			423
Purchases of loans held for sale		(15,144	)		(8,424	)
Proceeds from repayment of loans held for sale		1,538			4,095
Net change in fair value of trading securities and financial derivatives		(46,617	)		28,889
Amortization of SFAS 133 transition adjustment on financial derivatives		39			72
Impairment losses on available-for-sale investment securities		81			-
Gains on sale of available-for-sale investment securities		(3,150	)		(1	)
Gains on sale of loans and Farmer Mac Guaranteed Securities		(1,581	)		-
Total provision for losses		6,053			-
Deferred income taxes		13,290			(10,679	)
Stock-based compensation expense		654			914
Decrease in interest receivable		26,119			33,291
Decrease in guarantee and commitment fees receivable		4,770			2,079
Decrease/(increase) in other assets		25,753			(7,804	)
Decrease in accrued interest payable		(5,649	)		(16,273	)
Decrease in other liabilities		(9,843	)		(12,203	)
Net cash provided by operating activities		40,089			36,361

Cash flows from investing activities:
Purchases of available-for-sale investment securities		-			(835,025	)
Purchases of Farmer Mac Guaranteed Securities		(352,078	)		(60,281	)
Purchases of loans held for investment		(14,670	)		(29,044	)
Purchases of defaulted loans		(5,030	)		(1,163	)
Proceeds from repayment of available-for-sale investment securities		82,531			367,527
Proceeds from repayment of Farmer Mac Guaranteed Securities		67,277			69,697
Proceeds from repayment of loans		34,034			41,983
Proceeds from sale of available-for-sale investment securities		128,400			-
Proceeds from sale of loans held		358,953			-
Proceeds from sale of Farmer Mac Guaranteed Securities		17,124			6,118
Net cash provided by/(used in) investing activities		316,541			(440,188	)

Cash flows from financing activities:
Proceeds from issuance of discount notes		16,997,175			34,398,361
Proceeds from issuance of medium-term notes		919,427			639,974
Payments to redeem discount notes		(17,111,209	)		(33,934,610	)
Payments to redeem medium-term notes		(1,163,000	)		(599,000	)
Proceeds from common stock issuance		9			22
Purchases of common stock		-			(830	)
Proceeds from preferred stock issuance		10,800			-
Dividends paid		(4,443	)		(1,546	)
Net cash (used in)/provided by financing activities		(351,241	)		502,371
Net increase in cash and cash equivalents		5,389			98,544
Cash and cash equivalents at beginning of period		278,412			101,445
Cash and cash equivalents at end of period	$	283,801		$	199,989

See accompanying notes to condensed consolidated financial statements.

-5-

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1.

Accounting Policies

The 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 the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. The December 31, 2008 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2008 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 2008 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Below is a summary of Farmer Mac’s significant accounting policies.

(a) Cash and Cash Equivalents and Statements of Cash Flows

Farmer Mac considers highly liquid investment securities with original 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 three months ended March 31, 2009 and 2008.

	For the Three Months Ended
	March 31, 2009		March 31, 2008
	(in thousands)
Cash paid for:
Interest	$	23,172	$	40,171
Income taxes		-		16,000
Non-cash activity:
Loans acquired and securitized as Farmer Mac Guaranteed Securities		17,124		577
Transfers of investment securities from available-for-sale to trading from the effect of adopting SFAS 159		-		600,468
Transfers of Farmer Mac II Guaranteed Securities from held-to-maturity to trading from the effect of adopting SFAS 159		-		428,670
Transfers of Farmer Mac I Guaranteed Securities to loans held for sale		288,012		-
Transfers of loans held for investment to loans held for sale		617,072		-

-6-

(b) Allowance for Losses

As of March 31, 2009, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held, real estate owned and loans underlying LTSPCs, Farmer Mac I Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities 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.

Farmer Mac’s methodology for determining its allowance for losses incorporates the Corporation’s automated loan classification system. That system scores loans based on criteria such as historical repayment performance, indicators of current financial condition, 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 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 three-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying Farmer Mac I Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of unimpaired loans in 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.

Farmer Mac separately evaluates the cooperative lender obligations and loans underlying its Farmer Mac Guaranteed Securities – Rural Utilities to determine if there are probable losses inherent in the securities or the underlying rural utilities loans.

Farmer Mac also analyzes impaired assets in its portfolio for impairment under SFAS 114. Farmer Mac’s impaired assets include:

·	non-performing assets (loans 90 days or more past due, in foreclosure, restructured, in bankruptcy – including loans performing under either their original loan terms or a court-approved bankruptcy plan – and real estate owned);

-7-

·	loans for which Farmer Mac had adjusted the timing of borrowers’ payment schedules, but still expects to collect all amounts due and has not made economic concessions; and

·	additional performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress.

