Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

Unassociated Document

As filed with the Securities and Exchange Commission on

November 9, 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 September 30, 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 x No ¨

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 ¨	Accelerated filer x

Non-accelerated filer ¨	Smaller reporting company ¨

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

Yes ¨ No x

As of November 2, 2009 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,610,918 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 September 30, 2009 and December 31, 2008		3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008		5
Notes to Condensed Consolidated Financial Statements		6

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,
	2009			2008
	(in thousands)
Assets:
Cash and cash equivalents	$	274,894		$	278,412
Investment securities:
Available-for-sale, at fair value		924,041			1,072,096
Trading, at fair value		97,438			163,763
Total investment securities		1,021,479			1,235,859
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value		2,609,185			1,511,694
Trading, at fair value		890,976			939,550
Total Farmer Mac Guaranteed Securities		3,500,161			2,451,244
Loans:
Loans held for sale, at lower of cost or fair value		646,420			66,680
Loans held for investment, at amortized cost		85,706			718,845
Allowance for loan losses		(4,892	)		(10,929	)
Total loans, net of allowance		727,234			774,596

Real estate owned, at lower of cost or fair value		10,637			606
Financial derivatives, at fair value		21,099			27,069
Interest receivable		56,206			73,058
Guarantee and commitment fees receivable		54,472			61,109
Deferred tax asset, net		15,150			87,793
Prepaid expenses and other assets		52,399			117,561
Total Assets	$	5,733,731		$	5,107,307

Liabilities, Mezzanine Equity and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year	$	3,155,589		$	3,757,099
Due after one year		1,962,591			887,999
Total notes payable		5,118,180			4,645,098

Financial derivatives, at fair value		127,607			181,183
Accrued interest payable		37,388			40,470
Guarantee and commitment obligation		48,811			54,954
Accounts payable and accrued expenses		44,979			20,532
Reserve for losses		7,585			5,506
Total Liabilities		5,384,550			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, $1,000 per share, 100,000 shares authorized, 57,000 and 9,200 issued and outstanding as of September 30, 2009 and December 31, 2008, respectively		57,000			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		8,609			8,601
Additional paid-in capital		96,547			95,572
Accumulated other comprehensive income/(loss)		18,139			(47,412	)
Retained earnings/(accumulated deficit)		23,139			(52,144	)
Total Stockholders' Equity		204,965			15,348
Total Liabilities, Mezzanine Equity and Stockholders' Equity	$	5,733,731		$	5,107,307

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	6,345		$	20,395		$	22,303		$	97,305
Farmer Mac Guaranteed Securities		27,668			28,470			81,232			67,007
Loans		8,815			11,718			28,196			35,192
Total interest income		42,828			60,583			131,731			199,504
Total interest expense		23,031			39,260			68,593			135,885
Net interest income		19,797			21,323			63,138			63,619
Provision for loan losses		(3,098	)		(731	)		(939	)		(731	)
Net interest income after provision for loan losses		16,699			20,592			62,199			62,888

Non-interest income/(loss):
Guarantee and commitment fees		8,168			7,281			23,486			20,574
(Losses)/gains on financial derivatives		(7,733	)		(19,021	)		15,506			(29,691	)
Gains/(losses) on trading assets		25,047			(14,507	)		56,707			(21,664	)
Other-than-temporary impairment losses		(1,621	)		(97,108	)		(3,994	)		(102,452	)
Gains/(losses) on sale of available-for-sale investment securities		63			(85	)		2,913			65
Gains on sale of loans and Farmer Mac Guaranteed Securities		-			1,531			1,581			1,531
Gains on repurchase of debt		-			840			-			840
Other income		874			192			1,209			1,315
Non-interest income/(loss)		24,798			(120,877	)		97,408			(129,482	)

Non-interest expense:
Compensation and employee benefits		2,896			3,748			10,493			11,327
General and administrative		2,432			4,061			8,332			8,331
Regulatory fees		512			513			1,537			1,538
Real estate owned operating costs, net		203			15			208			102
Provision/(recoveries) for losses		89			(91	)		2,079			(91	)
Non-interest expense		6,132			8,246			22,649			21,207
Income/(loss) before income taxes		35,365			(108,531	)		136,958			(87,801	)
Income tax expense/(benefit)		13,097			(2,973	)		47,721			3,463
Net income/(loss)		22,268			(105,558	)		89,237			(91,264	)
Preferred stock dividends		(4,368	)		(578	)		(12,434	)		(1,698	)
Net income/(loss) available to common stockholders	$	17,900		$	(106,136	)	$	76,803		$	(92,962	)

