Unassociated Document
As filed with the Securities and Exchange Commission on
August 10, 2009 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009
 
Commission File Number 001-14951
 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)

Federally chartered instrumentality
of the United States
 
 
52-1578738
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer identification number)
     
1133 Twenty-First Street, N.W., Suite 600
Washington, D.C.
 
20036
(Address of principal executive offices)
 
(Zip code)

(202) 872-7700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes           x                                No           ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes           ¨                                No           x

As of August 3, 2009 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,609,233 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 June 30, 2009 and December 31, 2008
3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008
4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008
5
Notes to Condensed Consolidated Financial Statements
6
 
-2-

 
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Assets:
           
Cash and cash equivalents
  $ 362,858     $ 278,412  
Investment securities:
               
Available-for-sale, at fair value
    836,540       1,072,096  
Trading, at fair value
    185,437       163,763  
Total investment securities
    1,021,977       1,235,859  
Farmer Mac Guaranteed Securities:
               
Available-for-sale, at fair value
    2,124,281       1,511,694  
Trading, at fair value
    895,131       939,550  
Total Farmer Mac Guaranteed Securities
    3,019,412       2,451,244  
Loans:
               
Loans held for sale, at lower of cost or fair value
    613,126       66,680  
Loans held for investment, at amortized cost
    38,360       718,845  
Allowance for loan losses
    (1,810 )     (10,929 )
Total loans, net of allowance
    649,676       774,596  
                 
Real estate owned, at lower of cost or fair value
    41,561       606  
Financial derivatives, at fair value
    15,452       27,069  
Interest receivable
    53,796       73,058  
Guarantee and commitment fees receivable
    56,083       61,109  
Deferred tax asset, net
    39,820       87,793  
Prepaid expenses and other assets
    62,049       117,561  
Total Assets
  $ 5,322,684     $ 5,107,307  
                 
Liabilities, Mezzanine Equity and Stockholders' Equity:
               
Liabilities:
               
Notes payable:
               
Due within one year
  $ 3,262,856     $ 3,757,099  
Due after one year
    1,535,362       887,999  
Total notes payable
    4,798,218       4,645,098  
                 
Financial derivatives, at fair value
    123,286       181,183  
Accrued interest payable
    38,759       40,470  
Guarantee and commitment obligation
    50,572       54,954  
Accounts payable and accrued expenses
    20,839       20,532  
Reserve for losses
    7,496       5,506  
Total Liabilities
    5,039,170       4,947,743  
                 
Mezzanine Equity:
               
Series B redeemable preferred stock, par value $1,000,150,000 shares authorized, issued and outstanding
    144,216       144,216  
Stockholders' Equity:
               
Preferred stock:
               
Series C, stated at redemption/liquidation value, $1,000 per share, 75,000 shares authorized, 40,000 and 9,200 issued and outstanding as of June 30, 2009 and December 31, 2008, respectively
    40,000       9,200  
Common stock:
               
Class A Voting, $1 par value, no maximum authorization
    1,031       1,031  
Class B Voting, $1 par value, no maximum authorization
    500       500  
Class C Non-Voting, $1 par value, no maximum authorization
    8,607       8,601  
Additional paid-in capital
    95,961       95,572  
Accumulated other comprehensive loss
    (12,546 )     (47,412 )
Retained earnings/(accumulated deficit)
    5,745       (52,144 )
Total Stockholders' Equity
    139,298       15,348  
Total Liabilities, Mezzanine Equity and Stockholders' Equity
  $ 5,322,684     $ 5,107,307  

See accompanying notes to condensed consolidated financial statements.
-3-

 
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2009
   
June 30, 2008
   
June 30, 2009
   
June 30, 2008
 
   
(in thousands, except per share amounts)
 
Interest income:
                       