For loans with an updated appraised value, other updated collateral valuation or management’s estimate of discounted collateral value, this analysis includes the measurement of the fair value of the underlying collateral for individual loans relative to the total recorded investment, including principal, interest and advances. In the event that the collateral value does not support the total recorded investment, Farmer Mac specifically provides an allowance for the loan for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. For the remaining impaired assets without updated valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics.

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 Farmer Mac I Guaranteed Securities and LTSPCs and Farmer Mac Guaranteed Securities - Rural Utilities in accordance with SFAS 5 and SFAS 114.

The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three months ended March 31, 2009 and 2008:

	For the Three Months Ended March 31, 2009
	Allowance			REO				Total
	for Loan			Valuation		Reserve		Allowance
	Losses			Allowance		for Losses		for Losses
	(in thousands)
Beginning balance	$	10,929		$	-	$	5,506	$	16,435
Provision for losses		3,534			-		2,519		6,053
Charge-offs		(2,000	)		-		-		(2,000	)
Recoveries		765			-		-		765
Ending balance	$	13,228		$	-	$	8,025	$	21,253

	For the Three Months Ended March 31, 2008

	Allowance			REO				Total
	for Loan			Valuation		Reserve		Allowance
	Losses			Allowance		for Losses		for Losses
	(in thousands)
Beginning balance	$	1,690		$	-	$	2,197	$	3,887
Provision for losses		-			-		-		-
Charge-offs		(39	)		-		-		(39	)
Recoveries		-			-		-		-
Ending balance	$	1,651		$	-	$	2,197	$	3,848

-8-

No allowance for losses has been provided for loans underlying AgVantage securities or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”). Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security. As of March 31, 2009, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the credit quality of the obligors, as well as the underlying collateral. As of March 31, 2009, Farmer Mac had not experienced any credit losses on any AgVantage securities. 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 March 31, 2009, Farmer Mac had not experienced any credit losses on any Farmer Mac II Guaranteed Securities.

The table below summarizes the components of Farmer Mac’s allowance for losses as of March 31, 2009 and December 31, 2008:

	March 31,		December 31,
	2009		2008
	(in thousands)
Allowance for loan losses	$	13,228	$	10,929
Real estate owned valuation allowance		-		-
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities		519		869
Off-balance sheet Farmer Mac I Guaranteed Securities		1,692		535
LTSPCs		5,814		4,102
Farmer Mac Guaranteed Securities - Rural Utilities		-		-
Total	$	21,253	$	16,435

As of March 31, 2009, Farmer Mac individually analyzed $94.9 million of its $131.9 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $37.0 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics. Farmer Mac’s specific allowance for under-collateralized assets was $12.1 million as of March 31, 2009 and $8.6 million as of December 31, 2008. Farmer Mac’s non-specific or general allowance was $9.2 million as of March 31, 2009 and $7.8 million as of December 31, 2008.

Farmer Mac recognized interest income of approximately $1.1 million and $1.2 million on impaired loans during the three months ended March 31, 2009 and 2008, respectively. During the three months ended March 31, 2009 and 2008, Farmer Mac’s average investment in impaired loans was $125.7 million and $38.9 million, respectively.

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 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 often times deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market. Farmer Mac also recognizes 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”).

-9-

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”), futures contracts involving U.S. Treasury securities and interest rate swap contracts. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. 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 in the condensed consolidated statements of operations.

-10-

The following tables summarize information related to Farmer Mac’s financial derivatives as of March 31, 2009 and December 31, 2008:

	March 31, 2009
															Weighted-
								Weighted-			Weighted-			Weighted-	Average
								Average			Average			Average	Remaining
	Notional		Fair Value					Pay			Receive			Forward	Life
	Amount		Asset		(Liability)			Rate			Rate			Price	(in Years)
	(dollars in thousands)
Interest rate swaps:
Pay fixed callable	$	145,246	$	-	$	(5,305	)		5.52	%		1.21	%			7.77
Pay fixed non-callable		1,296,551		-		(153,943	)		5.20	%		1.24	%			5.08
Receive fixed callable		425,000		516		(77	)		1.23	%		1.77	%			0.77
Receive fixed non-callable		2,268,981		23,823		(87	)		1.22	%		1.79	%			1.75
Basis swaps		220,474		30		(4,248	)		2.84	%		1.78	%			3.56
Agency forwards		77,109		176		-								108.30
Treasury futures		2,100		-		(6	)							123.78
Total financial derivatives	$	4,435,461	$	24,545	$	(163,666	)		2.63	%		1.61	%

