Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

Unassociated Document

As filed with the Securities and Exchange Commission on May 10, 2010

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, 2010

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		(I.R.S. employer identification number)
incorporation or organization)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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	¨	Accelerated filer ¨

Non-accelerated filer	x	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

As of May 3, 2010 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,614,980 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, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009			4
Condensed Consolidated Statements of Equity for the three months ended March 31, 2010 and 2009			5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements			7

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,			December 31,
	2010			2009
	(in thousands)
Assets:
Cash and cash equivalents	$	418,211		$	654,794
Investment securities:
Available-for-sale, at fair value		1,198,374			1,041,923
Trading, at fair value		82,826			89,972
Total investment securities		1,281,200			1,131,895
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value		1,793,927			2,524,867
Trading, at fair value		-			874,129
Total Farmer Mac Guaranteed Securities		1,793,927			3,398,996
USDA Guaranteed Securities:
Available-for-sale, at fair value		781,823			-
Trading, at fair value		407,844			-
Total USDA Guaranteed Securities		1,189,667			-
Loans:
Loans held for sale, at lower of cost or fair value		758,437			666,534
Loans held for investment, at amortized cost		90,823			93,478
Loans held for investment in consolidated trusts, at amortized cost		1,789,026			-
Allowance for loan losses		(9,142	)		(6,292	)
Total loans, net of allowance		2,629,144			753,720
Real estate owned, at lower of cost or fair value		3,132			739
Financial derivatives, at fair value		21,170			15,040
Interest receivable		64,794			67,178
Guarantee and commitment fees receivable		34,195			55,016
Deferred tax asset, net		20,081			24,146
Prepaid expenses and other assets		23,644			37,289
Total Assets	$	7,479,165		$	6,138,813

Liabilities, Mezzanine Equity and Equity:
Liabilities:
Notes payable:
Due within one year	$	3,404,475		$	3,662,898
Due after one year		2,082,578			1,908,713
Total notes payable		5,487,053			5,571,611
Debt securities of consolidated trusts held by third parties		1,337,331			-
Financial derivatives, at fair value		110,602			107,367
Accrued interest payable		47,530			39,562
Guarantee and commitment obligation		31,039			48,526
Accounts payable and accrued expenses		12,094			23,445
Reserve for losses		6,427			7,895
Total Liabilities		7,032,076			5,798,406
Mezzanine Equity:
Series B redeemable preferred stock, par value $1,000, per share 150,000 shares authorized, issued and outstanding as of December 31, 2009 (redemption value $150,000,000)		-			144,216
Stockholders' Equity:
Preferred stock:
Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 issued and outstanding as of March 31, 2010 and December 31, 2009		57,578			57,578
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		8,613			8,611
Additional paid-in capital		97,861			97,090
Accumulated other comprehensive income		7,587			3,254
Retained earnings		32,066			28,127
Total Stockholders' Equity		205,236			196,191
Non-controlling interest - preferred stock		241,853			-
Total Equity		447,089			196,191
Total Liabilities, Mezzanine Equity and Equity	$	7,479,165		$	6,138,813

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended
	March 31, 2010			March 31, 2009
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	6,483		$	8,909
Farmer Mac and USDA Guaranteed Securities		20,831			27,759
Loans		33,418			10,485
Total interest income		60,732			47,153
Total interest expense		37,115			23,713
Net interest income		23,617			23,440
Provision for loan losses		(2,850	)		(3,534	)
Net interest income after provision for loan losses		20,767			19,906

Non-interest income:
Guarantee and commitment fees		5,919			7,410
(Losses)/gains on financial derivatives		(5,804	)		1,711
Gains on trading assets		3,367			31,625
Other-than-temporary impairment losses		-			(81	)
Gains on sale of available-for-sale investment securities		240			3,150
Gains on sale of loans and Farmer Mac Guaranteed Securities		-			1,581
Lower of cost or fair value adjustment on loans held for sale		(2,274	)		-
Other income		829			234
Non-interest income		2,277			45,630