Investments and cash equivalents
  $ 7,049     $ 35,402     $ 15,958     $ 76,910  
Farmer Mac Guaranteed Securities
    25,805       19,767       53,564       38,537  
Loans
    8,896       11,643       19,381       23,474  
Total interest income
    41,750       66,812       88,903       138,921  
Total interest expense
    21,849       42,454       45,562       96,625  
Net interest income
    19,901       24,358       43,341       42,296  
Recoveries for loan losses
    5,693       -       2,159       -  
Net interest income after provision for loan losses
    25,594       24,358       45,500       42,296  
                                 
Non-interest income/(loss):
                               
Guarantee and commitment fees
    7,908       6,659       15,318       13,293  
Gains/(losses) on financial derivatives
    21,528       31,050       23,239       (10,670 )
Gains/(losses) on trading assets
    35       (17,268 )     31,660       (7,157 )
Other-than-temporary impairment - credit losses
    (2,292 )     (5,344 )     (2,373 )     (5,344 )
(Losses)/gains on sale of available-for-sale investment securities
    (300 )     150       2,850       150  
Gains on sale of loans and Farmer Mac Guaranteed Securities
    -       -       1,581       -  
Other income
    101       662       335       1,123  
Non-interest income/(loss)
    26,980       15,909       72,610       (8,605 )
                                 
Non-interest expense:
                               
Compensation and employee benefits
    3,572       3,929       7,597       7,579  
General and administrative
    2,986       2,242       5,900       4,270  
Regulatory fees
    512       512       1,025       1,025  
Real estate owned operating costs, net
    (16 )     38       5       87  
(Recoveries)/provision for losses
    (529 )     -       1,990       -  
Non-interest expense
    6,525       6,721       16,517       12,961  
Income before income taxes
    46,049       33,546       101,593       20,730  
Income tax expense
    16,534       11,555       34,624       6,436  
Net income
    29,515       21,991       66,969       14,294  
Preferred stock dividends
    (4,130 )     (560 )     (8,066 )     (1,120 )
Net income available to common stockholders
  $ 25,385     $ 21,431     $ 58,903     $ 13,174  
                                 
Earnings per common share and dividends:
                               
Basic earnings per common share
  $ 2.50     $ 2.15     $ 5.81     $ 1.33  
Diluted earnings per common share
  $ 2.49     $ 2.13     $ 5.80     $ 1.31  
Common stock dividends per common share
  $ 0.05     $ 0.10     $ 0.10     $ 0.20  

See accompanying notes to condensed consolidated financial statements.
 
-4-

 
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
   
Six Months Ended
 
   
June 30, 2009
   
June 30, 2008
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
  $ 66,969     $ 14,294  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization of premiums and discounts on loans, investments and Farmer Mac Guaranteed Securities
    2,207       2,752  
Amortization of debt premiums, discounts and issuance costs
    8,116       47,430  
Proceeds from repayment and sale of trading investment securities
    472       628  
Purchases of loans held for sale
    (53,045 )     (30,685 )
Proceeds from repayment of loans held for sale
    16,117       5,792  
Net change in fair value of trading securities and financial derivatives
    (77,939 )     7,408  
Amortization of SFAS 133 transition adjustment on financial derivatives
    89       156  
Other-than-temporary impairment - credit losses
    2,373       5,344  
Gains on sale of loans and Farmer Mac Guaranteed Securities
    (1,581 )     (150 )
Gains on sale of available-for-sale investment securities
    (2,850 )     -  
Total provision for losses
    (169 )     -  
Deferred income taxes
    37,164       (3,537 )
Stock-based compensation expense
    1,543       2,284  
Decrease in interest receivable
    19,262       15,503  
Decrease in guarantee and commitment fees receivable
    5,026       2,181  
Decrease in other assets
    42,734       131  
Decrease in accrued interest payable
    (1,711 )     (2,071 )
Decrease in other liabilities
    (7,686 )     (8,122 )
Net cash provided by operating activities
    57,091       59,338  
Cash flows from investing activities:
               
