As filed with the Securities and Exchange Commission on
November 9, 2006 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 

FORM 10-Q/A
Amendment No. 1 to 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, 2006

Commission File Number 0-17440

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 T    No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £
Accelerated filer T
Non-accelerated filer £

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

As of August 1, 2006, the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 9,205,695 shares of Class C Non-Voting Common Stock outstanding.


FEDERAL AGRICULTURAL MORTGAGE CORPORATION
FORM 10-Q/A FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (the “Amendment”) to the Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation (“Farmer Mac”) for the quarterly period ended June 30, 2006, initially filed with the Securities and Exchange Commission on August 9, 2006 (the “Original Filing”) is being filed to amend and restate financial and other information contained in Item 1 (Condensed Consolidated Financial Statements), Item 2 (Management’s Discussion and Analysis of Operating Results and Financial Condition), Item 3 (Quantitative and Qualitative Disclosures About Market Risk) and Item 4 (Controls and Procedures) of Part I, and Item 6 (Exhibits) of Part II of the Original Filing.

This Amendment restates the Corporation’s unaudited interim condensed consolidated financial statements as of June 30, 2006 and December 31, 2005 and for the three and six months ended June 30, 2006 and 2005. The Corporation is concurrently filing amendments to (1)  its Form 10-K for the year ended December 31, 2005 to restate the Corporation’s consolidated financial statements as of December 31, 2005 and 2004, and for the years ended December 31, 2005, 2004 and 2003, and other financial information as of and for the years ended December 31, 2002 and 2001 and the quarterly unaudited data for 2005 and 2004 and (2) its Form 10-Q for the quarter ended March 31, 2006 to restate the quarterly unaudited interim consolidated financial statements and other financial information contained in that report. In this regard, investors should rely on the restated financial results for the years and each of the quarters in the years 2005, 2004, 2003, 2002 and 2001 and the first and second quarters of 2006 and, as the Corporation previously reported on Form 8-K on October 6, 2006, should not rely on the Corporation’s previously issued consolidated financial statements and other financial information for these reporting periods.

The Corporation, in light of SEC staff comments, has recently concluded a reassessment of its documentation and accounting treatment of financial derivative transactions under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), interpretations of which have evolved. Based on the reassessment, while the transactions engaged in by the Corporation were highly effective economic hedges of interest rate risk, the Corporation has determined that it was not appropriately applying hedge accounting in accordance with SFAS 133. See “Note 6 - Restatement of Condensed Consolidated Financial Statements” in Item 1 of Part I and the discussion under the caption “Restatement of Previously Issued Quarterly Financial Statements” in Item 2 of Part I for further information related to the restatement with respect to the hedge accounting that had been employed and the effects of this treatment on the restated consolidated financial statements.

This Amendment also addresses management’s re-evaluation of disclosure controls and procedures and management’s report on internal control over financial reporting resulting from management’s reassessment and identification of a material weakness in internal control over financial reporting relating to Farmer Mac’s accounting for derivatives under SFAS 133. See Item 4 (Controls and Procedures) of Part I for further discussion. New certifications of the principal executive officer and principal financial officer are included as exhibits to this Amendment.

-2-

Except as described above, no attempt has been made in this Amendment to amend or update other disclosures presented in this Form 10-Q/A. Therefore, this Amendment does not reflect events occurring after the filing of the Original Filing or amend or update those disclosures, or related exhibits, affected by subsequent events. Accordingly, this Amendment should be read in conjunction with Farmer Mac’s other filings with the SEC subsequent to the filing of the Original Filing.

-3-

PART I - FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

The following restated 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 annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. The December 31, 2005 consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2005 restated 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 2005 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.

The following information concerning Farmer Mac’s restated interim unaudited condensed consolidated financial statements is included in this report beginning on the pages listed below:

 
Condensed Consolidated Balance Sheets (as restated) as of June 30, 2006 and December 31, 2005
5
 
Condensed Consolidated Statements of Operations (as restated) for the three and six months ended June 30, 2006 and 2005
6
 
Condensed Consolidated Statements of Cash Flows (as restated) for the six months ended June 30, 2006 and 2005
7
 
Notes to Condensed Consolidated Financial Statements (as restated)
8
 
-4-

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
 
   
June 30,
2006
  
December 31,
2005
  
   
(As Restated)*
  
(As Restated)*
  
Assets:
          
Cash and cash equivalents
  
$
348,951
  
$
458,852
  
Investment securities
    
2,007,895
    
1,621,941
  
Farmer Mac Guaranteed Securities
    
1,303,921
    
1,330,976
  
Loans held for sale
    
54,801
    
41,956
  
Loans held for investment
    
732,334
    
762,436
  
Allowance for loan losses
    
(2,734
)
  
(4,876
)
Loans held for investment, net
    
729,600
    
757,560
  
Real estate owned
    
1,039
    
3,532
  
Financial derivatives
    
23,040
    
8,719
  
Interest receivable
    
63,652
    
67,509
  
Guarantee and commitment fees receivable
    
25,784
    
22,170
  
Deferred tax asset, net
    
2,497
    
3,223
  
Prepaid expenses and other assets
    
6,321
    
25,007
  
Total Assets
  
$
4,567,501
  
$
4,341,445
  
               
Liabilities and Stockholders' Equity:
              
Liabilities:
              
Notes payable:
              
Due within one year
  
$
3,040,620
  
$
2,587,704
  
Due after one year
    
1,186,872
    
1,406,527
  
Total notes payable
    
4,227,492
    
3,994,231
  
               
Financial derivatives
    
21,039
    
29,162
  
Accrued interest payable
    
29,034
    
29,250
  
Guarantee and commitment obligation
    
21,685
    
17,625
  
Accounts payable and accrued expenses
    
13,277
    
21,371
  
Reserve for losses
    
3,518
    
3,777
  
Total Liabilities
    
4,316,045
    
4,095,416
  
               
Stockholders' Equity:
              
Preferred stock:
              
Series A, stated at redemption/liquidation value, $50 per share, 700,000 shares authorized, issued and outstanding
    
35,000
    
35,000
  
Common stock:
              
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares issued and outstanding
    
1,031
    
1,031
  
Class B Voting, $1 par value, no maximum authorization, 500,301 shares issued and outstanding
    
500
    
500
  
Class C Non-Voting, $1 par value, no maximum authorization, 9,361,305 and 9,559,554 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
    
9,361
    
9,560
  
Additional paid-in capital
    
83,740
    
83,058
  
Accumulated other comprehensive income
    
(176
)
  
15,247
  
Retained earnings
    
122,000
    
101,633
  
Total Stockholders' Equity
    
251,456
    
246,029
  
Total Liabilities and Stockholders' Equity
  
$
4,567,501
  
$
4,341,445
  

See accompanying notes to condensed consolidated financial statements.