Non-interest expense:
Compensation and employee benefits		3,511			4,025
General and administrative		2,503			2,914
Regulatory fees		563			513
Real estate owned operating costs		10			21
(Recoveries)/provision for losses		(1,468	)		2,519
Non-interest expense		5,119			9,992
Income before income taxes		17,925			55,544
Income tax expense		4,336			18,090
Net income		13,589			37,454
Less: Net income attributable to non-controlling interest - preferred stock dividends		(4,068	)		-
Net income attributable to Farmer Mac		9,521			37,454
Preferred stock dividends		(1,970	)		(3,936	)
Loss on retirement of preferred stock		(5,784	)		-
Net income available to common stockholders	$	1,767		$	33,518

Earnings per common share and dividends:
Basic earnings per common share	$	0.17		$	3.31
Diluted earnings per common share	$	0.17		$	3.31
Common stock dividends per common share	$	0.05		$	0.05

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

	For the Three Months Ended
	March 31, 2010					March 31, 2009
	Shares		Amount			Shares		Amount
	(in thousands)
Preferred stock:
Balance, beginning of period		58	$	57,578			9	$	9,200
Issuance of Series C preferred stock		-		-			11		10,800
Balance, end of period		58	$	57,578			20	$	20,000
Common stock:
Balance, beginning of period		10	$	10,142			10	$	10,132
Issuance of Class C common stock		-		2			-		3
Balance, end of period		10	$	10,144			10	$	10,135
Additional paid-in capital:
Balance, beginning of period			$	97,090				$	95,572
Stock-based compensation expense				760					654
Issuance of Class C common stock				11					6
Expiration of stock options				-					(1,159	)
Balance, end of period			$	97,861				$	95,073
Retained earnings/(accumulated deficit):
Balance, beginning of period			$	28,127				$	(52,144	)
Net income attributable to Farmer Mac				9,521					37,454
Cash dividends:
Preferred stock, Series B ($8.33 per share)				(1,250	)				(3,726	)
Preferred stock, Series C ($12.50 per share)				(720	)				(210	)
Common stock ($0.05 per share)				(507	)				(507	)
Loss on retirement of preferred stock				(5,784	)				-
Cumulative effect of adoption of new accounting standard, net of tax				2,679					-
Balance, end of period			$	32,066				$	(19,133	)
Accumulated other comprehensive income:
Balance, beginning of period			$	3,254				$	(47,412	)
Change in unrealized gain on available-for-sale securities, net of tax and reclassification adjustments				4,310					1,764
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments				23					39
Balance, end of period			$	7,587				$	(45,609	)
Total Stockholders' Equity			$	205,236				$	60,466
Non-controlling interest:
Balance, beginning of period			$	-				$	-
Preferred stock - Farmer Mac II LLC				241,853					-
Balance, end of period			$	241,853				$	-
Total Equity			$	447,089				$	60,466
Comprehensive income:
Net income			$	13,589				$	37,454
Changes in accumulated other comprehensive income, net of tax				4,333					1,803
Comprehensive income				17,922					39,257
Less: Comprehensive income attributable to non-controlling interest				4,068					-
Total Comprehensive income attributable to Farmer Mac			$	13,854				$	39,257

