Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

Q1 2013 10Q

As filed with the Securities and Exchange Commission on May 9, 2013

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, 2013.

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)

1999 K Street, N.W., 4th Floor, Washington, D.C.		20006
(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 o

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 x No o

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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o

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

Yes o No x

As of May 1, 2013, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock and 9,278,349 shares of Class C non-voting common stock.

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PART I - Financial Information		3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
	1. Accounting Policies	8
	2. Investment Securities	19
	3. Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	22
	4. Financial Derivatives	24
	5. Loans and Allowance for Losses	28
	6. Off-Balance Sheet Guarantees and Long Term Standby Purchase Commitments	40
	7. Equity	42
	8. Fair Value Disclosures	44
	9. Business Segment Reporting	56
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	59
	Forward-Looking Statements	59
	Overview	60
	Critical Accounting Policies and Estimates	62
	Results of Operations	62
	Outlook	76
	Balance Sheet Review	78
	Off-Balance Sheet Arrangements	79
	Risk Management	79
	Liquidity and Capital Resources	94
	Regulatory Matters	96
	Other Matters	96
	Supplemental Information	97
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	101
Item 4.	Controls and Procedures	101
PART II - Other Information		102
Item 1.	Legal Proceedings	102
Item 1A.	Risk Factors	102
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	102
Item 3.	Defaults Upon Senior Securities	102
Item 4.	Mine Safety Disclosures	102
Item 5.	Other Information	102
Item 6	Exhibits	103
Signatures		104

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PART I - FINANCIAL INFORMATION


Item 1.	Consolidated Financial Statements

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)



	March 31, 2013			December 31, 2012
	(in thousands)
Assets:
Cash and cash equivalents	$	893,387		$	785,564
Investment securities:
Available-for-sale, at fair value	2,296,187			2,498,382
Trading, at fair value	1,129			1,247
Total investment securities	2,297,316			2,499,629
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value	5,100,080			4,766,258
USDA Guaranteed Securities:
Available-for-sale, at fair value	1,569,160			1,486,595
Trading, at fair value	87,271			104,188
Total USDA Guaranteed Securities	1,656,431			1,590,783
Loans:
Loans held for sale, at lower of cost or fair value	—			673,991
Loans held for investment, at amortized cost	2,212,211			1,503,559
Loans held for investment in consolidated trusts, at amortized cost	561,682			563,575
Allowance for loan losses	(7,967		)	(11,351		)
Total loans, net of allowance	2,765,926			2,729,774
Real estate owned, at lower of cost or fair value	4,417			3,985
Financial derivatives, at fair value	26,254			31,173
Interest receivable (includes $3,243 and $9,676, respectively, related to consolidated trusts)	66,535			103,414
Guarantee and commitment fees receivable	42,359			41,789
Deferred tax asset, net	—			3,123
Prepaid expenses and other assets	39,967			66,709
Total Assets	$	12,892,672		$	12,622,201
Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year	$	6,543,973		$	6,567,366
Due after one year	4,978,118			5,034,739
Total notes payable	11,522,091			11,602,105
Debt securities of consolidated trusts held by third parties	167,250			167,621
Financial derivatives, at fair value	133,838			150,682
Accrued interest payable (includes $1,276 and $2,534, respectively, related to consolidated trusts)	35,474			51,779
Guarantee and commitment obligation	38,905			37,803
Accounts payable and accrued expenses	350,578			13,710
Deferred tax liability, net	9,423			—
Reserve for losses	6,285			5,539
Total Liabilities	12,263,844			12,029,239
Commitments and Contingencies (Note 6)
Equity:
Preferred stock:
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding	58,333			—
Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 shares issued and outstanding	—			57,578
Common stock:
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding	1,031			1,031
Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding	500			500
Class C Non-Voting, $1 par value, no maximum authorization, 9,223,342 shares and 9,171,343 shares outstanding, respectively	9,223			9,171
Additional paid-in capital	108,386			106,617
Accumulated other comprehensive income, net of tax, related to available-for-sale securities	92,359			73,969
Retained earnings	117,143			102,243
Total Stockholders' Equity	386,975			351,109
Non-controlling interest - preferred stock	241,853			241,853
Total Equity	628,828			592,962
Total Liabilities and Equity	$	12,892,672		$	12,622,201

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



	For the Three Months Ended
	March 31, 2013			March 31, 2012
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	5,734		$	6,232
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	31,721			37,746
Loans	24,043			29,153
Total interest income	61,498			73,131
Total interest expense	33,128			38,923
Net interest income	28,370			34,208
Provision for loan losses	(430		)	(420		)
Net interest income after provision for loan losses	27,940			33,788
Non-interest income:
Guarantee and commitment fees	6,612			5,930
Gains on financial derivatives and hedging activities	4,494			6,400
Gains on trading assets	210			1,099
Gains on sale of available-for-sale investment securities	2			28
Gains on sale of real estate owned	47			—
Other income	1,080			721
Non-interest income	12,445			14,178
Non-interest expense:
Compensation and employee benefits	4,698			4,485
General and administrative	2,917			2,758
Regulatory fees	594			563
Real estate owned operating costs, net	126			6
Provision for losses	746			30
Non-interest expense	9,081			7,842
Income before income taxes	31,304			40,124
Income tax expense	8,716			11,654
Net income	22,588			28,470
Less: Net income attributable to non-controlling interest - preferred stock dividends	(5,547		)	(5,547		)
Net income attributable to Farmer Mac	17,041			22,923
Preferred stock dividends	(851		)	(720		)
Net income attributable to common stockholders	$	16,190		$	22,203

Earnings per common share and dividends:
Basic earnings per common share	$	1.51		$	2.14
Diluted earnings per common share	$	1.45		$	2.04
Common stock dividends per common share	$	0.12		$	0.10