	December 31, 2008
															Weighted-
								Weighted-			Weighted-			Weighted-	Average
								Average			Average			Average	Remaining
	Notional		Fair Value					Pay			Receive			Forward	Life
	Amount		Asset		(Liability)			Rate			Rate			Price	(in Years)
	(dollars in thousands)
Interest rate swaps:
Pay fixed callable	$	208,958	$	-	$	(6,646	)		5.51	%		3.23	%			7.66
Pay fixed non-callable		1,311,218		-		(169,040	)		5.21	%		3.05	%			5.33
Receive fixed callable		606,500		1,727		(65	)		2.91	%		3.20	%			1.28
Receive fixed non-callable		1,347,069		25,269		(94	)		2.23	%		2.28	%			1.43
Basis swaps		206,863		45		(3,734	)		3.84	%		3.28	%			4.31
Agency forwards		74,998		-		(1,604	)							105.85
Treasury futures		2,500		28		-								126.88
Total financial derivatives	$	3,758,106	$	27,069	$	(181,183	)		3.68	%		2.82	%

In the normal course of business, collateral requirements contained in Farmer Mac’s derivative contracts are enforced by Farmer Mac and its counterparties. Upon enforcement of the collateral requirements, the amount of collateral posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e., derivative assets net of derivative liabilities at the counterparty level. If Farmer Mac were to be in violation of certain provisions of the derivative contracts, the related counterparty could request payment or full collateralization on the derivative contracts. As of March 31, 2009, the fair value of Farmer Mac’s derivatives in a net liability position at the counterparty level, which includes accrued interest but excludes any adjustment for nonperformance risk, was $156.8 million. As of March 31, 2009, Farmer Mac posted assets with a fair value of $85.2 million as collateral for its derivatives in net liability positions. If Farmer Mac had breached certain provisions of the derivative contracts as of March 31, 2009, it could have been required to settle its obligations under the agreements or post additional collateral of $71.6 million.

-11-

The following table summarizes the effects of Farmer Mac’s financial derivatives on the condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008:

	Gains/(Losses) on Financial Derivatives
	For the Three Months Ended
	March 31, 2009			March 31, 2008
	(in thousands)

Interest rate swaps	$	2,659		$	(41,148	)
Agency forwards		(879	)		(318	)
Treasury futures		(9	)		(143	)
		1,771			(41,609	)
Amortization of SFAS 133
transition adjustment		(60	)		(111	)
Total	$	1,711		$	(41,720	)

As of March 31, 2009 and December 31, 2008, Farmer Mac had approximately $0.2 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive loss 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 12 months, Farmer Mac estimates that $0.1 million of the amount currently reported in accumulated other comprehensive loss will be reclassified into earnings.

As of March 31, 2009, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with total notional amount of $120.5 million and a fair value of $(4.2) million. As of December 31, 2008, those basis swaps had a total notional amount of $131.9 million and a fair value of $(3.7) million. Under the terms of those basis swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. Those swaps economically hedge most of 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. The pricing of discount notes is closely correlated to LIBOR rates. Accordingly, Farmer Mac recorded unrealized losses on those outstanding basis swaps of $0.5 million for first quarter 2009, $2.5 million for fourth quarter 2008 and $2.4 million for first quarter 2008.

-12-

(d) Earnings/(Loss) Per Common Share

Basic earnings/(loss) per common share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings/(loss) 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 and stock appreciation rights (“SARs”). The following schedule reconciles basic and diluted earnings/(loss) per common share (“EPS”) for the three months ended March 31, 2009 and 2008:

	For the Three Months Ended
	March 31, 2009						March 31, 2008
	Net Income		Shares		$ per Share		Net (Loss)			Shares		$ per Share
	(in thousands, except per share amounts)
Basic EPS
Net income/(loss) available
to common stockholders	$	33,518		10,135	$	3.31	$	(8,257	)		9,867	$	(0.84	)
Effect of dilutive securities:
Stock options and SARs (1)		-		-		-		-			-		-
Diluted EPS	$	33,518		10,135	$	3.31	$	(8,257	)		9,867	$	(0.84	)

(1)

For the three months ended March 31, 2009 and 2008, stock options and SARs of 1,697,829 and 2,218,199, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive.