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Three Months Ended
	March 31, 2010			March 31, 2009
	(in thousands)
Cash flows from operating activities:
Net income	$	13,589		$	37,454
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
Net amortization of premiums and discounts on loans, investments, and Farmer Mac and USDA Guaranteed Securities		1,632			1,228
Amortization of debt premiums, discounts and issuance costs		1,362			4,826
Proceeds from repayment and sale of trading investment securities		236			268
Purchases of loans held for sale		(127,740	)		(15,144	)
Proceeds from repayment of loans held for sale		32,963			1,538
Net change in fair value of trading securities and financial derivatives		(6,262	)		(46,617	)
Amortization of transition adjustment on financial derivatives		34			39
Other-than-temporary impairment losses		-			81
Gains on sale of loans and Farmer Mac Guaranteed Securities		-			(1,581	)
Gains on the sale of available-for-sale investments securities		(240	)		(3,150	)
Total provision for losses		1,382			6,053
Deferred income taxes		289			13,290
Stock-based compensation expense		760			654
Decrease in interest receivable		2,384			26,119
Decrease in guarantee and commitment fees receivable		20,821			4,770
Decrease in other assets		15,922			25,753
Increase/(decrease) in accrued interest payable		7,968			(5,649	)
Decrease in other liabilities		(19,931	)		(9,843	)
Net cash (used in)/provided by operating activities		(54,831	)		40,089
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(284,149	)		-
Purchases of Farmer Mac Guaranteed Securities		(93,197	)		(352,078	)
Purchases of loans held for investment		(9,226	)		(14,670	)
Purchases of defaulted loans		(2,490	)		(5,030	)
Proceeds from repayment of available-for-sale investment securities		57,766			82,531
Proceeds from repayment of Farmer Mac Guaranteed Securities		56,912			67,277
Proceeds from repayment of loans held for investment		84,464			34,034
Proceeds from sale of available-for-sale investment securities		69,175			128,400
Proceeds from sale of trading securities - fair value option		5,013			-
Proceeds from sale of Farmer Mac Guaranteed Securities		6,724			17,124
Proceeds from sale of loans		763			358,953
Net cash (used in)/provided by investing activities		(108,245	)		316,541
Cash flows from financing activities:
Proceeds from issuance of discount notes		14,970,627			16,997,175
Proceeds from issuance of medium-term notes		339,653			919,427
Payments to redeem discount notes		(15,099,610	)		(17,111,209	)
Payments to redeem medium-term notes		(296,590	)		(1,163,000	)
Payment to third parties on debt securities of consolidated trusts		(72,971	)		-
Proceeds from common stock issuance		13			9
Issuance costs on retirement of preferred stock		(5,784	)		-
Proceeds from preferred stock issuance - Farmer Mac II LLC		241,853			-
Proceeds from preferred stock issuance		-			10,800
Retirement of Series B Preferred stock		(144,216	)		-
Dividends paid - Non-controlling interest - preferred stock		(4,005	)		-
Dividends paid on common and preferred stock		(2,477	)		(4,443	)
Net cash used in financing activities		(73,507	)		(351,241	)
Net (decrease)/increase in cash and cash equivalents		(236,583	)		5,389
Cash and cash equivalents at beginning of period		654,794			278,412
Cash and cash equivalents at end of period	$	418,211		$	283,801

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”) and subsidiaries 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, 2009 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2009 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial statements as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2009 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 16, 2010. 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.

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

Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents. The carrying value of cash and cash equivalents is a reasonable estimate of their fair value. 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, 2010 and 2009.

	For the Three Months Ended
	March 31, 2010		March 31, 2009
	(in thousands)
Cash paid during the quarter for:
Interest	$	18,799	$	23,172
Income taxes		1,500		-
Non-cash activity:
Real estate owned acquired through foreclosure		2,393		-
Loans acquired and securitized as Farmer Mac Guaranteed Securities		-		17,124
Loans acquired and securitized as loans held for investment in consolidated trusts		763		-
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		1,400,371		-
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to debt securities of consolidated trusts held by third parties, upon the adoption of new consolidation guidance		1,400,371		-
Transfers of available-for-sale Farmer Mac I Guaranteed Securities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		5,385		-
Transfers of trading Farmer Mac Guaranteed Securities - Rural Utilities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		451,448		-
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

(b) Allowance for Losses

As of March 31, 2010, 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.

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.

-8-

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.

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 and LTSPCs, in accordance with the standard on accounting for contingencies issued by the Financial Accounting Standards Board (“FASB”).

Farmer Mac separately evaluates the rural utilities loans it owns, as well as the lender obligations and loans underlying or securing its Farmer Mac Guaranteed Securities – Rural Utilities, to determine if there are probable losses inherent in those assets.

Farmer Mac also analyzes assets in its portfolio for impairment in accordance with the FASB standard on measuring individual impairment of a loan. 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 (“REO”);

loans for which Farmer Mac has 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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The table below summarizes the components of Farmer Mac’s allowance for losses as of March 31, 2010 and December 31, 2009:

	March 31,		December 31,
	2010		2009
	(in thousands)
Allowance for loan losses	$	9,142	$	6,292
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities		-		-
Off-balance sheet Farmer Mac I Guaranteed Securities		-		2,033
LTSPCs		6,427		5,862
Farmer Mac Guaranteed Securities - Rural Utilities		-		-
Total	$	15,569	$	14,187

The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three months ended March 31, 2010 and 2009:

	For the Three Months Ended
	March 31, 2010							March 31, 2009
	Allowance					Total		Allowance					Total
	for Loan		Reserve			Allowance		for Loan			Reserve		Allowance
	Losses		for Losses			for Losses		Losses			for Losses		for Losses
	(in thousands)