Earnings/(loss) per common share and dividends:
Basic earnings/(loss) per common share	$	1.77		$	(10.55	)	$	7.58		$	(9.33	)
Diluted earnings/(loss) per common share	$	1.74		$	(10.55	)	$	7.54		$	(9.33	)
Common stock dividends per common share	$	0.05		$	0.10		$	0.15		$	0.30

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended
	September 30, 2009			September 30, 2008
	(in thousands)
Cash flows from operating activities:
Net income/(loss)	$	89,237		$	(91,264	)
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums and discounts on loans, investments and Farmer Mac Guaranteed Securities		3,123			3,752
Amortization of debt premiums, discounts and issuance costs		10,982			66,790
Proceeds from repayment and sale of trading investment securities		644			6,507
Purchases of loans held for sale		(122,421	)		(38,461	)
Proceeds from repayment of loans held for sale		51,896			14,747
Net change in fair value of trading securities and financial derivatives		(104,312	)		30,954
Amortization of transition adjustment on financial derivatives		124			222
Other-than-temporary impairment losses		3,994			102,452
Gains on sale of loans and Farmer Mac Guaranteed Securities		(1,581	)		(1,531	)
Gains on sale of available-for-sale investment securities		(2,913	)		(65	)
Gains on repurchase of debt		-			(840	)
Total provision for losses		3,018			640
Deferred income taxes		73,629			(11,316	)
Stock-based compensation expense		2,159			3,389
Decrease in interest receivable		16,852			34,238
Decrease/(increase) in guarantee and commitment fees receivable		6,637			(2,581	)
Decrease/(increase) in other assets		24,287			(41,561	)
Decrease in accrued interest payable		(3,082	)		(17,484	)
Increase in other liabilities		11,725			8,911
Net cash provided by operating activities		63,998			67,499
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(41,721	)		(1,160,501	)
Purchases of Farmer Mac Guaranteed Securities		(1,952,704	)		(305,584	)
Purchases of loans held for investment		(48,147	)		(86,024	)
Purchases of defaulted loans		(19,631	)		(1,746	)
Proceeds from repayment of available-for-sale investment securities		148,544			445,154
Proceeds from repayment of Farmer Mac Guaranteed Securities		690,741			219,341
Proceeds from repayment of loans		37,308			101,964
Proceeds from sale of available-for-sale investment securities		207,879			351,256
Proceeds from sale of Farmer Mac Guaranteed Securities		24,232			649,723
Proceeds from sale of real estate owned		31,056			-
Proceeds from sale of loans held		358,953			-
Net cash (used in)/provided by investing activities		(563,490	)		213,583
Cash flows from financing activities:
Proceeds from issuance of discount notes		40,680,191			105,086,822
Proceeds from issuance of medium-term notes		2,962,189			1,486,903
Payments to redeem discount notes		(41,077,281	)		(104,926,504	)
Payments to redeem medium-term notes		(2,103,000	)		(1,979,660	)
Tax benefit from tax deductions in excess of compensation cost recognized		-			381
Proceeds from common stock issuance		29			5,722
Purchases of common stock		-			(830	)
Proceeds from preferred stock issuance		47,800			-
Dividends paid		(13,954	)		(4,700	)
Net cash provided by/ (used in) financing activities		495,974			(331,866	)
Net decrease in cash and cash equivalents		(3,518	)		(50,784	)
Cash and cash equivalents at beginning of period		278,412			101,445
Cash and cash equivalents at end of period	$	274,894		$	50,661

See accompanying notes to condensed consolidated financial statements.

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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. Farmer Mac evaluated subsequent events through November 9, 2009. Below is a summary of Farmer Mac’s significant accounting policies.

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(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. During the three and nine months ended September 30, 2009, Farmer Mac refinanced $100 million and $500 million, respectively, of certain Farmer Mac Guaranteed Securities - Rural Utilities. For the nine months ended September 30, 2009, the cash flows related to these transactions are presented gross in the condensed consolidated statements of cash flows, whereas the six months ended June 30, 2009 reflected a net presentation. The following table sets forth information regarding certain cash and non-cash transactions for the nine months ended September 30, 2009 and 2008.