Purchases of available-for-sale investment securities
    -       (1,017,845 )
Purchases of Farmer Mac Guaranteed Securities
    (949,480 )     (221,053 )
Purchases of loans held for investment
    (14,670 )     (60,621 )
Purchases of defaulted loans
    (5,602 )     (1,189 )
Proceeds from repayment of available-for-sale investment securities
    129,265       296,048  
Proceeds from repayment of Farmer Mac Guaranteed Securities
    137,572       152,670  
Proceeds from repayment of loans
    34,252       65,262  
Proceeds from sale of available-for-sale investment securities
    153,100       288,275  
Proceeds from sale of loans held
    358,953       -  
Proceeds from sale of Farmer Mac Guaranteed Securities
    17,224       13,876  
Net cash used in investing activities
    (139,386 )     (484,577 )
Cash flows from financing activities:
               
Proceeds from issuance of discount notes
    27,760,730       74,710,734  
Proceeds from issuance of medium-term notes
    2,074,185       1,011,944  
Payments to redeem discount notes
    (27,974,911 )     (73,636,115 )
Payments to redeem medium-term notes
    (1,715,000 )     (1,050,000 )
Tax benefit from tax deductions in excess of compensation cost recognized
    -       175  
Proceeds from common stock issuance
    17       3,368  
Purchases of common stock
    -       (830 )
Proceeds from preferred stock issuance
    30,800       -  
Dividends paid
    (9,080 )     (3,108 )
Net cash provided by financing activities
    166,741       1,036,168  
Net increase in cash and cash equivalents
    84,446       610,929  
Cash and cash equivalents at beginning of period
    278,412       101,445  
Cash and cash equivalents at end of period
  $ 362,858     $ 712,374  

See accompanying notes to condensed consolidated financial statements.
 
-5-


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1.
Accounting Policies

The interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations and cash flows of Farmer Mac for the interim periods presented.  Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations.  The December 31, 2008 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2008 consolidated financial statements.  Management believes that the disclosures are adequate to present fairly the condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows as of the dates and for the periods presented.  These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2008 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009.  Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.  Below is a summary of Farmer Mac’s significant accounting policies.

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

Farmer Mac considers highly liquid investment securities with original maturities of three months or less at the time of purchase to be cash equivalents.  Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows.  The following table sets forth information regarding certain cash and non-cash transactions for the six months ended June 30, 2009 and 2008.
 
-6-


   
For the Six Months Ended
 
   
June 30, 2009
   
June 30, 2008
 
   
(in thousands)
 
Cash paid for:
           
Interest
  $ 42,465     $ 57,410  
Income taxes
    10,000       21,500  
Non-cash activity:
               
Transfer of loans held for investment to real estate owned
    40,955      
-
 
Loans acquired and securitized as Farmer Mac Guaranteed Securities
    17,224       1,390  
Transfers of investment securities from available-for-sale to  trading from the effect of adopting SFAS 159
   
-
      600,468  
Transfers of Farmer Mac II Guaranteed Securities from held-to-maturity to trading from the effect of adopting SFAS 159
   
-
      428,670  
Transfers of available-for-sale investment securities to available-for-sale Farmer Mac Guaranteed Securities - Rural Utilities
   
-
      902,420  
Transfers of trading investment securities to trading Farmer Mac Guaranteed Securities - Rural Utilities
   
-
      459,026  
Transfers of Farmer Mac I Guaranteed Securities to loans held for sale
    288,012      
-
 
Transfers of loans held for investment to loans held for sale
    617,072      
-
 

(b)    Allowance for Losses

As of June 30, 2009, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held and loans underlying LTSPCs, Farmer Mac I Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS 5”) and Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended (“SFAS 114”).

The allowance for losses is increased through periodic provisions for loan losses that are charged against net interest income and provisions for losses that are charged to non-interest expense and is reduced by charge-offs for actual losses, net of recoveries.  Negative provisions, 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.

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:
 
-7-

 
 
·
economic conditions;
 
·
geographic and agricultural commodity/product concentrations in the portfolio;
 
·
the credit profile of the portfolio;
 
·
delinquency trends of the portfolio;
 
·
historical charge-off and recovery activities of the portfolio; and
 
·
other factors to capture current portfolio trends and characteristics that differ from historical experience.