Beginning balance	$	6,292	$	7,895		$	14,187	$	10,929		$	5,506	$	16,435
Provision/(recovery) for losses		2,850		(1,468	)		1,382		3,534			2,519		6,053
Charge-offs		-		-			-		(2,000	)		-		(2,000	)
Recoveries		-		-			-		765			-		765
Ending balance	$	9,142	$	6,427		$	15,569	$	13,228		$	8,025	$	21,253

Upon the adoption of the new consolidation guidance on January 1, 2010, Farmer Mac reclassified $2.0 million from the reserve for losses to the allowance for loan losses as a result of Farmer Mac being determined the primary beneficiary of certain VIEs with beneficial interests owned by third party investors. The provision/(recovery) for losses for the three months ended March 31, 2010 reflects this reclassification as well as provisions of $0.9 million and $0.5 million, respectively, accounted for in the allowance for loan losses and reserve for losses. Prior to the adoption of this guidance, Farmer Mac classified these interests as off-balance sheet Farmer Mac I Guaranteed Securities.

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No allowance for losses has been provided for AgVantage securities, securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”), or USDA 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. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans. As of March 31, 2010, 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, 2010, Farmer Mac had not experienced any credit losses on any AgVantage securities. The guaranteed portions presented as USDA Guaranteed Securities, as well as those that collateralize 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, 2010, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any USDA Guaranteed Securities held or on any Farmer Mac II Guaranteed Securities.

As of March 31, 2010, Farmer Mac individually analyzed $50.3 million of its $83.9 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $33.6 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 March 31, 2010, and $0.6 million as of December 31, 2009. Farmer Mac’s non-specific or general allowances were $14.1 million as of March 31, 2010 and $13.6 million as of December 31, 2009.

Farmer Mac recognized interest income of approximately $0.5 million and $1.1 million on impaired loans during the three months ended March 31, 2010 and 2009 respectively. During the three months ended March 31, 2010 and 2009, Farmer Mac’s average investment in impaired loans was $92.6 million and $125.7 million, respectively.

Farmer Mac enters into transactions involving financial derivatives 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.

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.

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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 without any corresponding changes in the fair values of the hedged items.

The following tables summarize information related to Farmer Mac’s financial derivatives as of March 31, 2010 and December 31, 2009:

	March 31, 2010
													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	$	65,175	$	-		$	(1,379	)	5.70%	0.25%			7.45
Pay fixed non-callable		1,214,333		-			(106,330	)	4.95%	0.26%			4.32
Receive fixed callable		175,000		-			(18	)	0.17%	0.48%			1.03
Receive fixed non-callable		2,058,620		22,206			(1	)	0.45%	1.87%			2.19
Basis swaps		253,012		52			(3,616	)	1.49%	0.57%			2.07
Credit default swaps		30,000		-			(295	)	1.00%	0.00%			1.81
Agency forwards		49,488		-			(21	)				99.77
Treasury futures		11,300		-			(39	)				115.90
Credit valuation adjustment		-		(1,088	)		1,097
Total financial derivatives	$	3,856,928	$	21,170		$	(110,602	)

	December 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	$	65,686	$	-		$	(1,725	)	5.70%	0.27%			7.78
Pay fixed non-callable		1,236,156		5			(99,913	)	4.95%	0.26%			4.62
Receive fixed callable		300,000		236			-		0.09%	0.54%			0.76
Receive fixed non-callable		2,262,714		14,298			(2,815	)	0.41%	1.80%			2.25
Basis swaps		262,177		294			(3,673	)	1.63%	0.61%			2.39
Credit default swaps		30,000		-			(214	)	1.00%	0.00%			2.14
Agency forwards		75,511		453			-					101.22
Treasury futures		20,500		3			-					115.47
Credit valuation adjustment		-		(249	)		973
Total financial derivatives	$	4,252,744	$	15,040		$	(107,367	)

-12-

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, 2010, 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 $96.4 million. As of March 31, 2010, Farmer Mac posted assets with a fair value of $21.1 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, 2010, it could have been required to settle its obligations under the agreements or post additional collateral of $75.3 million.