	For the Nine Months Ended
	September 30, 2009		September 30, 2008
	(in thousands)
Cash paid for:
Interest	$	58,994	$	88,012
Income taxes		10,500		25,069
Non-cash activity:
Transfer of loans held for investment to real estate owned		41,086		-
Loans acquired and securitized as Farmer Mac Guaranteed Securities		17,224		79,757
Issuance of Series B redeemable preferred stock (net of deferred offering costs)		-		61,039
Reclassification of unsettled trades with the Reserve Primary Fund from Cash and cash equivalents to Prepaid expenses and other assets		-		42,489
Transfers of investment securities from available-for-sale to trading from the effect of adopting the fair value option		-		600,468
Transfers of Farmer Mac II Guaranteed Securities from held-to-maturity to trading from the effect of adopting the fair value option		-		428,670
Transfers of Farmer Mac II Guaranteed Securities from held-to-maturity to available for sale		-		493,997
Transfers of Farmer Mac I Guaranteed Securities from held-to-maturity to available for sale		-		25,458
Transfers of available-for-sale investment securities to available-for-sale Farmer Mac Guaranteed Securities - Rural Utilities		-		902,420
Transfers of trading investment securities to trading Farmer Mac Guaranteed Securities - Rural Utilities		-		459,026
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		-
Exchange of GSE preferred stock - transfer from trading to available-for-sale		90,657		-

(b) Allowance for Losses

As of September 30, 2009, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held and loans underlying LTSPCs, Farmer Mac I Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities in accordance with ASC 450-20, Loss Contingencies (formerly FASB Statement No. 5) and ASC 310-35, Receivables – Subsequent Measurement (formerly FASB Statement No. 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, or releases of allowance 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 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 of loans and loans underlying its Farmer Mac Guaranteed Securities in its Rural Utilities program to determine if there are probable losses inherent in the securities or the underlying rural utilities loans.

Farmer Mac also analyzes assets in its portfolio for impairment. 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);

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 provides a specific allowance 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.

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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 and loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities.

The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three and nine months ended September 30, 2009 and 2008:

	September 30, 2009								September 30, 2008
	Allowance					Total			Allowance						Total
	for Loan			Reserve		Allowance			for Loan			Reserve			Allowance
	Losses			for Losses		for Losses			Losses			for Losses			for Losses
	(in thousands)
For the Three Months Ended:
Beginning balance	$	1,810		$	7,496	$	9,306		$	1,592		$	2,197		$	3,789
Provision/(recovery) for losses		3,098			89		3,187			731			(91	)		640
Charge-offs		(16	)		-		(16	)		-			-			-
Recoveries		-			-		-			6			-			6
Ending balance	$	4,892		$	7,585	$	12,477		$	2,329		$	2,106		$	4,435

For the Nine Months Ended:
Beginning balance	$	10,929		$	5,506	$	16,435		$	1,690		$	2,197		$	3,887
Provision/(recovery) for losses		939			2,079		3,018			731			(91	)		640
Charge-offs		(7,741	)		-		(7,741	)		(108	)		-			(108	)
Recoveries		765			-		765			16			-			16
Ending balance	$	4,892		$	7,585	$	12,477		$	2,329		$	2,106		$	4,435

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 September 30, 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 September 30, 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 September 30, 2009, Farmer Mac had not experienced any credit losses on any Farmer Mac II Guaranteed Securities.

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The table below summarizes the components of Farmer Mac’s allowance for losses as of September 30, 2009 and December 31, 2008:

	September 30,		December 31,
	2009		2008
	(in thousands)
Allowance for loan losses	$	4,892	$	10,929
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities		-		869
Off-balance sheet Farmer Mac I Guaranteed Securities		1,511		535
LTSPCs		6,074		4,102
Farmer Mac Guaranteed Securities - Rural Utilities		-		-
Total	$	12,477	$	16,435

As of September 30, 2009, Farmer Mac individually analyzed $44.5 million of its $216.4 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $171.9 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 $1.5 million as of September 30, 2009 and $8.6 million as of December 31, 2008. Farmer Mac’s non-specific or general allowances were $11.0 million as of September 30, 2009 and $7.8 million as of December 31, 2008.