*
See Note 6 to the condensed consolidated financial statements
 
-5-

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)


   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
   
(As Restated)*
  
(As Restated)*
  
(As Restated)*
  
(As Restated)*
  
Interest income:
                  
Investments and cash equivalents
  
$
30,298
  
$
14,765
  
$
56,996
  
$
27,352
  
Farmer Mac Guaranteed Securities
    
18,953
    
18,672
    
36,990
    
36,999
  
Loans
    
11,847
    
11,470
    
23,230
    
23,591
  
Total interest income
    
61,098
    
44,907
    
117,216
    
87,942
  
Interest expense
    
51,020
    
31,966
    
96,471
    
61,120
  
Net interest income
    
10,078
    
12,941
    
20,745
    
26,822
  
Recovery/(provision) for loan losses
    
594
    
203
    
1,606
    
787
  
                           
Net interest income after recovery/(provision) for loan losses
    
10,672
    
13,144
    
22,351
    
27,609
  
                           
Guarantee and commitment fees
    
5,288
    
4,889
    
10,337
    
9,845
  
Gains/(losses) on financial derivatives and trading assets
    
9,908
    
(14,562
)
  
21,608
    
(4,697
)
Gains/(losses) on the sale of real estate owned
    
304
    
(67
)
  
514
    
(80
)
Representation and warranty claims income
    
718
    
-
    
718
    
79
  
Other income
    
58
    
367
    
227
    
687
  
Total revenues
    
26,948
    
3,771
    
55,755
    
33,443
  
Expenses:
                          
Compensation and employee benefits
    
2,673
    
1,899
    
5,577
    
3,675
  
General and administrative
    
2,577
    
2,275
    
5,335
    
4,264
  
Regulatory fees
    
588
    
576
    
1,175
    
1,152
  
Real estate owned operating costs, net
    
22
    
59
    
137
    
37
  
Provision/(recovery) for losses
    
592
    
(91
)
  
(104
)
  
(192
)
Total operating expenses
    
6,452
    
4,718
    
12,120
    
8,936
  
Income/(loss) before income taxes
    
20,496
    
(947
)
  
43,635
    
24,507
  
Income tax expense/(benefit)
    
6,559
    
(944
)
  
14,046
    
7,565
  
Net income/(loss)
    
13,937
    
(3
)
  
29,589
    
16,942
  
Preferred stock dividends
    
(560
)
  
(560
)
  
(1,120
)
  
(1,120
)
Net income/(loss) available to common stockholders
  
$
13,377
  
$
(563
)
$
28,469
  
$
15,822
  
                           
Earnings per common share:
                          
Basic earnings (loss) per common share
  
$
1.21
  
$
(0.05
)
$
2.57
  
$
1.37
  
Diluted earnings (loss) per common share
  
$
1.18
  
$
(0.05
)
$
2.50
  
$
1.36
  
Common stock dividends per common share
  
$
0.10
  
$
0.10
  
$
0.20
  
$
0.20
  
 
See accompanying notes to condensed consolidated financial statements.

*
See Note 6 to the condensed consolidated financial statements
 
-6-

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands) 
 
   
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
   
(As Restated)*
  
(As Restated)*
  
Cash flows from operating activities:
          
Net income
  
$
29,589
  
$
16,942
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Net (accretion)/amortization of investment premiums and discounts
    
(1,237
)
  
1,267
 
Net amortization of debt premiums, discounts and issuance costs
    
58,220
   
26,960
 
Proceeds from repayment of trading investment securities
    
1,001
   
1,525
 
Purchases of loans held for sale
    
(31,316
)
  
(27,781
)
Proceeds from repayment of loans held for sale
    
5,344
   
6,643
 
Net change in fair value of trading securities and financial derivatives
    
(22,420
)
  
(5,472
)
Amortization of SFAS 133 transition adjustment on financial derivatives
    
298
   
377
 
(Gains)/losses on the sale of real estate owned
    
(514
)
  
80
 
Total (recovery)/provision for losses
    
(1,711
)
  
(979
)
Deferred income taxes
    
1,527
   
(1,769
)
Stock-based compensation expense
    
955
   
-
 
Decrease in interest receivable
    
3,857
   
8,323
 
Decrease/(increase) in guarantee and commitment fees receivable
    
(3,614
)
  
759
 
Decrease/(increase) in other assets
    
28,794
   
1,807
 
Increase in accrued interest payable
    
(216
)
  
(2,747
)
Decrease in other liabilities
    
(9,086
)
  
(3,436
)
Net cash provided by operating activities
    
59,471
   
22,499
 
               
Cash flows from investing activities:
              
Purchases of available-for-sale investment securities
    
(1,913,573
)
  
(1,026,241
)
Purchases of Farmer Mac II Guaranteed Securities and
              
AgVantage Farmer Mac Guaranteed Securities
    
(108,600
)
  
(92,834
)
Purchases of loans held for investment
    
(25,058
)
  
(11,141
)
Purchases of defaulted loans
    
(4,565
)
  
(3,804
)
Proceeds from repayment of investment securities
    
1,524,967
   
899,988
 
Proceeds from repayment of Farmer Mac Guaranteed Securities
    
117,990
   
127,460
 
Proceeds from repayment of loans
    
68,426
   
69,781
 
Proceeds from sale of loans and Farmer Mac Guaranteed Securities
    
3,033
   
22,012
 
Proceeds from sale of real estate owned
    
2,819
   
572
 
Net cash used in investing activities
    
(334,561
)
  
(14,207
)
               
Cash flows from financing activities:
              
Proceeds from issuance of discount notes
    
37,272,236
   
22,405,440
 
Proceeds from issuance of medium-term notes
    
117,200
   
204,183
 
Payments to redeem discount notes
   
(37,100,394
)
  
(22,304,773
)
Payments to redeem medium-term notes
    
(114,000
)
  
(339,840
)
Tax benefit from tax deductions in excess of compensation cost recognized
    
348
   
-
 
Proceeds from common stock issuance
    
2,112
   
650
 
Purchases of common stock
    
(8,974
)
  
(10,965
)
Dividends paid
    
(3,339
)
  
(3,416
)
Net cash provided by/(used in) financing activities
    
165,189
   
(48,721
)
Net decrease in cash and cash equivalents
    
(109,901
)
  
(40,429
)
               
Cash and cash equivalents at beginning of period
    
458,852
   
430,504
 
Cash and cash equivalents at end of period
  
$
348,951
  
$
390,075
  

See accompanying notes to condensed consolidated financial statements.