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, 2010 and 2009:

	(Losses)/Gains on Financial Derivatives
	For the Three Months Ended
	March 31, 2010			March 31, 2009
	(in thousands)

Interest rate swaps	$	(4,546	)	$	2,659
Agency forwards		(598	)		(879	)
Treasury futures		(249	)		(9	)
Credit default swaps		(377	)		-
		(5,770	)		1,771
Amortization of derivatives transition adjustment		(34	)		(60	)
Total	$	(5,804	)	$	1,711

As of March 31, 2010 and December 31, 2009, respectively, Farmer Mac had approximately $23,000 and $0.1 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive income 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 will be reclassified into earnings.

As of March 31, 2010, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with total notional amount of $96.0 million and a fair value of $(3.6) million, compared to $105.2 million and $(3.7) million, respectively, as of December 31, 2009. 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 gains on those outstanding basis swaps of $0.1 million for first quarter 2010, compared to unrealized losses of $0.5 million for the same period in 2009.

-13-

(d) Earnings Per Common Share

Basic earnings per common share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share are based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights (“SARs”) and nonvested restricted stock awards. The following schedule reconciles basic and diluted earnings per common share (“EPS”) for the three months ended March 31, 2010 and 2009:

	For the Three Months Ended
	March 31, 2010						March 31, 2009
	Net				$ per		Net				$ per
	Income		Shares		Share		Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available to common stockholders	$	1,767		10,143	$	0.17	$	33,518		10,135	$	3.31
Effect of dilutive securities:
Stock options, SARs and restricted stock (1)				308		-				-		-
Diluted EPS	$	1,767		10,451	$	0.17	$	33,518		10,135	$	3.31

(1)

For the three months ended March 31, 2010 and 2009, stock options, SARs and nonvested restricted stock of 1,581,965 and 1,697,829, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended March 31, 2010, 82,500 contingent shares of nonvested restricted stock were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

(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, 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.

-14-

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 2009 have exercise prices ranging from $5.93 to $7.78 per share. 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. No restricted stock awards were granted during first quarter 2010.

For the three months ended March 31, 2010, Farmer Mac recognized $0.8 million of compensation expense related to stock options, SARs and restricted stock, compared to $0.7 million for the same period in 2009.

The following tables summarize activity related to stock options, SARs and nonvested restricted stock awards for the three months ended March 31, 2010 and 2009:

	For the Three Months Ended
	March 31, 2010				March 31, 2009
	Stock		Weighted-		Stock			Weighted-
	Options		Average		Options			Average
	and		Exercise		and			Exercise
	SARs		Price		SARs			Price
Outstanding, beginning of period		1,799,465	$	22.68		2,237,711		$	25.54
Granted		-		-		-			-
Exercised		-		-		-			-
Canceled		-		-		(539,882	)		28.30
Outstanding, end of period		1,799,465	$	22.68		1,697,829		$	24.66

Stock options and SARs exercisable at the end of the period		1,398,269	$	25.17		1,308,518		$	24.93

	For the Three Months Ended
	March 31, 2010				March 31, 2009
			Weighted-					Weighted-
	Nonvested		Average		Nonvested			Average
	Restricted		Grant-date		Restricted			Grant-date
	Stock		Fair Value		Stock			Fair Value
Outstanding, beginning of period		200,548	$	5.93		-		$	-
Granted		-		-		-			-
Canceled		-		-		-			-
Outstanding, end of period		200,548	$	5.93		-		$	-

The cancellations of stock options during the first three months of 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 such cancellations during the first three months of 2010. There were no stock options or SARs exercised during the first three months of 2010 or 2009.

-15-

The following tables summarize information regarding stock options, SARs and nonvested restricted stock outstanding as of March 31, 2010:

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

300,000

9.0 years

30,000

8.5 years

252,000

9.0 years

10.00 - 14.99

15.00 - 19.99

81,722

4.0 years

81,722

4.0 years

81,722

4.0 years

20.00 - 24.99

550,588

4.1 years

550,588

4.1 years

550,588

4.1 years

25.00 - 29.99

653,487

4.6 years

530,290

4.0 years

641,680

4.5 years

30.00 - 34.99

213,668

1.9 years

205,669

1.7 years

211,268

1.8 years

1,799,465

1,398,269

1,737,258

		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	0.9 years		180,496	0.9 years

There were no stock options, SARs or restricted stock granted during first quarter 2010. The weighted-average grant date fair value of options and SARs granted during 2009 was $5.11. The fair values for SARs and stock options were estimated using the Black-Scholes option pricing model based on the following assumptions:

		2009
Risk-free interest rate		1.6%
Expected years until exercise		7 years
Expected stock volatility		103.6%
Dividend yield		3.2%

(f) Fair Value Measurement

Effective January 1, 2008, Farmer Mac adopted new accounting guidance for fair value measurements. The guidance 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).