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

Farmer Mac also analyzes impaired assets in its portfolio for impairment under SFAS 114.  Farmer Mac’s impaired assets include:
 
 
·
non-performing assets (loans 90 days or more past due, in foreclosure, restructured, in bankruptcy – including loans performing under either their original loan terms or a court-approved bankruptcy plan);
 
·
loans for which Farmer Mac had adjusted the timing of borrowers’ payment schedules, but still expects to collect all amounts due and has not made economic concessions; and
 
·
additional performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress.

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

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 and Farmer Mac Guaranteed Securities - Rural Utilities in accordance with SFAS 5 and SFAS 114.
 
-8-


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

   
June 30, 2009
   
June 30, 2008
 
   
Allowance
         
Total
   
Allowance
         
Total
 
   
for Loan
   
Reserve
   
Allowance
   
for Loan
   
Reserve
   
Allowance
 
   
Losses
   
for Losses
   
for Losses
   
Losses
   
for Losses
   
for Losses
 
   
(in thousands)
   
(in thousands)
 
For the Three Months Ended:
                                   
Beginning balance
  $ 13,228     $ 8,025     $ 21,253     $ 1,651     $ 2,197     $ 3,848  
Provision/(recovery) for losses
    (5,693 )     (529 )     (6,222 )     -       -       -  
Charge-offs
    (5,725 )     -       (5,725 )     (69 )     -       (69 )
Recoveries
    -       -       -       10       -       10  
Ending balance
  $ 1,810     $ 7,496     $ 9,306     $ 1,592     $ 2,197     $ 3,789  
                                                 
For the Six Months Ended:
                                               
Beginning balance
  $ 10,929     $ 5,506     $ 16,435     $ 1,690     $ 2,197     $ 3,887  
Provision/(recovery) for losses
    (2,159 )     1,990       (169 )     -       -       -  
Charge-offs
    (7,725 )     -       (7,725 )     (108 )     -       (108 )
Recoveries
    765       -       765       10       -       10  
Ending balance
  $ 1,810     $ 7,496     $ 9,306     $ 1,592     $ 2,197     $ 3,789  

No allowance for losses has been provided for loans underlying AgVantage securities or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”).  Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security.  As of June 30, 2009, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the credit quality of the obligors, as well as the underlying collateral.  As of June 30, 2009, Farmer Mac had not experienced any credit losses on any AgVantage securities.  The guaranteed portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the United States Department of Agriculture (“USDA”).  Each USDA guarantee is an obligation backed by the full faith and credit of the United States.  As of June 30, 2009, Farmer Mac had not experienced any credit losses on any Farmer Mac II Guaranteed Securities.
 
-9-


The table below summarizes the components of Farmer Mac’s allowance for losses as of June 30, 2009 and December 31, 2008:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
       
Allowance for loan losses
  $ 1,810     $ 10,929  
Reserve for losses:
                                                                        
On-balance sheet Farmer Mac I Guaranteed Securities
    -       869  
Off-balance sheet Farmer Mac I Guaranteed Securities
    1,703       535  
LTSPCs
    5,793       4,102  
Farmer Mac Guaranteed Securities - Rural Utilities
    -       -  
Total
  $ 9,306     $ 16,435  

As of June 30, 2009, Farmer Mac individually analyzed $112.1 million of its $152.8 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values.  Farmer Mac evaluated the remaining $40.7 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 June 30, 2009 and $8.6 million as of December 31, 2008.  Farmer Mac’s non-specific or general allowances were $7.8 million as of both June 30, 2009 and December 31, 2008.

Farmer Mac recognized interest income of approximately $0.6 million and $1.7 million on impaired loans during the three and six months ended June 30, 2009, respectively, compared to $0.9 million and $2.1 million, respectively, during the same periods in 2008.  During the three and six months ended June 30, 2009, Farmer Mac’s average investment in impaired loans was $142.4 million and $136.2 million, respectively, compared to $43.6 million and $41.3 million, respectively, for the same periods in 2008.