*
See Note 6 to the condensed consolidated financial statements

-7-

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1.
Accounting Policies

 
(a)
Cash and Cash Equivalents

Farmer Mac considers highly liquid investment securities with 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, 2006 and 2005.
   
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
   
(in thousands)
  
Cash Paid For
          
Interest
  
$
40,360
  
$
33,295
  
Income taxes
    
4,500
   
6,700
 
Non-cash activity:
              
Real estate owned acquired through foreclosure
    
-
   
460
 
Loans acquired and securitized as Farmer Mac Guaranteed Securities
    
3,033
   
22,012
 
Loans previously under LTSPCs exchanged for Farmer Mac Guaranteed Securities
    
550,114
   
-
 

 
(b)
Allowance for Losses

As of June 30, 2006, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held for investment, real estate owned, and loans underlying long-term standby purchase commitments (“LTSPCs”) and Farmer Mac I Guaranteed Securities issued after the Farm Credit System Reform Act of 1996 (the “1996 Act”) 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 operating expense and is reduced by charge-offs for actual losses, net of recoveries. Negative provisions for loan losses or negative provisions for losses are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.

Historically, Farmer Mac estimated probable losses using a systematic process that began with management’s evaluation of the results of a proprietary loan pool simulation and guarantee fee model. That model drew upon historical information from a data set of agricultural mortgage loans screened to include only those loans with credit characteristics similar to those eligible for Farmer Mac’s programs. The results generated by that model were then modified, as necessary, by the application of management’s judgment.

-8-

During 2005, Farmer Mac completed the planned migration of its methodology for determining its allowance for losses away from one based on its loan pool simulation and guarantee fee model to one based on its own historical portfolio loss experience and credit trends. Farmer Mac recorded the effects of that change as a change in accounting estimate of $4.8 million as of September 30, 2005.

Farmer Mac’s current methodology for determining its allowance for losses incorporates the Corporation’s proprietary automated loan classification system. That system scores loans based on criteria such as historical repayment performance, 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 post-1996 Act 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 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 post-1996 Act Farmer Mac I Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of Farmer Mac’s portfolio to estimate inherent probable 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; and
 
·
historical charge-off and recovery activities of the portfolio.
 
If, based on that evaluation, management concludes that the assumption is not valid due to other more compelling indicators, the loss allowance calculation is modified by the addition of further assumptions to capture current portfolio trends and characteristics that differ from historical experience.

As of June 30, 2006, Farmer Mac concluded that the credit profile of its portfolio was consistent with Farmer Mac’s historical credit profile and trends. Management believes that its use of this methodology produces a reliable estimate of inherent probable losses, as of the balance sheet date, for all loans held, real estate owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs in accordance with SFAS 5 and SFAS 114.

-9-

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, 2006 and 2005:

   
June 30, 2006
  
   
Allowance
for Loan
Losses
  
REO
Valuation
Allowance
  
Reserve
for Losses
  
Total
Allowance
for Losses
  
   
(in thousands)
  
Three Months Ended:
                  
Beginning balance
  
$
3,883
  
$
-
  
$
2,931
  
$
6,814
  
Provision/(recovery) for losses
    
(594
)
  
5
    
587
    
(2
)
Net charge-offs
    
(555
)
  
(5
)
  
-
    
(560
)
Ending balance
  
$
2,734
  
$
-
  
$
3,518
  
$
6,252
  
                           
Six Months Ended:
                          
Beginning balance
  
$
4,876
  
$
-
  
$
3,777
  
$
8,653
  
Provision/(recovery) for losses
    
(1,606
)
  
155
    
(259
)
  
(1,710
)
Net charge-offs
    
(536
)
  
(155
)
  
-
    
(691
)
Ending balance
  
$
2,734
  
$
-
  
$
3,518
  
$
6,252
  

   
June 30, 2005
  
   
Allowance
for Loan
Losses
 
REO
Valuation
Allowance
 
Reserve
for Losses
 
Total
Allowance
for Losses
  
   
(in thousands)
  
Three Months Ended:
                  
Beginning balance
  
$
3,846
  
$
-
  
$
12,485
  
$
16,331
  
Provision for losses
    
(203
)
  
-
    
(91
)
  
(294
)
Net recoveries
    
27
    
-
    
-
    
27
  
Ending balance
  
$
3,670
  
$
-
  
$
12,394
  
$
16,064
  
                           
Six Months Ended:
                          
Beginning balance
  
$
4,395
  
$
-
  
$
12,706
  
$
17,101
  
Provision/(recovery) for losses
    
(787
)
  
120
    
(312
)
  
(979
)
Net (charge-offs)/recoveries
    
62
    
(120
)
  
-
    
(58
)
Ending balance
  
$
3,670
  
$
-
  
$
12,394
  
$
16,064
  
 
-10-
 
The table below summarizes the components of Farmer Mac’s allowance for losses as of June 30, 2006 and December 31, 2005:
 
   
June 30,
2006
  
December 31,
2005
  
   
(in thousands)
  
Allowance for loan losses
  
$
2,734
  
$
4,876
  
Real estate owned valuation allowance
    
-
   
-
 
Reserve for losses:
              
On-balance sheet Farmer Mac I Guaranteed Securities
    
1,505
   
2,068
 
Off-balance sheet Farmer Mac I Guaranteed Securities
    
1,324
   
1,078
 
LTSPCs
    
689
   
631
 
Total
 
$
6,252
  
$
8,653
  
 
No allowance for losses has been made for loans underlying Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”). Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed first loss subordinated interests, which are expected to exceed the estimated credit losses on those loans. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible mortgage loans. As of June 30, 2006, there were no probable losses inherent in Farmer Mac’s 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, 2006, Farmer Mac had not experienced any credit losses on any Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed Securities and does not expect to incur any such losses in the future.