-16-

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 inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in long-dated volatilities).

Effective January 1, 2008, Farmer Mac adopted FASB guidance on the fair value option for financial instruments that 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.

(g) Consolidation of Variable Interest Entities

Farmer Mac has interests in various entities that are considered to be variable interest entities (“VIEs”). These interests include investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities created pursuant to Farmer Mac’s securitization transactions and mortgage and asset-backed trusts that Farmer Mac did not create. Effective January 1, 2010, Farmer Mac adopted two new accounting standards that eliminated the concept of qualifying special purpose entities (“QSPEs”) and amended the accounting for transfers of financial assets and the consolidation model for variable interest entities (“VIEs”). All formerly designated QSPEs were evaluated for consolidation in accordance with the new consolidation model, which changed the method of analyzing which party to a VIE should consolidate the VIE. The new consolidation model uses a qualitative evaluation that requires consolidation of an entity when the reporting enterprise both (1) has the power to direct matters which significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses that could potentially be significant to the entity. The reporting enterprise that meets both these conditions is deemed the primary beneficiary of the VIE.

The new consolidation standard requires the incremental assets and liabilities consolidated upon adoption to initially be reported at their carrying amounts. Carrying amount refers to the amount at which the assets and liabilities would have been carried in the consolidated financial statements if the new guidance had been effective when Farmer Mac first met the conditions to be the primary beneficiary of the VIE. If determining the carrying amounts is not practicable, the assets and liabilities of the VIE shall be measured at fair value at the date the new standards first apply. For the outstanding trusts consolidated effective January 1, 2010, Farmer Mac initially recorded the assets and liabilities on the consolidated balance sheet at their carrying amounts, adjusted, where applicable, for fair value option elections that had been made previously. Accrued interest and allowance for losses have also been recognized as appropriate.

-17-

Although these new accounting standards did not change the economic risk to Farmer Mac’s business, specifically Farmer Mac’s liquidity, credit and interest rate risks, the adoption of these new accounting standards has a significant impact on the presentation of Farmer Mac’s consolidated financial statements beginning in 2010. On the consolidated balance sheet, there was an increase in loans held for investment, interest receivable, debt and accrued interest payable, and a decrease in available-for-sale and trading Farmer Mac Guaranteed Securities, the reclassification of a portion of the reserve for losses to allowance for loan losses, and the elimination of the guarantee and commitment fees receivable and guarantee and commitment obligations related to the consolidated trusts. On the income statement, there was an increase in interest income and interest expense attributable to the assets and liabilities of the consolidated trusts and a reclassification of a portion of guarantee fee income to interest income.

The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major judgment in determining if Farmer Mac is the primary beneficiary was whether Farmer Mac had the power to direct the activities of the trust that potentially had the most significant impact on the economic performance of the trust. Generally, the ability to make decisions regarding default mitigation was evidence of that power. Farmer Mac determined that it was the primary beneficiary for the securitization trusts related to most Farmer Mac I and all Rural Utilities securitization transactions because of its rights as guarantor under both programs to control the default mitigation activities of the trusts. For certain securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities, Farmer Mac determined that it was not the primary beneficiary since the power to make decisions regarding default mitigation was shared among unrelated parties. For similar securitization transactions where the power to make decisions regarding default mitigation was shared with a related party, Farmer Mac determined that it was the primary beneficiary because the applicable accounting guidance does not permit parties within a related party group to conclude that the power is shared.

For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the condensed consolidated balance sheet as “Loans held for investment in consolidated trusts” and “Debt securities of consolidated trusts held by third parties,” respectively. These assets can only be used to satisfy the obligations of the trust.