(c)    Financial Derivatives

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes.  Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term mortgage and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market.  Farmer Mac also recognizes certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative as promulgated by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”).
 
-10-


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

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

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

   
June 30, 2009
 
                                       
Weighted-
 
                     
Weighted-
   
Weighted-
   
Weighted-
   
Average
 
                     
Average
   
Average
   
Average
   
Remaining
 
   
Notional
   
Fair Value
   
Pay
   
Receive
   
Forward
   
Life
 
   
Amount
   
Asset
   
(Liability)
   
Rate
   
Rate
   
Price
   
(in years)
 
   
(dollars in thousands)
 
Interest rate swaps:
                                         
Pay fixed callable
  $ 129,980     $ -     $ (3,037 )     5.61 %     0.95 %           7.74  
Pay fixed non-callable
    1,207,273       -       (109,117 )     5.17 %     0.89 %           5.20  
Receive fixed callable
    300,000       441       -       0.79 %     1.36 %           0.95  
Receive fixed non-callable
    2,680,559       15,326       (9,674 )     0.87 %     1.80 %           2.16  
Basis swaps
    277,474       422       (3,411 )     2.29 %     1.15 %           3.04  
Agency forwards
    30,142       -       (203 )                     98.47          
Treasury futures
    2,400       1       -                       116.33          
Credit valuation adjustment
    -       (738 )     2,156                                  
Total financial derivatives
  $ 4,627,828     $ 15,452     $ (123,286 )     2.21 %     1.47 %                

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

-11-


In the normal course of business, collateral requirements contained in Farmer Mac’s derivative contracts are enforced by Farmer Mac and its counterparties.  Upon enforcement of the collateral requirements, the amount of collateral posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e., derivative assets net of derivative liabilities at the counterparty level.  If Farmer Mac were to be in violation of certain provisions of the derivative contracts, the related counterparty could request payment or full collateralization on the derivative contracts.  As of June 30, 2009, the fair value of Farmer Mac’s derivatives in a net liability position at the counterparty level, which includes accrued interest but excludes any adjustment for nonperformance risk, was $126.3 million.  As of June 30, 2009, Farmer Mac posted assets with a fair value of $49.4 million as collateral for its derivatives in net liability positions.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2009, it could have been required to settle its obligations under the agreements or post additional collateral of $76.9 million.

The following table summarizes the effects of Farmer Mac’s financial derivatives on the condensed consolidated statements of operations for the three and six months ended June 30, 2009 and 2008:
 
   
Gains/(Losses) on Financial Derivatives
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30, 2009
   
June 30, 2008
   
June 30, 2009
   
June 30, 2008
 
   
(in thousands)
 
       
Interest rate swaps
  $ 21,720     $ 30,582     $ 24,380     $ (10,566 )
Agency forwards
    (199 )     534       (1,078 )     215  
Treasury futures
    84       57       75       (85 )
      21,605       31,173       23,377       (10,436 )
Amortization of SFAS 133 transition adjustment
    (77 )     (123 )     (138 )     (234 )
Total
  $ 21,528     $ 31,050     $ 23,239     $ (10,670 )

As of June 30, 2009 and December 31, 2008, respectively, Farmer Mac had approximately $0.1 million and $0.2 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive loss related to the SFAS 133 transition adjustment.  These amounts will be reclassified into earnings in the same period or periods during which the hedged forecasted transactions (either the payment of interest or the issuance of discount notes) affect earnings or immediately when it becomes probable that the original hedged forecasted transaction will not occur within two months of the originally specified date.  Over the next 12 months, Farmer Mac estimates that $0.1 million of the amount currently reported in accumulated other comprehensive loss will be reclassified into earnings.