As of June 30, 2006, Farmer Mac individually analyzed $30.8 million of its $68.8 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $38.0 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics. Of the $30.8 million of assets analyzed individually, $29.4 million were adequately collateralized. For the $1.4 million of assets that were not adequately collateralized, individual collateral shortfalls totaled $15,000. Accordingly, Farmer Mac recorded specific allowances of $15,000 for those under-collateralized assets as of June 30, 2006. In addition to the specific allowances provided, Farmer Mac’s non-specific or general allowances were $6.2 million as of June 30, 2006.

-11-

The balance of impaired assets, both on- and off-balance sheet, and the related allowance specifically allocated to those impaired assets as of June 30, 2006 and December 31, 2005 are summarized in the following table:

   
June 30, 2006
  
December 31, 2005
  
   
Balance
  
Specific
Allowance
  
Net
Balance
  
Balance
  
Specific
Allowance
  
Net
Balance
  
   
(in thousands)
  
Impaired assets:
                          
Specific allowance for losses
  
$
1,360
  
$
(15
)
$
1,345
  
$
2,445
  
$
(161
)
$
2,284
  
No specific allowance for losses
    
67,412
   
-
   
67,412
   
71,177
   
-
   
71,177
 
Total
  
$
68,772
  
$
(15
)
 $
68,757
  
$
73,622
  
$
(161
)
$
73,461
  

 
(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 and future cash flows or debt 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 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. These transactions also may provide an overall lower effective cost of borrowing than would otherwise be available in the conventional debt market.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”). As discussed in Note 6, 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 and trading assets in the consolidated statements of operations.

The following table summarizes information related to Farmer Mac’s financial derivatives as of June 30, 2006 and December 31, 2005:
 
   
As of June 30, 2006
  
As of December 31, 2005
  
   
Notional
Amount
  
Fair
Value
  
Notional
Amount
  
Fair
Value
  
                   
Interest rate swaps:
                  
Pay-fixed
  
$
774,669
  
$
6,337
  
$
710,678
  
$
(17,228
)
Receive-fixed
    
279,000
   
(12,802
)
  
205,000
   
(5,752
)
Basis
    
372,899
   
8,525
   
389,496
   
2,801
 
Treasury futures
    
11
   
(4
)
  
-
   
-
 
Agency forwards
    
110,026
   
(55
)
  
91,178
   
(264
)
Total
   $
1,536,605
  
$
2,001
   $
1,396,352
  
$
(20,443
)
 
-12-
 
As of June 30, 2006, Farmer Mac had approximately $1.1 million of net after-tax unrealized losses included in accumulated other comprehensive income 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 twelve months, Farmer Mac estimates that $0.5 million of the amount currently reported in accumulated other comprehensive income will be reclassified into earnings.

As of June 30, 2006, Farmer Mac had outstanding basis swaps with a related party with a notional amount of $210.0 million and a fair value of $9.1 million.  See Note 3 “Related Party Transactions” in the Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005, as filed with the SEC on November 9, 2006 for additional information on these related party transactions.  As of December 31, 2005, these swaps had an outstanding notional amount of $225.6 million and a fair value of $3.7 million. 

 
(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. The following schedule reconciles basic and diluted earnings per common share (“EPS”) for the three and six months ended June 30, 2006 and 2005:
 
   
June 30, 2006
  
June 30, 2005
  
   
Basic
EPS
  
Dilutive
stock
options
  
Diluted
EPS
  
Basic
EPS
  
Dilutive
stock
options (1)
  
Diluted
EPS
  
   
(in thousands, except per share amounts)
  
Three Months Ended:
                          
Net income/(loss) available to common stockholders
  
$
13,377
        
$
13,377
  
$
(563
)
      
$
(563
)
Weighted-average shares
    
11,083
 
256
    
11,339
   
11,409
 
-
    
11,409
 
Earnings/(loss) per common share
  
$
1.21
        
$
1.18
  
$
(0.05
)
      
$
(0.05
)
                                       
Six Months Ended:
                                      
Net income available to common stockholders
  
$
28,469
        
$
28,469
  
$
15,822
        
$
15,822
  
Weighted average shares
    
11,095
 
287
    
11,382
   
11,548
 
56
    
11,604
 
Earnings per common share
  
$
2.57
        
$
2.50
  
$
1.37
        
$
1.36
  

(1)
For the three months ended June 30, 2005, approximately 42,000 stock options were not included in the loss per share computation because they would have been anti-dilutive.
 
During the three and six months ended June 30, 2006, Farmer Mac repurchased 282,500 shares and 321,450 shares, respectively, of its Class C Non-Voting Common Stock at an average price of $26.55 per share and $26.70 per share, respectivley, pursuant to the Corporation’s previously announced stock repurchase program. These repurchases reduced the Corporation’s capital by approximately $7.5 million and $8.6 million, respectively.

-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. Under the plan, stock option awards 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 options issued to directors since June 1, 1998, if not exercised, expire five years from the date of grant. Of the 3,750,000 shares authorized to be issued under the plan, 490,923 remain available for future issuance as of June 30, 2006. 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.

Effective January 1, 2006, Farmer Mac adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (“SFAS 123(R)”) using the modified prospective method of transition, which requires (1) the recordation of compensation expense for the non-vested portion of previously issued awards that remain outstanding as of the initial date of adoption and (2) the recordation of compensation expense for any awards issued or modified after December 31, 2005. Accordingly, prior period amounts have not been retrospectively adjusted for this change. The adoption resulted in the recognition of $0.4 million and $0.9 million of compensation expense during the three-month and six-month periods ended June 30, 2006, respectively, related to the non-vested portion of previously issued stock option awards that were outstanding as of the initial date of adoption. Additionally, Farmer Mac recognized $0.1 million of compensation expense related to stock options awarded during second quarter 2006. The effect of the recognition of compensation expense resulting from stock options on diluted EPS for the three-month and six-month periods ended June 30, 2006 was a reduction of $0.03 and $0.05, respectively, per diluted share. Prior to the adoption of SFAS 123(R), Farmer Mac accounted for its stock-based employee compensation plans under the intrinsic value method of accounting for employee stock options pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and had adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended (“SFAS 123”). Accordingly, no compensation expense was recognized in 2005 for employee stock option plans. Had Farmer Mac elected to use the fair value method of accounting for employee stock options, net income available to common stockholders and earnings per share for the three and six months ended June 30, 2005 would have been reduced to the pro forma amounts indicated in the following table:

-14-
 
   
Three Months
Ended
June 30, 2005
  
Six Months
Ended
June 30, 2005
  
   
(in thousands, except per share amounts)
  
Net income/(loss) available to common stockholders, as reported
  
$
(563
)
$
15,822
  
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax
    
(1,838
)
  
(1,838
)
Pro forma net income/(loss) available to
              
common stockholders
  
$
(2,401
)
$
13,984
  
               
Earnings per common share:
              
Basic - as reported
  
$
(0.05
)
$
1.37
  
Basic - pro forma
  
$
(0.21
)
$
1.21
  
               
Diluted - as reported
  
$
(0.05
)
$
1.36
  
Diluted - pro forma
  
$
(0.21
)
$
1.21
  
 
    As of June 30, 2006, there was $5.9 million of total unrecognized compensation cost related to stock options outstanding and unvested as of June 30, 2006.  Of that amount, $2.8 million was related to stock options outstanding and unvested as of December 31, 2005.  Of that cost, $0.9 million and $1.4 million is expected to be recognized in the remainder of 2006 and 2007, respectively.

-15-

The following table summarizes stock option activity for the three and six months ended June 30, 2006 and 2005:

   
June 30, 2006
  
June 30, 2005
  
   
Shares
  
Weighted-
Average
Exercise
Price
  
Shares
  
Weighted-
Average
Exercise
Price
  
Three Months Ended:
                  
Outstanding, beginning of period
    
2,091,208
 
$
22.68
    
1,803,484
  
$
22.72
  
Granted
    
358,928
   
26.35
   
432,561
   
20.59
 
Exercised
    
(75,111
)
  
17.26
   
(38,066
)
  
14.01
 
Canceled
    
(75,091
)
  
28.82
   
(56,679
)
  
26.59
 
Outstanding, end of period
    
2,299,934
   
23.23
   
2,141,300
    
22.30
 
                           
Options exercisable at end of period
    
1,431,465
         
1,397,755
        
                           
Six Months Ended:
                          
Outstanding, beginning of period
    
2,153,008
 
$
22.41
    
1,812,222
  
$
22.67
  
Granted
    
358,928
   
26.35
   
432,561
   
20.59
 
Exercised
    
(136,911
)
  
15.40
   
(39,803
)
  
14.11
 
Canceled
    
(75,091
)
  
28.82
   
(63,680
)
  
26.34
 
Outstanding, end of period
    
2,299,934
   
23.23
   
2,141,300
    
22.30
 
                           
Options exercisable at end of period
    
1,431,465
         
1,397,755
        
 
Stock options cancellations during the six months ended June 30, 2006 and June 30, 2005 were due either to unvested options terminating in accordance with the provisions of the applicable stock option plans upon directors’ or employees’ departures from Farmer Mac or vested options terminating unexercised on their expiration date. For the three-month and the six-month periods ended June 30, 2006, the additional paid-in capital received from stock option exercises was $1.2 million and $2.0 million, respectively, compared to $0.5 million and $0.5 million for the comparable periods in the prior year. For the three-month and the six-month periods ended June 30, 2006, the reduction of income taxes to be paid as a result of the deduction for stock option exercises was $0.3 million and $0.7 million, respectively, compared to $0.1 million and $0.1 million for the comparable periods in the prior year.

-16-

The following table summarizes information regarding options outstanding as of June 30, 2006:

   
Options Outstanding
  
Options
Exercisable
Range of
Exercise
Prices
  
Number of
Shares
  
Weighted-
Average
RemainingContractual
Life
  
Number of
Shares
             
$10.00 - $19.99
 
401,609
  
6.2 years
  
254,270
20.00 - 24.99
 
1,100,058
  
5.9 years
  
743,856
25.00 - 29.99
 
607,349
  
7.3 years
  
242,421
30.00 - 34.99
 
190,418
  
4.9 years
  
190,418
35.00 - 39.99
 
-
  
-
  
-
40.00 - 44.99
 
-
  
-
  
-
45.00 - 50.00
 
500
  
5.8 years
  
500
   
2,299,934
  
 
  
1,431,465


The weighted-average grant date fair values of options granted in 2006, 2005 and 2004 were $10.05, $6.69 and $7.34 per share, respectively. The fair values were estimated using the Black-Scholes option pricing model based on the following assumptions:

 
2006
  
2005
  
2004
Risk-free interest rate
5.0%
  
3.9%
  
4.3%
Expected years until exercise
6 years
  
7 years
  
5 years
Expected stock volatility
36.9%
  
46.3%
  
47.8%
Dividend yield
1.6%
  
1.9%
  
0.0%
 
 
(f)
Reclassifications

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

 
(g)
New Accounting Standards

In March 2004, the Emerging Issues Task Force (“EITF”) amended EITF 03-1, The Meaning of Other-Than-Temporary Impairment. This amendment, which was originally effective for financial periods beginning after June 15, 2004, introduced qualitative and quantitative guidance for determining whether securities are other-than-temporarily impaired. In November 2005, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. 115-1 and No. 124-1 (“FSP”), which supersedes the guidance in paragraphs 10-18 of EITF 03-1 and references existing other-than-temporary impairment guidance. The FSP clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell the security has not been made, and also provides guidance on the subsequent accounting for impaired debt securities. The FSP is effective for reporting periods beginning after December 15, 2005. Farmer Mac’s adoption of the FSP effective January 1, 2006 did not have a material effect on Farmer Mac’s results of operations or financial position.

-17-
 
In May 2005, FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which replaced Accounting Principles Board Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principles, unless determination of either the period specific effects or the cumulative effect of the change is impracticable or otherwise promulgated. SFAS 154 is effective for fiscal years beginning after December 15, 2005. Farmer Mac’s adoption of SFAS 154 effective January 1, 2006 did not have a material effect on Farmer Mac’s results of operations or financial position.

In February 2006, FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments - an Amendment of FASB Statements No. 133 and 140 (“SFAS 155”), which resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155, among other things, permits the fair value re-measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 is effective for all financial instruments acquired or issued in a fiscal year beginning after September 15, 2006. SFAS 155 is not expected to have a material effect on Farmer Mac’s results of operations and financial position.

In March 2006, FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for subsequent measurement. SFAS 156 is effective on January 1, 2007. The adoption of SFAS 156 is not expected to have a material effect on Farmer Mac’s results of operations or financial position.

In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires the recognition in financial statements of the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 31, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Farmer Mac is currently evaluating the impact, if any, that FIN 48 will have on its financial statements.

-18-
 
Note 2. Farmer Mac Guaranteed Securities

The following table sets forth information about Farmer Mac Guaranteed Securities retained by Farmer Mac as of June 30, 2006 and December 31, 2005.

   
June 30, 2006
  
December 31, 2005
  
   
Available-
for-Sale
  
Held-to-
Maturity
  
Total
  
Available-
for-Sale
  
Held-to-
Maturity
  
Total
  
   
(in thousands)
  
Farmer Mac I
  
$
433,493
  
$
40,351
  
$
473,844
  
$
492,158
  
$
41,573
  
$
533,731
  
Farmer Mac II
    
-
   
830,077
   
830,077
   
-
   
797,245
   
797,245
 
Total
  
$
433,493
  
$
870,428
  
$
1,303,921
  
$
492,158
  
$
838,818
  
$
1,330,976
  
                                       
Amortized cost
  
$
428,325
  
$
870,428
  
$
1,298,753
  
$
477,561
  
$
838,818
  
$
1,316,379
  
Unrealized gains
    
8,921
   
268
   
9,189
   
18,395
   
448
   
18,843
 
Unrealized losses
    
(3,753
)
  
(13,594
)
  
(17,347
)
  
(3,798
)
  
(8,339
)
  
(12,137
)
Fair value
  
$
433,493
  
$
857,102
  
$
1,290,595
  
$
492,158
  
$
830,927
  
$
1,323,085
  
 
The table below presents a sensitivity analysis for Farmer Mac’s retained Farmer Mac Guaranteed Securities as of June 30, 2006.

   
June 30, 2006
  
   
(dollars in thousands)
  
       
Fair value of beneficial interests retained in Farmer Mac Guaranteed Securities
  
$
1,290,595
  
         
Weighted-average remaining life (in years)
    
4.8
  
         
Weighted-average prepayment speed (annual rate)
    
10.1
%
Effect on fair value of a 10% adverse change
  
$
(53
)
Effect on fair value of a 20% adverse change
  
$
(80
)
         
Weighted-average discount rate
    
5.7
%
Effect on fair value of a 10% adverse change
  
$
(17,912
)
Effect on fair value of a 20% adverse change
  
$
(35,802
)
 
These sensitivities are hypothetical. Changes in fair value based on 10 percent or 20 percent variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, in this table the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In fact, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might amplify or counteract the sensitivities.

-19-

The table below presents the outstanding principal balances as of the periods indicated for Farmer Mac Guaranteed Securities, loans, and LTSPCs.

   
June 30,
2006
  
December 31,
2005
  
   
(in thousands)
  
On-balance sheet assets
          
Farmer Mac I:
          
Loans
  
$
778,304
  
$
784,422
  
Guaranteed Securities
    
467,944
   
518,250
 
Farmer Mac II:
              
Guaranteed Securities
    
828,939
   
796,224
 
Total on-balance sheet
  
$
2,075,187
  
$
2,098,896
  
               
Off-balance sheet assets
              
Farmer Mac I:
              
LTSPCs
  
$
2,149,677
  
$
2,329,798
  
Guaranteed Securities
    
1,778,288
   
804,785
 
Farmer Mac II:
              
Guaranteed Securities
    
34,839
   
39,508
 
Total off-balance sheet
  
$
3,962,804
  
$
3,174,091
  
               
Total
  
$
6,037,991
  
$
5,272,987
  
 
Net credit losses and 90-day delinquencies as of and for the periods indicated for Farmer Mac Guaranteed Securities, loans and LTSPCs are presented in the table below. Information is not presented for loans underlying Farmer Mac I Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed first loss subordinated interests, which are expected to exceed the estimated credit losses on those loans. The guaranteed portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the USDA. Each USDA guarantee is an obligation backed by the full faith and credit of the United States. As of June 30, 2006, Farmer Mac had not experienced any credit losses on any Farmer Mac I Guaranteed Securities issued prior to the 1996 Act or on any Farmer Mac II Guaranteed Securities and does not expect to incur any such losses in the future.

-20-

   
90-Day
Delinquencies (1)
  
Net Credit
Losses/(Recoveries)
  
   
As of
June 30,
  
As of
December 31,
  
For the Six Months Ended
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
   
(in thousands)
  
On-balance sheet assets:
                  
Farmer Mac I:
                  
Loans
  
$
18,599
  
$
23,308
  
$
536
  
$
(62
)
Guaranteed Securities
    
-
   
-
   
-
   
-
 
Total on-balance sheet
  
$
18,599
  
$
23,308
  
$
536
  
$
(62
)
                         
                         
Off-balance sheet assets:
                          
Farmer Mac I:
                          
LTSPCs
  
$
2,409
  
$
2,153
  
$
-
  
$
-
  
Guaranteed Securities
    
-
   
-
   
-
   
-
 
Total off-balance sheet
  
$
2,409
  
$
2,153
  
$
-
  
$
-
  
                         
Total
  
$
21,008
  
$
25,461
  
$
536
  
$
(62
)

(1)
Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
 
 
Note 3.
Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments

Overview

Farmer Mac offers approved agricultural and rural residential mortgage lenders two off-balance sheet alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through either the Farmer Mac I program or the Farmer Mac II program; and (2) LTSPCs, which are available only through the Farmer Mac I program. Both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac in the ordinary course of its business.
 
-21-

Off-Balance Sheet Farmer Mac Guaranteed Securities

Periodically Farmer Mac transfers agricultural mortgage loans into trusts that are used as vehicles for the securitization of the transferred assets and the beneficial interests in the trusts are sold to third party investors. The following table summarizes certain cash flows received from and paid to these trusts:

   
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
   
(in thousands)
  
Proceeds from new securitizations
  
$
3,033
  
$
22,012
  
Guarantee fees received
    
761
    
776
  
Purchases of assets from the trusts
    
506
    
1,595
  
Servicing advances
    
10
    
5
  
Repayment of servicing advances
    
8
    
21
  
 
The following table presents the outstanding balance of off-balance sheet Farmer Mac Guaranteed Securities, which represents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make with respect to those securities as of June 30, 2006 and December 31, 2005, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans.
 
Outstanding Balance of Off-Balance Sheet
          
Farmer Mac Guaranteed Securities
          
   
June 30,
2006
  
December 31,
2005
  
   
(in thousands)
  
Farmer Mac I Guaranteed Securities
  
$
1,778,288
  
$
804,785
  
Farmer Mac II Guaranteed Securities
    
34,839
    
39,508
  
 Total Farmer Mac I and II
  
$
1,813,127
  
$
844,293
  
 
As of June 30, 2006, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 17.1 years. For those securities issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the condensed consolidated balance sheet. This liability approximated $4.8 million as of June 30, 2006 and $5.2 million as of December 31, 2005.

Long-Term Standby Purchase Commitments (LTSPCs)

An LTSPC is a commitment by Farmer Mac to purchase eligible loans from a segregated pool of loans, either for cash or in exchange for Farmer Mac I Guaranteed Securities, on one or more undetermined future dates.

-22-

As of June 30, 2006 and December 31, 2005, the maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans, was $2.1 billion and $2.3 billion, respectively.

As of June 30, 2006, the weighted-average remaining maturity of all loans underlying LTSPCs was 14.1 years. For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the condensed consolidated balance sheet. This liability approximated $16.9 million as of June 30, 2006 and $12.4 million as of December 31, 2005.

Note 4.
Comprehensive Income

Comprehensive income represents all changes in stockholders’ equity except those resulting from investments by or distributions to stockholders, and is comprised primarily of net income available to common stockholders and unrealized gains and losses on securities available-for-sale net of related taxes. The following table sets forth Farmer Mac’s comprehensive income for the three and six months ended June 30, 2006 and 2005:
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
   
(in thousands)
  
Net income available to common stockholders
  
$
13,377
  
$
(563
)
$
28,469
  
$
15,822
  
                           
Unrealized gains/(losses) on securities
    
(10,275
)
  
14,700
   
(24,186
)
  
(1,657
)
Amortization of FAS 133 transition adjustment on financial derivatives
    
257
   
320
   
458
   
580
 
Other compehensive income, before tax
    
(10,018
)
  
15,020
   
(23,728
)
  
(1,077
)
                           
Income tax related to items of other comprehensive income
    
(3,506
)
  
5,257
   
(8,305
)
  
(376
)
Other comprehensive income/(loss), net of tax
    
(6,512
)
  
9,763
   
(15,423
)
  
(701
)
                           
Comprehensive income available to common stockholders
  
$
6,865
  
$
9,200
  
$
13,046
  
$
15,121
  
 
Note 5.
Investments

As of the dates indicated below, Farmer Mac’s investment portfolio was comprised of the following investment securities:

   
June 30,
2006
  
December 31,
2005
  
   
(in thousands)
  
Held-to-maturity
  
$
10,602
  
$
10,602
  
Available-for-sale
    
1,991,398
    
1,604,419
  
Trading
    
5,895
    
6,920
  
   
$
2,007,895
  
$
1,621,941
  
 
-23-
 
The amortized cost and estimated fair values of investments as of June 30, 2006 and December 31, 2005 were as follows:

   
As of June 30, 2006
  
As of December 31, 2005
  
   
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Fair Value
  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Fair Value
  
   
(in thousands)
  
Held-to-maturity:
                                  
Cash investment in fixed rate guaranteed investment contract
  
$
10,602
  
$
262
  
$
-
  
$
10,864
  
$
10,602
  
$
18
  
$
-
  
$
10,620
  
Total held-to-maturity
  
$
10,602
  
$
262
  
$
-
  
$
10,864
  
$
10,602
  
$
18
  
$
-
  
$
10,620
  
                                                 
Available-for-sale:
                                                  
Floating rate asset-backed securities
  
$
448,098
  
$
720
  
$
-
  
$
448,818
  
$
336,647
  
$
941
  
$
-
  
$
337,588
  
Floating rate corporate debt securities
    
407,496
   
507
   
(91
)
  
407,912
   
230,787
    
515
   
(10
)
  
231,673
 
Fixed rate corporate debt securities
    
544,484
   
-
   
(9,254
)
  
535,230
   
520,381
    
-
   
(1,950
)
  
518,050
 
Fixed rate preferred stock
    
237,918
   
4,947
   
(446
)
  
242,419
   
239,033
   
11,687
   
(304
)
  
250,416
 
Fixed rate commercial paper
    
184,153
   
-
   
-
   
184,153
   
90,848
   
-
   
-
   
90,848
 
Floating rate mortgage- backed securities
    
162,710
   
576
   
(11
)
  
163,275
   
175,441
   
481
   
(78
)
  
175,844
 
Fixed rate mortgage- backed securities
    
10,014
   
-
   
(423
)
  
9,591
   
-
   
-
   
-
   
-
 
Total available-for-sale
  
$
1,994,873
  
$
6,750
  
$
(10,225
)
$
1,991,398
  
$
1,593,137
  
$
13,624
  
$
(2,342
)
$
1,604,419
  
 
                                                  
Trading:
                                                  
Adjustable rate mortgage-backed securities
  
$
5,866
  
$
29
  
$
-
  
$
5,895
  
$
6,867
  
$
53
  
$
-
  
$
6,920
  
Total trading
  
$
5,866
  
$
29
  
$
-
  
$
5,895
  
$
6,867
  
$
53
  
$
-
  
$
6,920
  

The temporary unrealized losses presented above are principally due to changes in interest rates from the date of acquisition to June 30, 2006 and December 31, 2005, as applicable. Farmer Mac has the intent and ability to hold its investment securities until either the market value recovers or the securities mature.