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



	For the Three Months Ended
	March 31, 2013			March 31, 2012
	(in thousands)
Net income	$	22,588		$	28,470
Other comprehensive income/(loss), net of tax:
Unrealized holding gains on available-for-securities (1)	21,812			36
Less reclassification adjustments included in:
Gains on financial derivatives and hedging activities (2)	(3,207		)	—
Gains on sale of available-for-sale investment securities (3)	(1		)	(18		)
Other income (4)	(214		)	(265		)
Other comprehensive income/(loss)	18,390			(247		)
Comprehensive income	40,978			28,223
Less: Comprehensive income attributable to noncontrolling interest - preferred stock dividends	(5,547		)	(5,547		)
Comprehensive income attributable to Farmer Mac	$	35,431		$	22,676


(1)	Presented net of income tax expense of $11.7 million and $19,000 for the three months ended March 31, 2013 and 2012, respectively.


(2)	Relates to the amortization of the fair value of the hedged items prior to hedge inception. Presented net of income tax benefit of $1.7 million for the three months ended March 31, 2013.


(3)	Represents realized gains on sales of available-for-sale investment securities. Presented net of income tax benefit of $1,000 and $10,000 for the three months ended March 31, 2013 and 2012, respectively.


(4)	Represents amortization of deferred gains related to certain available-for-sale USDA Guaranteed Securities and Farmer Mac Guaranteed Securities. Presented net of income tax benefit of $0.1 million for both the three months ended March 31, 2013 and 2012.

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)



	For the Three Months Ended
	March 31, 2013					March 31, 2012
	Shares		Amount			Shares	Amount
	(in thousands)
Preferred stock:
Balance, beginning of period	58		$	57,578		58	$	57,578
Issuance of Series A preferred stock	2,400		58,333			—	—
Redemption of Series C preferred stock	(58	)	(57,578		)	—	—
Balance, end of period	2,400		$	58,333		58	$	57,578
Common stock:
Balance, beginning of period	10,702		$	10,702		10,357	$	10,357
Issuance of Class C common stock	52		52			16	16
Balance, end of period	10,754		$	10,754		10,373	$	10,373
Additional paid-in capital:
Balance, beginning of period			$	106,617			$	102,821
Stock-based compensation expense			866				956
Issuance of Class C common stock			3				4
Tax effect of stock-based awards			900				429
Balance, end of period			$	108,386			$	104,210
Retained earnings:
Balance, beginning of period			$	102,243			$	62,554
Net income attributable to Farmer Mac			17,041				22,923
Cash dividends:
Preferred stock, Series A ($0.2978 per share)			(715		)		—
Preferred stock, Series C ($2.36 per share in 2013 and $12.50 per share in 2012)			(136		)		(720		)
Common stock ($0.12 per share in 2013 and $0.10 per share in 2012)			(1,290		)		(1,038		)
Balance, end of period			$	117,143			$	83,719
Accumulated other comprehensive income:
Balance, beginning of period			$	73,969			$	79,370
Other comprehensive income/(loss), net of tax			18,390				(247		)
Balance, end of period			$	92,359			$	79,123
Total Stockholders' Equity			$	386,975			$	335,003
Non-controlling interest - preferred stock:
Balance, beginning of period			$	241,853			$	241,853
Issuance of Preferred stock - Farmer Mac II LLC			—				—
Balance, end of period			$	241,853			$	241,853
Total Equity			$	628,828			$	576,856

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	For the Three Months Ended
	March 31, 2013			March 31, 2012
	(in thousands)
Cash flows from operating activities:
Net income	$	22,588		$	28,470
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of deferred gains, premiums and discounts on loans, investments, Farmer Mac Guaranteed Securities, and USDA Guaranteed Securities	2,712			3,672
Amortization of debt premiums, discounts and issuance costs	3,286			3,362
Net change in fair value of trading securities, hedged assets, financial derivatives, and loans held for sale	(8,997		)	(16,768		)
Gains on the sale of available-for-sale investment securities	(2		)	(28		)
Gains on the sale of real estate owned	(47		)	—
Total provision for losses	1,176			450
Deferred income taxes	1,992			5,190
Stock-based compensation expense	865			956
Proceeds from repayment of trading investment securities	315			288
Purchases of loans held for sale	—			(27,991		)
Proceeds from repayment of loans purchased as held for sale	66,095			46,873
Net change in:
Interest receivable	36,879			36,717
Guarantee and commitment fees receivable	(570		)	129
Other assets	27,003			6,690
Accrued interest payable	(16,305		)	(19,017		)
Other liabilities	5,069			3,783
Net cash provided by operating activities	142,059			72,776
Cash flows from investing activities:
Purchases of available-for-sale investment securities	(244,819		)	(649,645		)
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	(222,187		)	(301,725		)
Purchases of loans held for investment	(190,149		)	(106,845		)
Purchases of defaulted loans	(140		)	(729		)
Proceeds from repayment of available-for-sale investment securities	439,135			291,065
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	163,508			177,551
Proceeds from repayment of loans purchased as held for investment	93,587			88,440
Proceeds from sale of available-for-sale investment securities	15,014			5,028
Proceeds from sale of Farmer Mac Guaranteed Securities	25,042			3,380
Proceeds from sale of real estate owned	203			—
Net cash provided by/(used in) investing activities	79,194			(493,480		)
Cash flows from financing activities:
Proceeds from issuance of discount notes	15,653,949			16,835,683
Proceeds from issuance of medium-term notes	703,268			565,987
Payments to redeem discount notes	(16,021,517		)	(16,436,929		)
Payments to redeem medium-term notes	(419,000		)	(332,000		)
Excess tax benefits related to stock-based awards	613			623
Payments to third parties on debt securities of consolidated trusts	(25,413		)	(48,162		)
Proceeds from common stock issuance	888			4
Proceeds from Series A Preferred stock issuance	58,333			—
Retirement of Series C Preferred stock	(57,578		)	—
Dividends paid - Non-controlling interest - preferred stock	(5,547		)	(5,547		)
Dividends paid on common and preferred stock	(1,426		)	(1,038		)
Net cash (used in)/provided by financing activities	(113,430		)	578,621
Net increase in cash and cash equivalents	107,823			157,917
Cash and cash equivalents at beginning of period	785,564			817,046
Cash and cash equivalents at end of period	$	893,387		$	974,963