For those trusts where Farmer Mac has a variable interest but has not been determined to be the primary beneficiary, Farmer Mac’s interests are recorded as either Farmer Mac Guaranteed Securities or Investment Securities. Farmer Mac’s involvement in on-balance sheet VIEs classified as Farmer Mac Guaranteed Securities include securitization trusts under the Farmer Mac II program and trusts related to the AgVantage program. In the case of Farmer Mac II trusts, Farmer Mac was not determined to be the primary beneficiary because it does not have the decision-making power over default mitigation activities. For the AgVantage trusts, Farmer Mac currently does not have the power to direct the activities that have the most significant economic impact to the trust unless, as guarantor, there is a default by the issuer of the trust securities. Should there be a default, Farmer Mac would reassess whether it is primary beneficiary of those trusts. For VIEs classified as Investment Securities, which include asset-backed securities and GSE-guaranteed mortgage-backed securities, Farmer Mac was determined not to be the primary beneficiary because of the lack of voting rights or other powers to direct the activities of the trust. The Farmer Mac Guaranteed Securities trusts and Investment Securities trusts have carrying amounts on the condensed consolidated balance sheet totaling $72.7 million and $444.2 million, respectively, which is Farmer Mac’s maximum exposure to loss. In addition, Farmer Mac has a variable interest in off-balance sheet VIEs, which include a guarantee of timely payment of principal and interest, totaling $2.8 billion.

-18-

(h) New Accounting Standards

Accounting for Transfers of Financial Assets

On December 23, 2009, the FASB issued an Accounting Standards Update (“ASU”), which codifies recent accounting guidance related to transfers of financial assets. The new guidance eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets and enhances information reported to financial statement users by increasing the transparency or disclosures about transfers of financial assets and an entity’s continuing involvement with transferred financial assets. Farmer Mac adopted the ASU on January 1, 2010 and the impact of adoption was not material to Farmer Mac’s financial condition, results of operations or cash flows.

Variable Interest Entities

On December 23, 2009, the FASB issued an ASU, which codifies recent accounting guidance on consolidation of VIEs. The new guidance replaces the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. The ASU requires additional disclosures about a reporting entity’s involvement with VIEs and about any significant changes in risk exposure as a result of that involvement. Farmer Mac adopted this ASU on January 1, 2010, which resulted in the consolidation of assets and liabilities onto Farmer Mac’s balance sheet in connection with trusts that previously qualified 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.

As of December 31, 2009, Farmer Mac disclosed the impact of adopting the new consolidation standard as an increase in consolidated assets of $292.8 million, requiring incremental regulatory capital of $5.9 million, and an increase in retained earnings of $2.6 million. Upon adoption, Farmer Mac reassessed its securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities in consideration of the related party relationship with certain counterparties to these transactions and concluded that additional trusts required consolidation. The actual impact upon adoption was an increase in consolidated assets of $1.5 billion, which resulted in an incremental capital requirement of $30.4 million. The transition adjustment upon adoption did not change significantly from the reported amount, increasing retained earnings by $2.7 million, which is presented in the Condensed Consolidated Statement of Equity as “Cumulative effect of adoption of new accounting standard, net of tax.”

-19-

Accounting Standards Update on Fair Value Measurements and Disclosures

On January 21, 2010, the FASB issued a new accounting standard, which amends FASB guidance on fair value measurements and disclosures to add new requirements for disclosures about transfers into and out of levels 1 and 2 and separate disclosures about purchases, sales, issuance, and settlements relating to level 3 measurements. The new standard also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for first quarter 2010 reporting except for the level 3 activity disclosures, which are effective in first quarter 2011. Adoption of the new accounting guidance did not have a significant impact on Farmer Mac’s fair value disclosures.

(i) Reclassifications

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

Note 2.

Investment Securities

The following tables present the amortized cost and estimated fair values of Farmer Mac’s investments as of March 31, 2010 and December 31, 2009.

	March 31, 2010
	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	$	-	$	(11,844	)	$	62,256
Floating rate asset-backed securities		26,163		10		(15	)		26,158
Floating rate corporate debt securities		218,932		654		(864	)		218,722
Floating rate Government/GSE
guaranteed mortgage-backed securities		409,466		1,666		(612	)		410,520
Fixed rate GSE guaranteed mortgage-backed
securities		5,790		326		-			6,116
Floating rate GSE subordinated debt		70,000		-		(19,464	)		50,536
Fixed rate GSE preferred stock		80,237