Farmer Mac recognized interest income of approximately $0.4 million and $2.0 million on impaired loans during the three and nine months ended September 30, 2009, respectively, compared to $1.0 million and $3.1 million, respectively, during the same periods in 2008. During the three and nine months ended September 30, 2009, Farmer Mac’s average investment in impaired loans was $184.6 million and $168.0 million, respectively, compared to $46.9 million and $42.2 million, respectively, for the same periods in 2008.

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 loans 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 in ASC Topic 815, Derivatives and Hedging (“ASC 815”).

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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 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. 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.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. 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.

The following tables summarize information related to Farmer Mac’s financial derivatives as of September 30, 2009 and December 31, 2008:

	September 30, 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	$	100,337	$	-		$	(2,664	)		5.74	%		0.45	%				7.65
Pay fixed non-callable		1,190,521		-			(121,394	)		5.15	%		0.42	%				4.94
Receive fixed callable		325,000		347			(51	)		0.04	%		0.56	%				0.92
Receive fixed non-callable		2,601,263		20,702			(778	)		0.53	%		1.77	%				2.04
Basis swaps		262,177		533			(3,961	)		1.74	%		1.09	%				2.59
Agency forwards		34,551		-			(298	)								99.04
Treasury futures		800		-			(1	)								118.18
Credit valuation adjustment		-		(483	)		1,540
Total financial derivatives	$	4,514,649	$	21,099		$	(127,607	)		1.91	%		1.25	%

	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	%

-11-

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 September 30, 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 $116.6 million. As of September 30, 2009, Farmer Mac posted assets with a fair value of $37.5 million as collateral for its derivatives in net liability positions. If Farmer Mac had breached certain provisions of the derivative contracts as of September 30, 2009, it could have been required to settle its obligations under the agreements or post additional collateral of $79.1 million.

The following table summarizes the effects of Farmer Mac’s financial derivatives on the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008:

	(Losses)/Gains on Financial Derivatives
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
	(in thousands)

Interest rate swaps	$	(6,409	)	$	(18,652	)	$	17,971		$	(29,218	)
Agency forwards		(1,223	)		(470	)		(2,301	)		(255	)
Treasury futures		(47	)		148			28			63
Pay-fixed swaptions		-			61			-			61
		(7,679	)		(18,913	)		15,698			(29,349	)

Amortization of derivatives transition adjustment		(54	)		(108	)		(192	)		(342	)
Total	$	(7,733	)	$	(19,021	)	$	15,506		$	(29,691	)

As of September 30, 2009 and December 31, 2008, respectively, Farmer Mac had approximately $0.1 million and $0.2 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive income/(loss) related to the financial derivatives 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 income/(loss) will be reclassified into earnings.

-12-

As of September 30, 2009, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with total notional amount of $105.2 million and a fair value of $(3.9) million, compared to $131.9 million and $(3.7) million, respectively, as of December 31, 2008. 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. Farmer Mac recorded unrealized losses of $0.6 million and $0.2 million on those outstanding basis swaps for the three and nine months ended September 30, 2009, respectively, compared to unrealized gains of $0.2 million and unrealized losses of $0.1 million, respectively, for the same periods in 2008.

(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, stock appreciation rights (“SARs”) and nonvested restricted stock awards. The following schedule reconciles basic and diluted earnings/(loss) per common share (“EPS”) for the three and nine months ended September 30, 2009 and 2008:

	For the Three Months Ended
	September 30, 2009							September 30, 2008
	Net				$ per			Net					$ per
	Income		Shares		Share			Loss			Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income/(loss) available to common stockholders	$	17,900		10,140	$	1.77		$	(106,136	)		10,065	$	(10.55	)
Effect of dilutive securities:
Stock options, SARs and restricted stock (1)				146		(0.03	)					-		-
Diluted EPS	$	17,900		10,286	$	1.74		$	(106,136	)		10,065	$	(10.55	)

(1)	For the three months ended September 30, 2009 and 2008, stock options, SARs and nonvested restricted stock of 1,590,965 and 2,381,503, respectively, were outstanding but not included in the computation of diluted earnings/(loss) per share of common stock because they were anti-dilutive.