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.	ACCOUNTING POLICIES

The interim unaudited 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 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 position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted as permitted by SEC rules and regulations. The December 31, 2012 consolidated balance sheet presented in this report has been derived from the Corporation's audited 2012 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2012 consolidated financial statements of Farmer Mac and subsidiaries included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. 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.

Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA-guaranteed portions. The consolidated financial statements also include the accounts of variable interest entities ("VIEs") in which Farmer Mac determined itself to be the primary beneficiary. See Note 1(f) for more information on consolidated VIEs.

A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities. When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished. For Farmer Mac Guaranteed Securities in the Corporation's portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC. The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the consolidated statements of operations. These guarantee fees totaled $2.6 million and for both the three months ended March 31, 2013 and 2012. The corresponding expense of FMMSC has been eliminated against interest income in consolidation. All other inter-company balances and transactions have been eliminated in consolidation.


(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

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estimate of their approximate fair value. Changes in the balance of cash and cash equivalents are reported in the 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, 2013 and 2012:



	For the Three Months Ended
	March 31, 2013		March 31, 2012
	(in thousands)
Cash paid during the period for:
Interest	$	33,068	$	34,082
Non-cash activity:
Real estate owned acquired through loan liquidation	1,034		—
Loans acquired and securitized as Farmer Mac Guaranteed Securities	25,042		3,380
Purchases of securities traded, not yet settled	325,000		—
Consolidation of Farm and Ranch Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties	25,042		3,380
Transfers of loans held for sale to loans held for investment	673,991		—

On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held to sale to held for investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or (2) generally securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance sheet and reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac transferred these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac recorded a $5.9 million unamortized discount for loans transferred at fair value. At the time of purchase, loans are classified as either held for sale or held for investment depending upon management's intent and ability to hold the loans for the foreseeable future. Cash receipts from the repayment of loans are classified within the statements of cash flows based on management's intent upon purchase of the loan, as prescribed by accounting guidance related to the statement of cash flows.


(b)	Allowance for Losses

Farmer Mac maintains an allowance for losses to cover estimated probable losses incurred as of the balance sheet date on loans held ("allowance for loan losses") and loans underlying LTSPCs and Farmer Mac Guaranteed Securities ("reserve for losses") based on available information. Farmer Mac's methodology for determining the allowance for losses separately considers its portfolio segments – Farm & Ranch, USDA Guarantees, and Rural Utilities, and disaggregates its analysis, where relevant, into classes of financing receivables, which currently include loans and AgVantage securities. Further disaggregation by commodity type is performed, where appropriate, in analyzing the need for an allowance for losses.

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, generally 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. In certain circumstances, for example when a defaulted loan is purchased out of a guaranteed security or pursuant to an LTSPC, the related reserve for losses is

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reclassified as allowance for loan losses and there is a corresponding release from the provision for losses and a charge to the provision for loan losses.

The total allowance for losses consists of a general allowance for losses and a specific allowance for impaired loans.

Charge-offs

Farmer Mac records a charge-off against the allowance for losses principally when a loss has been confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan. The loss equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs.

General Allowance for Losses

Farm & Ranch

Farmer Mac's methodology for determining its allowance for losses incorporates the Corporation's 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 purposes of the loss allowance methodology, the loans in Farmer Mac's portfolio of loans and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs have been scored and classified for each calendar quarter since first quarter 2000. The allowance methodology captures the migration of loan scores across concurrent and overlapping 3-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying Farm & Ranch 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 several 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 reasonable estimate of probable losses, as of the balance sheet date, for all loans held in the Farm & Ranch portfolio and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs. There were no purchases or sales during first quarter 2013 that materially affected the credit profile of the Farm & Ranch portfolio.

Farmer Mac has not provided an allowance for losses for loans underlying Farm & Ranch AgVantage securities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security, with some level of overcollateralization required for Farm & Ranch AgVantage

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securities. 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.

USDA Guarantees

No allowance for losses has been provided for Farmer Mac's USDA Guarantees line of business. The USDA-guaranteed portions presented as "USDA Guaranteed Securities" on the consolidated balance sheets, as well as those that collateralize Farmer Mac Guaranteed Securities, are guaranteed by the United States Department of Agriculture. Each USDA guarantee is an obligation backed by the full faith and credit of the United States. Farmer Mac excludes these guaranteed portions from the credit risk metrics it discloses because of the USDA guarantee.

Rural Utilities

Farmer Mac separately evaluates the rural utilities loans it owns, as well as the lender obligations and loans underlying or securing its Rural Utilities Guaranteed Securities, including AgVantage securities, to determine if there are any probable losses inherent in those assets. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. No allowance for losses has been provided for this portfolio segment based on the credit quality of the collateral supporting rural utilities assets and Farmer Mac's counterparty risk analysis. As of March 31, 2013, there were no delinquencies and no probable losses inherent in Farmer Mac's rural utilities loans held or in any Rural Utilities Guaranteed Securities.