As of June 30, 2006, Farmer Mac owned one held-to-maturity investment that matures in 2006 with an amortized cost of $10.6 million, a fair value of $10.9 million, and a yield of 6.5 percent. As of June 30, 2006, Farmer Mac owned trading investment securities that mature after 10 years with an amortized cost of $5.9 million, a fair value of $5.9 million, and a weighted average yield of 5.38 percent. The amortized cost, fair value and yield of investments by remaining contractual maturity for available-for-sale investment securities as of June 30, 2006 are set forth below. Asset- and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.

-24-

   
Investment Securities
Available-for-Sale
as of June 30, 2006
  
   
Amortized Cost
  
Fair Value
  
Yield
  
   
(dollars in thousands)
  
Due within one year
  
$
253,008
  
$
252,955
    
4.95
%
Due after one year through five years
    
946,390
    
937,159
    
5.14
%
Due after five years through ten years
    
112,886
    
116,576
    
7.41
%
Due after ten years
    
682,589
    
684,708
    
5.81
%
Total
  
$
1,994,873
  
$
1,991,398
    
5.47
%
 
Note 6.
Restatement of Condensed Consolidated Financial Statements

Subsequent to the issuance of its June 30, 2006 unaudited condensed consolidated financial statements, the Corporation determined that it needed to restate prior financial results to correct its accounting for financial derivatives. The Corporation determined that it had inappropriately recorded changes in the fair value of cash flow hedges in other comprehensive income, net of income taxes, and recorded changes in the fair value of fair value hedges as basis adjustments on the hedged item rather than account for the financial derivatives as undesignated financial derivatives with all changes in the fair value of the financial derivatives recognized in the consolidated statements of operations.

The Corporation, in light of SEC staff comments, has recently concluded a reassessment of its documentation and accounting treatment of financial derivative transactions under SFAS 133 and related interpretations. Based on the reassessment, while the transactions engaged in by the Corporation were highly effective economic hedges of interest rate risk, the Corporation has determined that it was not appropriately applying hedge accounting in accordance with SFAS 133.

As a result, the condensed consolidated financial statements have been restated from the amounts previously reported to correct the accounting for financial derivatives. The corrections related to the Corporation’s accounting for fair value hedges and cash flow hedges as described in more detail below.

The Corporation reduced its stockholders’ equity by $0.9 million as of January 1, 2003 as the cumulative effect of the correction of its accounting for financial derivatives for all periods preceding January 1, 2003, and restated its consolidated statements of operations and cash flows for the years ended December 31, 2005, 2004 and 2003 and its consolidated balance sheet as of December 31, 2005 and 2004. The restatement resulted in an increase to previously reported net income available to common stockholders of $5.8 million ($0.51 per diluted common share) and $15.8 million ($1.39 per diluted common share) for the three and six months ended June 30, 2006, and a decrease of $8.8 million ($0.77 per diluted common share) and an increase of $2.7 million ($0.23 per diluted common share) for the three and six months ended June 30, 2005, respectively. There was no effect on net cash flows or the amount of dividends declared for any periods presented.

-25-

Fair Value Hedges:

The Corporation has determined that it did not meet the specific documentation requirements required by SFAS 133 to assume no ineffectiveness in its fair value hedge relationships or to apply hedge accounting to its fair value hedges. As a result, the Corporation’s designation of its financial derivatives as fair value hedges for the period from January 1, 2001 to June 30, 2006 did not meet the requirements of SFAS 133.

The impact of the restatement on the consolidated statements of operations related to fair value hedges was to reverse previously applied hedge accounting for all hedging relationships. For financial derivatives previously accounted for as fair value hedges, the net accruals for the derivatives were previously recorded to net interest income, and net changes in fair values of the financial derivatives were previously recorded as basis adjustments to the hedged items, such as notes payable, loans held for sale, or investment securities. As a result of the restatement, the previous accounting treatment was reversed (i.e., the net accruals recorded to net interest income were reclassified to gains and losses on financial derivatives and basis adjustments for the hedged items was reversed), and the total changes in the fair values of the derivative instruments, including interest accrual settlements, were recorded directly to gains/(losses) on financial derivatives and trading assets.

Cash Flow Hedges:

The Corporation determined also that it did not meet specific documentation and other requirements of SFAS 133 to apply hedge accounting to its cash flow hedges. In this regard, the Corporation has determined that its forecasted transactions were not documented with sufficient specificity at the inception of the hedge relationship to allow those transactions to be identified as the intended “hedged transactions” when they occurred; some of its forecasted transactions related to the acquisitions of assets, or incurrences of liabilities, involved subsequent remeasurements with changes in fair value attributable to the hedged risk reported currently in earnings; and the benchmark index identified for its basis swaps did not meet the definition of a “benchmark interest rate” as that term is defined in SFAS 133. As a result, the Corporation’s designation of its financial derivatives as cash flow hedges for the period from January 1, 2001 to June 30, 2006 did not meet the requirements of SFAS 133. 

The impact of the restatement on the consolidated statements of operations related to fair value hedges was to reverse previously applied hedge accounting for all hedging relationships. For financial derivatives previously accounted for as cash flow hedges, the Corporation recorded accruals from the financial derivatives to net interest income and recorded net changes in the fair values of the derivatives, net-of-tax, to accumulated other comprehensive income (“OCI”). As a result of the restatement, the previous accounting treatment for cash flow hedges was reversed from accumulated OCI and net interest income, and recorded to gains/(losses) on financial derivatives and trading assets.

The following tables set forth the previously reported and restated amounts of selected items within the condensed consolidated balance sheets as of June 30, 2006 and December 31, 2005 and within the consolidated statements of operations and consolidated statements of cash flows for the three and six months ended June 30, 2006 and 2005.

-26-
 
   
June 30, 2006
  
December 31, 2005
  
Selected Balance Sheet Date:
  
As Previously
Reported
  
As
Restated
  
As Previously
Reported
  
As
Restated
  
   
(in thousands)
  
Assets:
                  
Deferred tax asset, net
  
$
950
  
$
2,497
  
$
2,397
  
$
3,223
  
Total Assets
    
4,565,954
   
4,567,501
   
4,340,619
   
4,341,445
 
Liabilities and Stockholders' Equity:
                          
Notes payable: Due after one year
    
1,181,875
   
1,186,872
   
1,403,598
   
1,406,527
 
Total notes payable
    
4,222,495
   
4,227,492
   
3,991,302
   
3,994,231
 
Total Liabilities
    
4,311,048
   
4,316,045