(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 ten 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. 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. As of June 30, 2008, the plan had terminated pursuant to its terms and no further grants will be made under it.

During 2008, Farmer Mac’s stockholders approved the 2008 Omnibus Incentive Compensation Plan that authorizes the grants of restricted stock, stock options and SARs, among other alternative forms of equity-based compensation, to directors, officers and other employees. SARs awarded to officers and employees vest annually in thirds and SARs awarded to directors vest fully after approximately one year. If not exercised or terminated earlier due to the termination of employment or service on the Board, SARs granted to officers or employees expire after ten years and those granted to directors expire after seven years. For all SARs granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on the date of grant. SARs granted during 2008 have exercise prices ranging from $7.35 to $28.94 per share.

For the three months ended March 31, 2009, Farmer Mac recognized $0.7 million of compensation expense related to stock options and SARs, compared to $0.9 million for the three months ended March 31, 2008.

-13-

The following table summarizes stock option and SARs activity for the three months ended March 31, 2009 and 2008:

	For the Three Months Ended
	March 31, 2009					March 31, 2008
	Stock			Weighted-		Stock		Weighted-
	Options			Average		Options		Average
	and			Exercise		and		Exercise
	SARs			Price		SARs		Price
Outstanding, beginning of period		2,237,711		$	25.54		2,218,199	$	25.48
Granted		-			-		-		-
Exercised		-			-		-		-
Canceled		(539,882	)		28.30		-		-
Outstanding, end of period		1,697,829		$	24.66		2,218,199	$	25.48

Options and SARs exercisable at end of period		1,308,518		$	24.93		1,360,222	$	24.46

The cancellations of stock options during first quarter 2009 were due to unvested options or SARs terminating and the cancellation of a portion of vested options upon employee and officers’ departures from Farmer Mac. There were no cancellations of stock options or SARs during first quarter 2008. There were no stock options or SARs exercised during first quarter 2009 or first quarter 2008.

The following table summarizes information regarding stock options and SARs outstanding as of March 31, 2009:

	Outstanding		Exercisable		Vested or Expected to Vest
		Weighted-		Weighted-		Weighted-
		Average		Average		Average
Range of		Remaining		Remaining		Remaining
Exercise	Stock Options	Contractual	Stock Options	Contractual	Stock Options	Contractual
Prices	and SARS	Life	and SARS	Life	and SARS	Life

$5.00 - $ 9.99	90,000	9.5 years	-	-	63,000	9.5 years
10.00 - 14.99	-	-	-	-	-	-
15.00 - 19.99	81,722	5.0 years	81,722	5.0 years	81,722	5.0 years
20.00 - 24.99	656,952	4.3 years	646,114	4.3 years	653,700	4.3 years
25.00 - 29.99	655,487	5.6 years	383,017	4.4 years	620,574	5.5 years
30.00 - 34.99	213,668	2.9 years	197,665	2.4 years	208,867	2.8 years
	1,697,829		1,308,518		1,627,863

-14-

There were no stock options or SARS granted during first quarter 2009. The weighted-average grant date fair value of options and SARs granted during the year ended December 31, 2008 was $9.71 per share. The fair values were estimated using the Black-Scholes option pricing model based on the following assumptions:

	2008
Risk-free interest rate		2.4	%
Expected years until exercise	6 years
Expected stock volatility		52.2	%
Dividend yield		2.2	%

(f) Reclassifications

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

(g) Fair Value

Effective January 1, 2008, Farmer Mac adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a fair value hierarchy that ranks the quality and reliability of the inputs to valuation techniques used to measure fair value. The hierarchy gives highest rank to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest rank to unobservable inputs (Level 3 measurements). Effective January 1, 2009, Farmer Mac adopted FASB Statement of Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) for all non-recurring fair value measurements of non-financial assets and liabilities. FSP 157-2 had delayed the effective date of SFAS 157 for non-recurring, non-financial assets and liabilities.

Farmer Mac’s assessment of the significance of the input to the fair value measurement requires judgment, and considers factors specific to the financial instrument. Both observable and unobservable inputs may be used to determine the fair value of positions that Farmer Mac has classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in long-dated volatilities) inputs.

Effective January 1, 2008, Farmer Mac adopted 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 provides companies an irrevocable option to report financial instruments at fair value with changes in fair value recorded in earnings as they occur. On January 1, 2008, Farmer Mac recorded a cumulative effect of adoption adjustment of $12.1 million, net of tax, as an increase to the beginning balance of retained earnings. The fair value option election was made for certain available-for-sale investment securities and certain Farmer Mac II Guaranteed Securities that were classified as held-to-maturity on January 1, 2008.

See Note 7 for more information regarding fair value measurement.

-15-

(h) New Accounting Standards

In December 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but affects only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. Farmer Mac adopted this statement prospectively on January 1, 2009 and the impact of adoption was not material to its financial condition, results of operations or cash flows.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). This standard applies to derivative instruments, non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS 133. SFAS 161 does not change the accounting for derivatives and hedging activities, but requires disclosures concerning the effect on the financial statements from their use. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Farmer Mac adopted this statement in first quarter 2009. Since SFAS 161 only required additional disclosures, it did not have an impact on Farmer Mac’s financial condition, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with GAAP. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Farmer Mac does not expect the adoption of this statement to have a material impact on the Corporation’s financial condition, results of operations or cash flows in future periods.

In September 2008, the FASB issued three separate but related Exposure Drafts for public comment. The proposed FASB Statements, Accounting for Transfers of Financial Assets and Amendments to FASB Interpretation No. 46(R) (“FIN 46(R)”), address amendments to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and to FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The two proposed FASB statements would be effective for fiscal years beginning after November 15, 2009. The proposed statements, amending SFAS 140 and FIN 46(R), would remove the concept of a qualifying special-purpose entity (“QSPE”) from SFAS 140 and remove the exception from applying FIN 46(R) to QSPEs. While the proposed standards have not been finalized, these changes may result in the consolidation of assets and liabilities onto Farmer Mac’s condensed consolidated balance sheet in connection with trusts that currently qualify for the QSPE exception. Farmer Mac is currently evaluating the impact of this proposed standard.

In October 2008, FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The example emphasizes the principles of SFAS 157, including the objective of fair value, the necessary considerations pertaining to distressed transactions, the relevance of observable data, management’s assumptions about nonperformance and liquidity risks, third-party pricing quotes and disclosure requirements. The FSP became effective on October 10, 2008 and applies to prior periods for which financial statements have not yet been issued. Entities must account for revisions to fair value estimates resulting from the adoption of the FSP as a change in accounting estimate under SFAS 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3, but do not need to provide the disclosures required by that Statement. Farmer Mac adopted the provisions of FSP 157-3 on September 30, 2008 for its investments in GSE preferred stock issued by CoBank, ACB and AgFirst Farm Credit Bank.

-16-

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46R-8, Disclosures by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP No. FAS 140-4 and FIN 46R-8”). FSP No. FAS 140-4 and FIN 46R-8 amends the disclosure requirements of SFAS 140 and FIN 46R and is effective for the first reporting period ending after December 15, 2008, or December 31, 2008 for Farmer Mac. The adoption of FSP No. FAS 140-4 and FIN 46R-8 did not have a material impact on Farmer Mac’s financial condition, results of operations or cash flows.

In January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP 99-20-1”). FSP 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. The objective of FSP 99-20-1 was to achieve more consistent determination of whether an other-than-temporary impairment has occurred. An entity with beneficial interests within the scope of FSP 99-20-1 is no longer required to solely consider market participant assumptions when evaluating cash flows for an adverse change that would be indicative of other-than-temporary impairment. FSP 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements of SFAS 115 and other related guidance. FSP 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008. The impact of adoption was not material to Farmer Mac’s financial condition, results of operations or cash flows.

In April 2009, the FASB issued three final FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. The FSPs are effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSPs for the interim and annual periods ending after March 15, 2009. Farmer Mac will adopt the FSPs for the interim period ending June 30, 2009. Farmer Mac does not expect the adoption of this guidance to have a material impact on its financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP amends and clarifies FASB Statement No. 141 (revised 2007), Business Combinations, to address application issues relating to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Farmer Mac’s adoption of this guidance did not have a material impact on its financial condition, results of operations or cash flows.

-17-

Note 2.

Investments

The following tables present the amortized cost and estimated fair values of Farmer Mac’s investments as of March 31, 2009 and December 31, 2008.

	March 31, 2009
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	74,100	$	-	$	(6,464	)	$	67,636
Floating rate asset-backed securities		78,350		-		(2,032	)		76,318
Floating rate corporate debt securities		396,831		-		(46,138	)		350,693
Floating rate Government/GSE
guaranteed mortgage-backed securities		319,243		96		(3,223	)		316,116
Fixed rate GSE guaranteed mortgage-backed
securities		7,077		270		-			7,347
Floating rate GSE subordinated debt		70,000		-		(20,868	)		49,132
Floating rate GSE preferred stock		700		-