Specific Allowance for Impaired Loans

Farmer Mac also analyzes certain loans in its portfolio for impairment in accordance with accounting guidance on measuring individual impairment of a loan. Farmer Mac's impaired loans generally include loans 90 days or more past due, in foreclosure, restructured, in bankruptcy and certain 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 and net of any charge-offs. In the event that the collateral value does not support the total recorded investment, Farmer Mac specifically provides an allowance for the loan for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. Estimated selling costs are based on historical selling costs incurred by Farmer Mac or management's best estimate of selling costs for a particular property. 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. Farmer Mac considers appraisals aged more than two years as of the reporting period end date to be outdated.

Farmer Mac believes this methodology that utilizes loan classification scores and historical loss experience is a better indication of impairment for these collateral-dependent loans than other valuation

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methods. Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $68.8 million (54.0 percent) of impaired loans as of March 31, 2013, which resulted in a specific reserve of $1.4 million. As of December 31, 2012, the impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $56.0 million (55.8 percent) of impaired loans, which resulted in a specific reserve of $1.1 million.

Farmer Mac uses a risk-based approach in determining the necessity of obtaining updated appraisals on impaired loans. For example, larger exposures associated with highly improved and specialized collateral will generally receive updated appraisals once the loans are identified as impaired. In addition, updated appraisals are always obtained during the foreclosure process. Depending on the risk factors associated with the loan and underlying collateral, which can vary widely depending on the circumstances of the loan and collateral, this can occur early in the foreclosure process, while in other instances this may occur just prior to the transfer of title. As part of its routine credit review process, Farmer Mac often will exercise judgment in discounting an appraisal value due to local real estate trends or the condition of the property (e.g., following an inspection by Farmer Mac or the servicer). In addition, a property appraisal value may be discounted based on the market's reaction to Farmer Mac's asking price for sale of the property.

A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring ("TDR"). Farmer Mac has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due in a timely manner, including interest accrued at the original contract rate. In making its determination of whether a borrower is experiencing financial difficulties, Farmer Mac considers several factors, including whether (1) the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial doubt as to whether the borrower will continue to be a going concern, and (3) the borrower can obtain funds from other sources at an effective interest rate at or near a current market interest rate for debt with similar risk characteristics. Farmer Mac evaluates TDRs similarly to other impaired loans for purposes of the allowance for losses. For the quarter ended ended March 31, 2013, the recorded investment of loans determined to be TDRs was $0.2 million before restructuring and $0.3 million after restructuring. For the quarter ended March 31, 2012, the recorded investment of loans determined to be TDRs was $1.0 million before restructuring and $1.1 million after restructuring. As of March 31, 2013, there were three TDRs identified during the previous 12 months that were in default, under the modified terms, with a recorded investment of $1.3 million. The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial in both first quarter 2013 and 2012. See Note 5 for more information related to the allowance for losses.

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(c)	Financial Derivatives

issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts

principally to adjust the characteristics of its short-term debt to match more closely the cash flow and

duration characteristics of its longer-term 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 is

required to recognize certain contracts and commitments as derivatives when the characteristics of those

contracts and commitments meet the definition of a derivative.

Accounting for financial derivatives differs significantly depending on whether a derivative is designated in a fair value or cash flow hedging relationship. Derivative instruments designated in hedging relationships that mitigate exposure to changes in the fair value of assets or liabilities are considered fair value hedges. Derivative instruments designated in hedging relationships that mitigate exposure to the variability in expected future cash flows or other forecasted transactions are considered cash flow hedges. In order to qualify for hedge accounting treatment, documentation must indicate the intention to designate the derivative as a hedge of a specific asset or liability or a future cash flow. Effectiveness of the hedge must be monitored over the life of the hedging relationship.

Financial derivatives are recorded on the consolidated balance sheets at fair value as a freestanding asset or liability on a gross basis without giving consideration to master netting arrangements. Fair value hedges are accounted for by recording the fair value of the financial derivative and the change in fair value of the hedged item attributable to the risk being hedged on the consolidated balance sheets with the net difference reported in gains/(losses) on financial derivatives and hedging activities in the consolidated statements of operations. The accrual of the contractual amounts due on the financial derivative is included as an adjustment to the yield of the hedged item and is reported in net interest income. Cash flow hedges which are deemed effective under GAAP are accounted for by recording the fair value of the financial derivative as either a freestanding asset or a freestanding liability on the consolidated balance sheets, with the effective portion of the change in fair value of the financial derivative recorded in accumulated other comprehensive income within stockholders' equity, net of tax. Amounts are reclassified from accumulated other comprehensive income to interest income or expense in the consolidated statements of operations in the period the hedged transaction affects earnings. Any ineffective portion of the change in fair value of the financial derivative is reported in gains/(losses) on financial derivatives and hedging activities in the consolidated statements of operations. If it becomes probable that a hedged forecasted transaction will not occur, any amounts included in accumulated other comprehensive income related to the specific hedging relationship are reclassified from accumulated other comprehensive income to the consolidated statements of operations and reported in gains/(losses) on financial derivatives and hedging activities.

In accordance with applicable fair value measurement guidance, Farmer Mac made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio, consistent with how the Corporation previously has been measuring credit risk for these instruments. See Notes 4 and 8 for more information on financial derivatives.

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(d)	Earnings Per Common Share

Basic earnings per common share ("EPS") is based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is 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 non-vested restricted stock awards. The following schedule reconciles basic and diluted EPS for the three months ended March 31, 2013 and 2012:



	For the Three Months Ended
	March 31, 2013						March 31, 2012
	Net Income		Weighted-Average Shares	$ per Share			Net Income		Weighted-Average Shares	$ per Share
	(in thousands, except per share amounts)
Basic EPS
Net income attributable to common stockholders	$	16,190	10,737	$	1.51		$	22,203	10,365	$	2.14
Effect of dilutive securities (1):
Stock options, SARs and restricted stock	—		424	(0.06		)	—		538	(0.10		)
Diluted EPS	$	16,190	11,161	$	1.45		$	22,203	10,903	$	2.04

(1)

For the three months ended March 31, 2013 and 2012, stock options and SARs of 4,000 and 582,447, 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, 2013 and 2012, contingent shares of non-vested restricted stock of 25,300 and 79,300, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions were not met.