	For the Nine Months Ended
	September 30, 2009							September 30, 2008
	Net				$ per			Net					$ per
	Income		Shares		Share			Loss			Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income/(loss) available to common stockholders	$	76,803		10,138	$	7.58		$	(92,962	)		9,966	$	(9.33	)
Effect of dilutive securities:
Stock options, SARs and restricted stock (1)				49		(0.04	)					-		-
Diluted EPS	$	76,803		10,187	$	7.54		$	(92,962	)		9,966	$	(9.33	)

(1)	For the nine months ended September 30, 2009 and 2008, stock options, SARs and nonvested restricted stock of 1,784,912 and 2,385,890, respectively, were outstanding but not included in the computation of diluted earnings/(loss) per share of common stock because they were anti-dilutive.

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(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 to officers during June 2009 have an exercise price of $5.93 per share. There were no SARs granted to directors during 2009. Restricted stock was awarded to directors in June 2009 and vests fully after approximately one year. Restricted stock awarded to officers in June 2009 vests after approximately three years and only vests if certain performance conditions are met. Restricted stock awards granted to both directors and officers are not issued until full vesting occurs.

For the three and nine months ended September 30, 2009, Farmer Mac recognized $0.6 million and $2.2 million, respectively, of compensation expense related to stock options, SARs, and restricted stock awards compared to $1.1 million and $3.4 million for the same periods in 2008.

-14-

The following tables summarize activity related to stock options, SARs and nonvested restricted share awards for the three and nine months ended September 30, 2009 and 2008:

	September 30, 2009					September 30, 2008
	Stock			Weighted-		Stock			Weighted-
	Options			Average		Options			Average
	and			Exercise		and			Exercise
	SARs			Price		SARs			Price
For the Three Months Ended:
Outstanding, beginning of period		1,755,965		$	23.06		2,381,503		$	26.24
Granted		-			-		-			-
Exercised		-			-		(106,331	)		21.99
Canceled		(1,500	)		22.94		(12,667	)		28.50
Outstanding, end of period		1,754,465		$	23.06		2,262,505		$	26.43

For the Nine Months Ended:
Outstanding, beginning of period		2,237,711		$	25.54		2,218,199		$	25.48
Granted		165,000			5.93		339,770			28.92
Exercised		-			-		(264,297	)		21.43
Canceled		(648,246	)		27.27		(31,167	)		28.67
Outstanding, end of period		1,754,465		$	23.06		2,262,505		$	26.43

Stock Options and SARs exercisable at the end of the period		1,398,262		$	25.17		1,520,944		$	25.32

	September 30, 2009				September 30, 2008
			Weighted-				Weighted-
	Nonvested		Average		Nonvested		Average
	Restricted		Grant-date		Restricted		Grant-date
	Stock		Fair Value		Stock		Fair Value
For the Three Months Ended:
Outstanding, beginning of period		200,548	$	5.93		-	$	-
Granted		-		-		-		-
Canceled		-		-		-		-
Outstanding, end of period		200,548	$	5.93		-	$	-

For the Nine Months Ended:
Outstanding, beginning of period		-	$	-		-	$	-
Granted		200,548		5.93		-		-
Canceled		-		-		-		-
Outstanding, end of period		200,548	$	5.93		-	$	-

The cancellations of stock options during the first nine months of 2009 and 2008 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 stock options or SARs exercised during the first nine months of 2009 and 264,297 shares were exercised during the first nine months of 2008.

-15-

The following tables summarize information regarding stock options, SARs and nonvested restricted stock outstanding as of September 30, 2009:

Outstanding

Exercisable

Vested or Expected to Vest

Weighted-

Stock

Average

Stock

Average

Stock

Average

Range of

Options

Remaining

Options

Remaining

Options

Remaining

Exercise

and

Contractual

and

Contractual

and

Contractual

Prices

SARs

Life

SARs

Life

SARs

Life

$5.00 - $ 9.99

255,000

9.4 years

30,000

9.0 years

220,500

9.5 years

10.00 - 14.99

15.00 - 19.99

81,722

4.5 years

81,722

4.5 years

81,722

4.5 years

20.00 - 24.99

550,588

4.6 years

550,588

4.6 years

550,588

4.6 years

25.00 - 29.99

653,487

5.1 years

530,288

4.5 years

642,634

5.0 years

30.00 - 34.99

213,668

2.4 years

205,664

2.2 years

211,267

2.3 years

1,754,465

1,398,262

1,706,711

		Outstanding		Expected to Vest
			Weighted-		Weighted-
Weighted-			Average		Average
Average		Nonvested	Remaining	Nonvested	Remaining
Grant-Date		Restricted	Contractual	Restricted	Contractual
Fair Value		Stock	Life	Stock	Life

$	5.93	200,548	1.4 years	180,493	1.4 years

The weighted-average grant date fair value of options and SARs granted during the nine months ended 2009 and 2008 was $4.12 and $11.33 per share, respectively. The weighted-average grant date fair value of shares of restricted stock granted during the nine months ended 2009 was $5.93 per share. No shares of restricted stock were granted in 2008. The fair values for SARs and stock options were estimated using the Black-Scholes option pricing model based on the following assumptions:

	SARs and Stock Options
	2009			2008
Risk-free interest rate		1.5	%		2.5	%
Expected years until exercise	7 years			6 years
Expected stock volatility		104.3	%		43.2	%

(f) Reclassifications

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

-16-

(g) Fair Value

Effective January 1, 2008, Farmer Mac adopted the guidelines in ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures (formerly FASB Statement No. 157). ASC 820 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 the guidance in ASC 820 related to non-recurring fair value measurements of 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 the guidelines in ASC Topic 825 (“ASC 825”), Financial Instruments (formerly FASB Statement No. 159). ASC 825 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.

(h) New Accounting Standards

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets (“FAS 166”) and FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”). These statements address amendments to ASC Topic 860 (“ASC 860”), Transfers and Servicing (formerly FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), and to ASC Topic 810 (“ASC 810”), Consolidations (formerly FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities). The two FASB statements are effective for fiscal years beginning after November 15, 2009. The statements, amending ASC 860 and ASC 810, remove the concept of a qualifying special-purpose entity (“QSPE”) from ASC 860 and remove the exception from applying ASC 810 to QSPEs. Although Farmer Mac is currently evaluating the impact of these new accounting standards, Farmer Mac believes the adoption of FAS 166 and FAS 167 will result in the consolidation of assets and liabilities onto Farmer Mac’s balance sheet in connection with trusts that currently qualify for the QSPE exception. Additionally, interest income and interest expense related to the consolidated assets and liabilities of the trusts will be reflected in the statement of operations. Farmer Mac expects the adoption of FAS 166 and FAS 167 to require the consolidation of additional assets and liabilities on its balance sheet, resulting in an increase in its statutory minimum capital requirement; however, Farmer Mac believes its current capital is adequate to remain in compliance with regulatory capital requirements, absorb the additional capital required upon adoption, and provide sufficient excess capital above the statutory minimum capital requirement for its business needs.

-17-

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this guidance did not have a material impact on Farmer Mac’s financial condition, results of operations or cash flows.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”), within ASC 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques that maximize the use of relevant observable inputs. The ASU is effective for the first interim or annual reporting period beginning after issuance, which will be fourth quarter 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.

-18-

Note 2.

Investments

The following tables present the amortized cost and estimated fair values of Farmer Mac’s investments as of September 30, 2009 and December 31, 2008.

	September 30, 2009
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	74,100	$	-	$	(1,365	)	$	72,735
Floating rate asset-backed securities		67,352		140		(41	)		67,451
Floating rate corporate debt securities		292,807		9		(2,708	)		290,108
Floating rate Government/GSE guaranteed mortgage-backed securities		328,395		798		(1,067	)		328,126
Fixed rate GSE guaranteed mortgage-backed securities		6,451		328		-			6,779
Floating rate GSE subordinated debt		70,000		-		(9,684	)		60,316
Fixed rate GSE preferred stock		90,622		7,904		-			98,526
Total available-for-sale		929,727		9,179		(14,865	)		924,041

Trading:
Floating rate asset-backed securities		6,850		-		(5,002	)		1,848
Fixed rate GSE preferred stock		89,816		5,774		-			95,590
Total trading		96,666		5,774		(5,002	)		97,438
Total investm