-12-

 
As of June 30, 2009, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with total notional amount of $120.5 million and a fair value of $(3.4) million.  As of December 31, 2008, those basis swaps had a total notional amount of $131.9 million and a fair value of $(3.7) million.  Under the terms of those basis swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR.  Those swaps economically hedge most of the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant Maturity Treasury based-rate and the discount notes Farmer Mac issues to fund the loan purchases.  The pricing of discount notes is closely correlated to LIBOR rates.  Farmer Mac recorded unrealized gains of $0.8 million and $0.3 million on those outstanding basis swaps for the three and six months ended June 30, 2009, respectively, compared to an unrealized gain of $2.1 million and an unrealized loss of $0.4 million, respectively, for the same periods in 2008.

(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 and six months ended June 30, 2009 and 2008:

   
For the Three Months Ended
 
   
June 30, 2009
   
June 30, 2008
 
   
Net
         
$ per
   
Net
         
$ per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(in thousands, except per share amounts)
Basic EPS
                                   
Net income available to common stockholders
  $ 25,385       10,138     $ 2.50     $ 21,431       9,964     $ 2.15  
Effect of dilutive securities:
                                               
Stock options, SARs and nonvested shares (1)
            38       (0.01 )             108       (0.02 )
Diluted EPS
  $ 25,385       10,176     $ 2.49     $ 21,431       10,072     $ 2.13  

(1) 
For the three months ended June 30, 2009 and 2008, stock options, SARs and nonvested shares of 1,862,829 and 1,546,664, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive.

   
For the Six Months Ended
 
   
June 30, 2009
   
June 30, 2008
 
   
Net
         
$ per
   
Net
         
$ per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(in thousands, except per share amounts)
 
Basic EPS
                                   
Net income available to common stockholders
  $ 58,903       10,136     $ 5.81     $ 13,174       9,916     $ 1.33  
Effect of dilutive securities:
                                               
Stock options, SARs and nonvested shares (1)
            19       (0.01 )             112       (0.02 )
Diluted EPS
  $ 58,903       10,155     $ 5.80     $ 13,174       10,028     $ 1.31  

(1) 
For the six months ended June 30, 2009 and 2008, stock options, SARs and nonvested shares of 1,881,885 and 1,385,929, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive.
 
-13-


(e)    Stock-Based Compensation

In 1997, Farmer Mac adopted a stock option plan for directors, officers and other employees to acquire shares of Class C Non-Voting Common Stock.  Upon stock option exercise, new shares are issued by the Corporation.  Under the plan, stock options awarded vest annually in thirds, with the first third vesting one year after the date of grant.  If not exercised, any options granted under the 1997 plan expire ten years from the date of grant, except that options issued to directors since June 1, 1998, if not exercised, expire five years from the date of grant.  For all stock options granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on or immediately preceding the date of grant.  As of June 30, 2008, the plan had terminated pursuant to its terms and no further grants will be made under it.

During 2008, Farmer Mac’s stockholders approved the 2008 Omnibus Incentive Compensation Plan that authorizes the grants of restricted stock, stock options and SARs, among other alternative forms of equity-based compensation, to directors, officers and other employees.  SARs awarded to officers and employees vest annually in thirds and SARs awarded to directors vest fully after approximately one year.  If not exercised or terminated earlier due to the termination of employment or service on the Board, SARs granted to officers or employees expire after ten years and those granted to directors expire after seven years.  For all SARs granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on the date of grant.  SARs granted during June 2009 have an exercise price of $5.93 per share.  Restricted stock was awarded to directors in June 2009 and vests fully after approximately one year.  Restricted stock awarded to officers vests after approximately three years and only vests if certain performance conditions are met.  Restricted stock awards granted to both directors and officers are not issued until full vesting occurs.

For the three and six months ended June 30, 2009, Farmer Mac recognized $0.9 million and $1.6 million, respectively, of compensation expense related to stock options, SARs, and restricted stock awards compared to $1.4 million and $2.3 million for the same periods in 2008.

The following tables summarize activity related to stock options, SARs and nonvested restricted share awards for the three and six months ended June 30, 2009 and 2008:
 
-14-

 
   
June 30, 2009
   
June 30, 2008
 
   
Stock
   
Weighted-
   
Stock
   
Weighted-
 
   
Options
   
Average
   
Options
   
Average
 
   
and
   
Exercise
   
and
   
Exercise
 
   
SARs
   
Price
   
SARs
   
Price
 
For the Three Months Ended:
                       
Outstanding, beginning of period
    1,697,829     $ 24.66       2,218,199     $ 25.48  
Granted
    165,000       5.93       339,770       28.92  
Exercised
    -       -       (157,966 )     21.05  
Canceled
    (106,864 )     22.12       (18,500 )     28.79  
Outstanding, end of period
    1,755,965     $ 23.06       2,381,503     $ 26.24  
                                 
For the Six Months Ended:
                               
Outstanding, beginning of period
    2,237,711     $ 25.54       2,218,199     $ 25.48  
Granted
    165,000       5.93       339,770       28.92  
Exercised
    -       -       (157,966 )     21.05  
Canceled
    (646,746 )     27.28       (18,500 )     28.79  
Outstanding, end of period
    1,755,965     $ 23.06       2,381,503     $ 26.24  
                                 
Stock Options and SARs exercisable at the end of the period
    1,349,258     $ 25.51       1,597,527     $ 25.06  

   
June 30, 2009
   
June 30, 2008
 
         
Weighted-
         
Weighted-
 
         
Average
         
Average
 
   
Nonvested
   
Grant-date
   
Nonvested
   
Grant-date
 
   
Shares
   
Fair Value
   
Shares
   
Fair Value
 
For the Three Months Ended:
                       
Nonvested at beginning of period
    -     $ -       -     $ -  
Granted
    200,548       5.93       -       -  
Canceled
    -       -       -       -  
Nonvested at end of period
    200,548     $ 5.93       -     $ -  
                                 
For the Six Months Ended:
                               
Nonvested at beginning of period
    -     $ -       -     $ -  
Granted
    200,548       5.93       -       -  
Canceled
    -       -       -       -  
Nonvested at end of period
    200,548     $ 5.93       -     $ -  

The cancellations of stock options during the first six months of 2009 and 2008 were due to unvested options or SARs terminating and the cancellation of a portion of vested options upon employee and officers’ departures from Farmer Mac.  There were no stock options or SARs exercised during the first six months of 2009 and 157,966 shares were exercised during the first six months of 2008.

-15-

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

   
Outstanding
   
Exercisable
   
Vested or Expected to Vest
 
         
Weighted-
         
Weighted-
         
Weighted-
 
   
Stock
   
Average
   
Stock
   
Average
   
Stock
   
Average
 
 Range of 
 
Options
   
Remaining
   
Options
   
Remaining
   
Options
   
Remaining
 
 Exercise 
 
and
   
Contractual
   
and
   
Contractual
   
and
   
Contractual
 
 Prices
 
SARs
   
Life
   
SARs
   
Life
   
SARs
   
Life
 
                                     
 $5.00 - $ 9.99
    255,000    
9.7 years
     
-
     
-
      229,500    
9.7 years
 
 10.00 - 14.99
   
-
     
-
     
-
     
-
     
-
     
-
 
 15.00 - 19.99
    81,722    
4.7 years
      81,722    
4.7 years
      81,722    
4.7 years
 
 20.00 - 24.99
    552,088    
4.8 years
      541,249    
4.8 years
      548,836    
4.8 years
 
 25.00 - 29.99
    653,487    
5.3 years
      528,622    
4.8 years
      637,734    
5.3 years
 
 30.00 - 34.99
    213,668    
2.6 years
      197,665    
2.2 years
      208,867    
2.5 years
 
                                                                        
      1,755,965               1,349,258               1,706,659          

   
Outstanding
   
Expected to Vest
             
         
Weighted-
         
Weighted-
             
Weighted-
       
Average
         
Average
             
Average
       
Remaining
         
Remaining
             
Grant-Date
 
Nonvested
   
Contractual
   
Nonvested
   
Contractual
             
Fair Value
 
Shares
   
Life
   
Shares
   
Life
             
                                       
$    5.93
    200,548    
1.6 years
      180,493    
1.6 years
                 
                                               
The weighted-average grant date fair value of options and SARs granted during the six months ended 2009 and 2008 was $4.12 and $11.33 per share, respectively.  The weighted-average grant date fair value of nonvested shares granted during the six months ended 2009 was $5.93 per share.  There were no nonvested shares granted in 2008.  The fair values were estimated using the Black-Scholes option pricing model based on the following assumptions:

   
SARs and Stock Options
 
   
2009
   
2008
 
Risk-free interest rate
    1.5 %     2.5 %
Expected years until exercise
 
7 years
   
6 years
 
Expected stock volatility
    104.3 %     43.2 %
Dividend yield
    3.4 %     1.4 %
                 
   
Nonvested Shares
 
   
2009
   
2008
 
Risk-free interest rate
    1.5 %    
-
 
Expected years until vesting
 
3 years
     
-
 
Expected stock volatility
    104.3 %    
-
 
Dividend yield
    0.0 %    
-
 

-16-

 
(f)     Reclassifications

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

(g)    Fair Value

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

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

Effective January 1, 2008, Farmer Mac adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 provides companies an irrevocable option to report financial instruments at fair value with changes in fair value recorded in earnings as they occur.  On January 1, 2008, Farmer Mac recorded a cumulative effect of adoption adjustment of $12.1 million, net of tax, as an increase to the beginning balance of retained earnings.  The fair value option election was made for certain available-for-sale investment securities and certain Farmer Mac II Guaranteed Securities that were classified as held-to-maturity on January 1, 2008.

See Note 7 for more information regarding fair value measurement.
 
-17-


(h)    New Accounting Standards

In April 2009, the FASB issued three final FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.  FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157.  FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures.  FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.  The FSPs are effective for interim and annual periods ending after June 15, 2009.  Farmer Mac adopted the FSPs for the interim period ending June 30, 2009.  Farmer Mac’s adoption of this guidance did not have a material impact on its financial condition, results of operations or cash flows.  Farmer Mac held no debt securities at the beginning of the interim period for which an other-than-temporary impairment was previously recognized.  Accordingly, a cumulative effect of adoption adjustment was not recognized.

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

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events.  This statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Entities are required to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected.  This statement is effective for interim or annual financial periods ending after June 15, 2009.  Farmer Mac’s adoption of this guidance did not have a material impact on its financial condition, results of operations or cash flows.  Farmer Mac evaluated subsequent events through August 10, 2009.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”) and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”).  These statements address amendments to Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) and to FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46(R)”).  The two FASB statements are effective for fiscal years beginning after November 15, 2009.  The statements, amending SFAS 140 and FIN 46(R), remove the concept of a qualifying special-purpose entity (“QSPE”) from SFAS 140 and remove the exception from applying FIN 46(R) to QSPEs.  Although Farmer Mac is currently evaluating the impact of these new accounting standards, Farmer Mac believes adoption of SFAS 166 and SFAS 167 will result in the consolidation of assets and liabilities onto Farmer Mac’s balance sheet in connection with trusts that currently qualify for the QSPE exception.  Additionally, interest income and interest expense related to the consolidated assets and liabilities related to the trusts will be reflected in the statement of operations.  Farmer Mac expects it will be required to hold additional capital as a result of adopting SFAS 166 and SFAS 167; however, Farmer Mac believes it will have adequate capital to remain in compliance with regulatory capital requirements.

-18-


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

Note 2.
Investments

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

   
June 30, 2009
 
   
Amortized
   
Unrealized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
   
(in thousands)
 
Available-for-sale:
                       
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 74,100     $
-
    $ (5,384 )   $ 68,716  
Floating rate asset-backed securities
    70,394       14       (288 )     70,120  
Floating rate corporate debt securities
    349,645      
-
      (13,991 )     335,654  
Floating rate Government/GSE
                               
guaranteed mortgage-backed securities