(e)	Fair Value Measurement

Farmer Mac follows accounting guidance for fair value measurements that 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).

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 financial instruments 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 projected prepayment rates) inputs. See Note 8 for more information regarding fair value measurement.

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(f)	Consolidation of Variable Interest Entities

Farmer Mac has interests in various entities that are considered to be 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. The 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 VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major factor in determining if Farmer Mac is the primary beneficiary is whether Farmer Mac has the power to direct the activities of the trust that potentially have the most significant impact on the economic performance of the trust. Generally, the ability to make decisions regarding default mitigation is evidence of that power. Farmer Mac determined that it is the primary beneficiary for the securitization trusts related to most Farm & Ranch 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 Farm & Ranch 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 these trusts, the shared power provisions are substantive with respect to decision-making power and relate to the same activity (i.e., default mitigation). 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. In the event that a related party status changes, consolidation or deconsolidation of these securitization trusts could occur.

For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the consolidated balance sheets as "Loans held for investment in consolidated trusts, at amortized cost" and "Debt securities of consolidated trusts held by third parties," respectively. These assets can only be used to satisfy the obligations of the related 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 presented as either "Farmer Mac Guaranteed Securities" or "Investment securities" on the consolidated balance sheets. Farmer Mac's involvement in VIEs classified as Farmer Mac Guaranteed Securities include securitization trusts under the USDA Guarantees line of business and certain trusts related to Farm & Ranch AgVantage securities. In the case of the USDA Guarantees trusts, Farmer Mac is not determined to be the primary beneficiary because it does not have the decision-making power over default mitigation activities. Based on the USDA's program authority over the servicing and default mitigation activities of the USDA guaranteed portions of loans, Farmer Mac believes that the USDA has the power to direct the activities that most significantly impact the trust's economic performance. Farmer Mac does not have exposure to losses that could be significant to the trust and there are no triggers that would result in Farmer Mac superseding the USDA's authority with regard to directing the activities of the trust. 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 the primary beneficiary of those trusts. The amounts disclosed in the tables

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below represent Farmer Mac's holdings of a portion of the beneficial interests issued by these AgVantage Trusts. For VIEs classified as investment securities, which include auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities, Farmer Mac is 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 following tables present, by line of business, details about the consolidation of VIEs:



	Consolidation of Variable Interest Entities
	March 31, 2013
	Farm & Ranch		USDA Guarantees		Rural Utilities		Investments		Total
	(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated trusts, at amortized cost (1)	$	166,162	$	—	$	395,520	$	—	$	561,682
Debt securities of consolidated trusts held by third parties (2)	167,250		—		—		—		167,250
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)	31,345		27,198		—		—		58,543
Maximum exposure to loss (4)	30,000		25,852		—		—		55,852
Investment securities:
Carrying value	—		—		—		699,591		699,591
Maximum exposure to loss (4)	—		—		—		708,317		708,317
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (5)	1,826,499		25,581		—		—		1,852,080

(1) Includes unamortized premiums related to Rural Utilities of $33.8 million.

(2) Includes borrower remittances of $1.1 million, which have not been passed through to third party investors as of March 31, 2013.

(3) Includes unamortized premiums and discounts and fair value adjustments related to Farm & Ranch and USDA Guarantees of $1.3 million and $1.3 million, respectively.

(4) Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.

(5) Of the Farm & Ranch amount, $856.5 million relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.

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	Consolidation of Variable Interest Entities
	December 31, 2012
	Farm & Ranch		USDA Guarantees		Rural Utilities		Investments		Total
	(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated trusts, at amortized cost (1)	$	160,436	$	—	$	403,139	$	—	$	563,575
Debt securities of consolidated trusts held by third parties (2)	167,621		—		—		—		167,621
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)	31,370		26,681		—		—		58,051
Maximum exposure to loss (4)	30,000		26,238		—		—		56,238
Investment securities:
Carrying value	—		—		—		724,893		724,893
Maximum exposure to loss (4)	—		—		—		737,148		737,148
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (5)	1,881,370		29,658		—		—		1,911,028

(1) Includes unamortized premiums related to Rural Utilities of $34.3 million.

(2) Includes borrower remittances of $7.2 million, which have not been passed through to third party investors as of December 31, 2012.

(3) Includes unamortized premiums and discounts and fair value adjustments related to Farm & Ranch and USDA Guarantees of $1.4 million and $0.4 million, respectively.

(4) Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.

(5) Of the Farm & Ranch amount, $911.4 million relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.


(g)	New Accounting Standards

Offsetting Assets and Liabilities

On December 16, 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2011-11, Disclosures about Offsetting Assets and Liabilities, which provided new guidance requiring entities to disclose net and gross information for certain derivative instruments and financial instruments and information about the impact of collateral on offsetting arrangements and other amounts subject to a master netting agreement that are not offset on the balance sheet. On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities addressing the implementation of ASU 2011-11. The amendment clarifies that the scope of ASU 2011-11 applies to recognized derivative instruments, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in the financial statements or are subject to enforceable master netting arrangements or similar agreements. ASU 2011-11 and ASU 2013-01 were effective for interim and annual periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 and ASU 2013-01 during first quarter 2013 did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

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Comprehensive Income

On February 5, 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”). The new guidance requires entities to disclose additional information about reclassification adjustments, including changes in AOCI balances by component and significant items reclassified out of AOCI. An entity would disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current period other comprehensive income. ASU 2013‑02 also requires significant items reclassified out of AOCI to be presented either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The income tax benefit or expense attributed to each component of other comprehensive income and reclassification adjustment must be presented in the financial statement or notes to the financial statements. The amendments in ASU 2013-02 do not change the current requirement for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 was effective for all reporting periods beginning on or after December 15, 2012. The adoption of the new guidance during first quarter 2013 did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.


(h)	Reclassifications

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

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2.	INVESTMENT SECURITIES

The following tables present the amount outstanding, amortized cost, and fair values of Farmer Mac's investment securities as of March 31, 2013 and December 31, 2012:



	March 31, 2013
	Amount Outstanding		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	74,100	$	—		$	74,100	$	—	$	(8,887	)	$	65,213
Floating rate asset-backed securities	146,110		(326		)	145,784		905		(11		)	146,678
Fixed rate asset-backed securities	2,983		—			2,983		—		(3		)	2,980
Floating rate corporate debt securities	91,345		(16		)	91,329		475		—			91,804
Fixed rate corporate debt securities	62,000		258			62,258		117		(18		)	62,357
Floating rate Government/GSE guaranteed mortgage-backed securities	673,283		5,603			678,886		9,096		(4		)	687,978
Fixed rate GSE guaranteed mortgage-backed securities	1,580		1			1,581		123		—			1,704
Floating rate GSE subordinated debt	70,000		—			70,000		—		(6,849		)	63,151
Fixed rate GSE preferred stock	78,500		683			79,183		7,609		—			86,792
Fixed rate taxable municipal bonds	8,542		50			8,592		5		—			8,597
Floating rate senior agency debt	50,000		(3		)	49,997		51		—			50,048
Fixed rate senior agency debt	119,000		474			119,474		147		—			119,621
Fixed rate U.S. Treasuries	907,000		1,996			908,996		268		—			909,264
Total available-for-sale	2,284,443		8,720			2,293,163		18,796		(15,772		)	2,296,187
Trading:
Floating rate asset-backed securities	4,013		—			4,013		—		(2,884		)	1,129
Total investment securities	$	2,288,456	$	8,720		$	2,297,176	$	18,796	$	(18,656	)	$	2,297,316

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	December 31, 2012
	Amount Outstanding		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	74,100	$	—		$	74,100	$	—	$	(10,941	)	$	63,159
Floating rate asset-backed securities	150,519		(372		)	150,147		933		(36		)	151,044
Fixed rate asset-backed securities	6,501		—			6,501		—		—			6,501
Floating rate corporate debt securities	76,345		(32		)	76,313		450		—			76,763
Fixed rate corporate debt securities	51,969		243			52,212		204		—			52,416
Floating rate Government/GSE guaranteed mortgage-backed securities	699,062		5,973			705,035		8,035		(211		)	712,859
Fixed rate GSE guaranteed mortgage-backed securities	1,910		1			1,911		154		—			2,065
Floating rate GSE subordinated debt	70,000		—			70,000		—		(12,569		)	57,431
Fixed rate GSE preferred stock	78,500		784			79,284		7,802		—			87,086
Floating rate senior agency debt	50,000		(6		)	49,994		61		—			50,055
Fixed rate senior agency debt	72,700		287			72,987		128		(1		)	73,114
Fixed rate U.S. Treasuries	1,163,400		2,240			1,165,640		258		(9		)	1,165,889
Total available-for-sale	2,495,006		9,118			2,504,124		18,025		(23,767		)	2,498,382
Trading:
Floating rate asset-backed securities	4,327		—			4,327		—		(3,080		)	1,247
Total investment securities	$	2,499,333	$	9,118		$	2,508,451	$	18,025	$	(26,847	)	$	2,499,629

During the three months ended March 31, 2013, Farmer Mac received proceeds of $15.0 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $2,000, compared to proceeds of $5.0 million for the same period in 2012, resulting in gross realized gains of $28,000.

As of March 31, 2013 and December 31, 2012, unrealized losses on available-for-sale investment securities were as follows:



	March 31, 2013
	Available-for-Sale Securities
	Unrealized loss position for less than 12 months					Unrealized loss position for more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—		$	65,213	$	(8,887	)
Floating rate asset-backed securities	—		—			10,337		(11		)
Fixed rate asset-backed securities	2,981		(3		)	—		—
Fixed rate corporate debt securities	25,099		(18		)	—		—
Floating rate Government/GSE guaranteed mortgage-backed securities	8,185		(2		)	816		(2		)
Floating rate GSE subordinated debt	—		—			63,151		(6,849		)
Total	$	36,265	$	(23	)	$	139,517	$	(15,749	)

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	December 31, 2012
	Available-for-Sale Securities
	Unrealized loss position for less than 12 months					Unrealized loss position for more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—		$	63,159	$	(10,941	)
Floating rate asset-backed securities	21,648		(27		)	3,619		(9		)
Floating rate Government/GSE guaranteed mortgage-backed securities	174,352		(209		)	829		(2		)
Floating rate GSE subordinated debt	—		—			57,431		(12,569		)
Fixed rate senior agency debt	50,088		(1		)	—		—
Fixed rate U.S. Treasuries	136,194		(9		)	—		—
Total	$	382,282	$	(246	)	$	125,038	$	(23,521	)

The unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to March 31, 2013 and December 31, 2012, as applicable. The resulting decrease in fair values reflect an increase in the perceived risk by the financial markets related to those securities. As of March 31, 2013, all of the investment securities in an unrealized loss position had credit ratings of at least "AA+" except three that were rated "A-". As of December 31, 2012, all of the investment securities in an unrealized loss position had credit ratings of at least "AA+" except one that was rated "A-". The unrealized losses were on 16 and 17 individual investment securities as of March 31, 2013 and December 31, 2012, respectively.

As of March 31, 2013, 9 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $15.7 million. As of December 31, 2012, 9 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $23.5 million. The unrealized losses on those securities are principally due to a general widening of credit spreads from the dates of acquisition. Securities in unrealized loss positions 12 months or more have a fair value as of March 31, 2013 that is, on average, approximately 89.9 percent of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of changes in credit spreads or maturity. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represent other-than-temporary impairment as of March 31, 2013 and December 31, 2012. Farmer Mac does not intend to sell these securities and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

Farmer Mac did not own any held-to-maturity investment securities as of March 31, 2013 and December 31, 2012. As of March 31, 2013, Farmer Mac owned trading investment securities with an amortized cost of $4.0 million, a fair value of $1.1 million, and a weighted average yield of 4.29 percent. As of December 31, 2012, Farmer Mac owned trading investment securities with an amortized cost of $4.3 million, a fair value of $1.2 million, and a weighted average yield of 4.29 percent.

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The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by remaining contractual maturity as of March 31, 2013 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.



	Investment Securities Available-for-Sale as of
	March 31, 2013
	Amortized Cost		Fair Value		Weighted- Average Yield
	(dollars in thousands)
Due within one year	$	1,102,158	$	1,102,548	0.59%
Due after one year through five years	178,721		179,528		1.02%
Due after five years through ten years	399,858		396,373		1.07%
Due after ten years	612,426		617,738		2.61%
Total	$	2,293,163	$	2,296,187	1.25%


3.	FARMER MAC GUARANTEED SECURITIES AND USDA GUARANTEED SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities as of March 31, 2013 and December 31, 2012:



	March 31, 2013
	Unpaid Principal Balance		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Farm & Ranch	$	3,439,200	$	151		$	3,439,351	$	95,508	$	(6,339	)	$	3,528,520
USDA Guarantees	25,853		(451		)	25,402		1,796		—			27,198
Rural Utilities	1,545,582		—			1,545,582		15,568		(16,788		)	1,544,362
Total Farmer Mac Guaranteed Securities	5,010,635		(300		)	5,010,335		112,872		(23,127		)	5,100,080
USDA Guaranteed Securities	1,514,581		5,562			1,520,143		49,084		(67		)	1,569,160
Total available-for-sale	6,525,216		5,262			6,530,478		161,956		(23,194		)	6,669,240
Trading:
USDA Guaranteed Securities	82,090		5,893			87,983		573		(1,285		)	87,271
Total Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	$	6,607,306	$	11,155		$	6,618,461	$	162,529	$	(24,479	)	$	6,756,511

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	December 31, 2012
	Unpaid Principal Balance		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Farm & Ranch	$	3,339,200	$	160		$	3,339,360	$	92,223	$	(5,094	)	$	3,426,489
USDA Guarantees	26,238		(452		)	25,786		909		(14		)	26,681
Rural Utilities	1,298,506		—			1,298,506		18,530		(3,948		)	1,313,088
Total Farmer Mac Guaranteed Securities	4,663,944		(292		)	4,663,652		111,662		(9,056		)	4,766,258
USDA Guaranteed Securities	1,461,184		5,975			1,467,159		19,605		(169		)	1,486,595
Total available-for-sale	6,125,128		5,683			6,130,811		131,267		(9,225		)	6,252,853
Trading:
USDA Guaranteed Securities	98,499		6,415			104,914		624		(1,350		)	104,188
Total Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	$	6,223,627	$	12,098		$	6,235,725	$	131,891	$	(10,575	)	$	6,357,041

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to March 31, 2013 and December 31, 2012, as applicable. Additionally, the $325.0 million Rural Utilities AgVantage Security purchased in first quarter 2013 was at a narrow net interest margin spread, which resulted in an unrealized fair value loss as of March 31, 2013. The unrealized losses related to Farmer Mac's USDA Guarantees line of business are backed by the full faith and credit of the United States. None of the Farm & Ranch or Rural Utilities Guaranteed Securities has been in an unrealized loss position for greater than 12 months. Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities and USDA Guaranteed Securities represents an other-than-temporary impairment as of March 31, 2013 and December 31, 2012. Farmer Mac does not intend to sell these securities and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

During the three months ended March 31, 2013 and 2012 Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities.

The amortized cost, fair value, and weighted average yield of available-for-sale Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by remaining contractual maturity as of March 31, 2013 are set forth below. The balances presented are based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.



	Farmer Mac Guaranteed Securities and USDA Guaranteed Securities Available-for-Sale as of March 31, 2013
	Amortized Cost		Fair Value		Weighted- Average Yield
	(dollars in thousands)
Due within one year	$	829,636	$	838,105	2.01	%
Due after one year through five years	3,136,706		3,220,504		2.33	%
Due after five years through ten years	760,245		777,915		2.62	%
Due after ten years	1,803,891		1,832,716		2.61	%
Total	$	6,530,478	$	6,669,240	2.40	%

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Farmer Mac did not own any held-to-maturity Farmer Mac Guaranteed Securities or USDA Guaranteed Securities as of March 31, 2013 and December 31, 2012. As of March 31, 2013, Farmer Mac owned trading USDA Guaranteed Securities with an amortized cost of $88.0 million, a fair value of $87.3 million, and a weighted average yield of 5.73 percent. As of December 31, 2012, Farmer Mac owned trading USDA Guaranteed Securities with an amortized cost of $104.9 million, a fair value of $104.2 million, and a weighted average yield of 5.77 percent.


4.	FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows, or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts 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. Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e., LIBOR).

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 GSEs and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both 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 are expected to offset changes in funding costs.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives are reported in "Gains on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in "Gains on financial derivatives and hedging activities" in the consolidated statements of operations. Farmer Mac currently has no financial derivatives designated in cash flow hedging relationships.

Market Risk:

Market risk is the risk of an adverse effect resulting from changes in interest rates or spreads on the value of a financial instrument. Farmer Mac manages market risk associated with financial derivatives by establishing and monitoring limits as to the degree of risk that may be undertaken. This risk is periodically measured as part of Farmer Mac's overall risk monitoring processes, which include market value of equity measurements, net interest income modeling, and other measures.

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Credit Risk:

Credit risk is the risk that a counterparty will fail to perform according to the terms of a financial contract in which Farmer Mac has an unrealized gain. Credit losses could occur in the event of non-performance by counterparties to the financial derivative contracts. Farmer Mac mitigates this counterparty credit risk by contracting only with counterparties that have investment grade credit ratings (i.e., at least BBB), establishing and maintaining collateral requirements based upon credit ratings, and entering into netting agreements. Netting agreements provide for the calculation of the net amount of all receivables and payables under all transactions covered by the netting agreement between Farmer Mac and a single counterparty. Farmer Mac's exposure to credit risk related to its financial derivatives is represented by those counterparties for which Farmer Mac has a net receivable, including the effect of any netting arrangements. As of March 31, 2013 and December 31, 2012, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $35.8 million and $37.1 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $2.7 million and $2.4 million as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, Farmer Mac held cash of $1.5 million and $1.7 million, respectively, as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $1.2 million and $0.8 million, respectively. Farmer Mac records cash held as collateral as an increase in the balance of cash and cash equivalents and an increase in the balance of accounts payable and accrued expenses.

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 an event of default were to occur with respect to Farmer Mac under the derivative contracts, such as the failure to pay amounts when due, any other material breach of the agreements that remains unremedied, a material default under another of Farmer Mac's credit agreements, or bankruptcy, insolvency or receivership, the related counterparty could request payment or full collateralization on the derivative contracts. In addition, if Farmer Mac ceases to be a federally chartered instrumentality of the United States, the related counterparty could request full collateralization on the derivative contracts. As of March 31, 2013 and December 31, 2012, the fair value of Farmer Mac's derivatives in a net liability position including accrued interest but excluding netting arrangements and any adjustment for nonperformance risk, was $142.4 million and $168.0 million, respectively; however, including netting arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level, was $109.3 million and $135.8 million as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, Farmer Mac posted cash of $36.7 million and $60.3 million, respectively, as collateral for its derivatives in net liability positions. Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. If Farmer Mac had breached certain provisions of the derivative contracts as of March 31, 2013 and December 31, 2012, it could have been required to settle its obligations under the agreements or post additional collateral of $72.6 million and $75.5 million, respectively. As of March 31, 2013 and December 31, 2012, there were no financial derivatives in a net payable position where Farmer Mac was required to pledge collateral which the counterparty had the right to sell or repledge.

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Interest Rate Risk:

Farmer Mac uses financial derivatives to manage its interest rate risk exposure by effectively modifying the interest rate reset or maturity characteristics of certain assets and liabilities and by locking in the rates for certain forecasted issuances of liabilities. The primary financial derivatives Farmer Mac uses include interest rate swaps and forward sale contracts. Farmer Mac uses interest rate swaps to assume fixed rate interest payments in exchange for floating rate interest payments and vice versa. Depending on the economic hedging relationship, the effects of these agreements are (a) the conversion of variable rate liabilities to longer-term fixed rate liabilities, (b) the conversion of long-term fixed rate assets to shorter-term floating rate assets, or (c) the reduction of the variability of future changes in interest rates on forecasted issuances of liabilities. The accrual of the contractual amounts due on these agreements that are not designated in hedging relationships is recorded as "Gains on financial derivatives and hedging activities" in the consolidated statements of operations.

The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of March 31, 2013 and December 31, 2012 and the effects of financial derivatives on the consolidated statements of operations for the three months ended March 31, 2013 and 2012:



	March 31, 2013
			Fair Value						Weighted- Average Pay Rate	Weighted- Average Receive Rate	Weighted- Average Forward Price	Weighted- Average Remaining Life (in years)
	Notional Amount		Asset			(Liability)			Weighted- Average Pay Rate	Weighted- Average Receive Rate	Weighted- Average Forward Price	Weighted- Average Remaining Life (in years)
	(dollars in thousands)
Fair value hedges:
Interest rate swaps:
Pay fixed non-callable	$	950,000	$	—		$	(52,967	)	2.20%	0.30%		3.83
No hedge designation:
Interest rate swaps:
Pay fixed non-callable	749,874		857			(80,097		)	4.85%	0.29%		4.18
Receive fixed non-callable	4,355,623		25,075			(446		)	0.32%	0.81%		0.74
Receive fixed callable	290,000		—			(429		)	0.14%	0.58%		3.75
Basis swaps	550,223		375			(642		)	0.37%	0.31%		1.24
Agency forwards	2,435		—			(1		)			99.83
Treasury futures	14,400		13			—					132.08
Credit valuation adjustment			(66		)	744
Total financial derivatives	$	6,912,555	$	26,254		$	(133,838	)
Collateral (received)/pledged			(1,495		)	36,711
Net amount			$	24,759		$	(97,127	)

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December 31, 2012

Fair Value

Weighted-
Average
Pay Rate

Weighted-
Average Receive Rate

Weighted-
Average
Forward
Price

Weighted-
Average
Remaining
Life (in years)

Notional Amount

Asset

(Liability)

(dollars in thousands)

Fair value hedges:

Interest rate swaps:

Pay fixed non-callable

950,000

—

(58,758

)

2.20%

0.31%

4.07

No hedge designation: