Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

Unassociated Document

As filed with the Securities and Exchange Commission on November 9, 2010

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

Commission File Number 001-14951

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

(Exact name of registrant as specified in its charter)

Federally chartered instrumentality of the United States		52-1578738
(State or other jurisdiction of 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ 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 o	Accelerated filer o

Non-accelerated filer x	Smaller reporting company o

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

Yes ¨ No x

As of November 1, 2010 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,750,869 shares of Class C Non-Voting Common Stock outstanding.

PART I - FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

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

Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009	4
Condensed Consolidated Statements of Equity for the nine months ended September 30, 2010 and 2009	5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009	6
Notes to Condensed Consolidated Financial Statements	7

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,
	2010			2009
	(in thousands)
Assets:
Cash and cash equivalents	$	453,273		$	654,794
Investment securities:
Available-for-sale, at fair value		1,375,518			1,041,923
Trading, at fair value		81,913			89,972
Total investment securities		1,457,431			1,131,895
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value		2,434,467			2,524,867
Trading, at fair value		-			874,129
Total Farmer Mac Guaranteed Securities		2,434,467			3,398,996
USDA Guaranteed Securities:
Available-for-sale, at fair value		970,901			-
Trading, at fair value		354,539			-
Total USDA Guaranteed Securities		1,325,440			-
Loans:
Loans held for sale, at lower of cost or fair value		981,985			666,534
Loans held for investment, at amortized cost		88,498			93,478
Loans held for investment in consolidated trusts, at amortized cost		1,292,716			-
Allowance for loan losses		(9,442	)		(6,292	)
Total loans, net of allowance		2,353,757			753,720
Real estate owned, at lower of cost or fair value		3,434			739
Financial derivatives, at fair value		52,471			15,040
Interest receivable		67,424			67,178
Guarantee and commitment fees receivable		34,058			55,016
Deferred tax asset, net		-			24,146
Prepaid expenses and other assets		40,987			37,289
Total Assets	$	8,222,742		$	6,138,813

Liabilities, Mezzanine Equity and Equity:
Liabilities:
Notes payable:
Due within one year	$	3,645,811		$	3,662,898
Due after one year		2,979,147			1,908,713
Total notes payable		6,624,958			5,571,611
Debt securities of consolidated trusts held by third parties		849,430			-
Financial derivatives, at fair value		144,715			107,367
Accrued interest payable		45,094			39,562
Guarantee and commitment obligation		30,922			48,526
Accounts payable and accrued expenses		20,239			23,445
Deferred tax liability, net		2,441			-
Reserve for losses		9,575			7,895
Total Liabilities		7,727,374			5,798,406

Commitments and Contingencies (Note 5)

Mezzanine Equity:
Series B redeemable preferred stock, par value $1,000 per share, 150,000 shares authorized, issued and outstanding as of December 31, 2009 (redemption value $150,000,000)		-			144,216
Stockholders' Equity:
Preferred stock:
Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 shares issued and outstanding		57,578			57,578
Common stock:
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding		1,031			1,031
Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding		500			500
Class C Non-Voting, $1 par value, no maximum authorization, 8,746,123 shares outstanding as of September 30, 2010 and 8,610,918 shares outstanding as of December 31, 2009		8,746			8,611
Additional paid-in capital		99,468			97,090
Accumulated other comprehensive income		47,332			3,254
Retained earnings		38,860			28,127
Total Stockholders' Equity		253,515			196,191
Non-controlling interest - preferred stock		241,853			-
Total Equity		495,368			196,191
Total Liabilities, Mezzanine Equity and Equity	$	8,222,742		$	6,138,813

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	6,430		$	6,345		$	19,303		$	22,303
Farmer Mac and USDA Guaranteed Securities		22,971			27,668			62,597			81,232
Loans		29,174			8,815			94,734			28,196
Total interest income		58,575			42,828			176,634			131,731
Total interest expense		33,526			23,031			106,360			68,593
Net interest income		25,049			19,797			70,274			63,138
Provision for loan losses		(412	)		(3,098	)		(1,392	)		(939	)
Net interest income after provision for loan losses		24,637			16,699			68,882			62,199

Non-interest (loss)/income:
Guarantee and commitment fees		5,977			8,168			17,606			23,486
(Losses)/gains on financial derivatives		(6,864	)		(7,733	)		(28,508	)		15,506
(Losses)/gains on trading assets		(1,722	)		25,047			6,703			56,707
Other-than-temporary impairment losses		-			(1,621	)		-			(3,994	)
Gains on sale of available-for-sale investment securities		24			63			264			2,913
Gains on sale of loans and Farmer Mac Guaranteed Securities		-			-			-			1,581
Lower of cost or fair value adjustment on loans held for sale		(906	)		-			(3,090	)		-
Other income		140			874			1,180			1,209
Non-interest (loss)/income		(3,351	)		24,798			(5,845	)		97,408

Non-interest expense:
Compensation and employee benefits		4,501			2,896			11,919			10,493
General and administrative		1,775			2,432			6,329			8,332
Regulatory fees		568			512			1,693			1,537
Real estate owned operating costs, net		1,189			203			1,497			208
Provision for losses		105			89			1,680			2,079
Non-interest expense		8,138			6,132			23,118			22,649
Income before income taxes		13,148			35,365			39,919			136,958
Income tax expense		885			13,097			5,977			47,721
Net income		12,263			22,268			33,942			89,237
Less: Net income attributable to non-controlling interest - preferred stock dividends		(5,546	)		-			(15,160	)		-
Net income attributable to Farmer Mac		6,717			22,268			18,782			89,237
Preferred stock dividends		(720	)		(4,368	)		(3,410	)		(12,434	)
Loss on retirement of preferred stock		-			-			(5,784	)		-
Net income available to common stockholders	$	5,997		$	17,900		$	9,588		$	76,803

Earnings per common share and dividends:
Basic earnings per common share	$	0.58		$	1.77		$	0.94		$	7.58
Diluted earnings per common share	$	0.56		$	1.74		$	0.91		$	7.54
Common stock dividends per common share	$	0.05		$	0.05		$	0.15		$	0.15

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

	For the Nine Months Ended
	September 30, 2010					September 30, 2009
	Shares		Amount			Shares		Amount
	(in thousands)
Preferred stock:
Balance, beginning of period		58	$	57,578			9	$	9,200
Issuance of Series C preferred stock		-		-			48		47,800
Balance, end of period		58	$	57,578			57	$	57,000
Common stock:
Balance, beginning of period		10,142	$	10,142			10,132	$	10,132
Issuance of Class C common stock		122		122			8		8
Exercise of stock options and SARs		13		13			-		-
Balance, end of period		10,277	$	10,277			10,140	$	10,140
Additional paid-in capital:
Balance, beginning of period			$	97,090				$	95,572
Stock-based compensation expense				2,187					2,160
Issuance of Class C common stock				33					21
Exercise, vesting and cancellation of stock options
SARs and restricted stock				158					(1,206	)
Balance, end of period			$	99,468				$	96,547
Retained earnings/(accumulated deficit):
Balance, beginning of period			$	28,127				$	(52,144	)
Net income attributable to Farmer Mac				18,782					89,237
Cash dividends:
Preferred stock, Series B ($8.33 per share in 2010 and $75.00 per share in 2009)				(1,250	)				(11,250	)
Preferred stock, Series C ($37.50 per share)				(2,160	)				(1,184	)
Common stock ($0.15 per share)				(1,534	)				(1,520	)
Loss on retirement of preferred stock				(5,784	)				-
Cumulative effect of adoption of new accounting standard, net of tax				2,679					-
Balance, end of period			$	38,860				$	23,139
Accumulated other comprehensive income/(loss):
Balance, beginning of period			$	3,254				$	(47,412	)
Change in unrealized gain on available-for-sale securities, net of tax and reclassification adjustments				44,000					65,427
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments				78					124
Balance, end of period			$	47,332				$	18,139
Total Stockholders' Equity			$	253,515				$	204,965
Non-controlling interest:
Balance, beginning of period			$	-				$	-
Preferred stock - Farmer Mac II LLC				241,853					-
Balance, end of period			$	241,853				$	-
Total Equity			$	495,368				$	204,965

Comprehensive income:
Net income			$	33,942				$	89,237
Change in accumulated other comprehensive income, net of tax				44,078					65,551
Comprehensive income				78,020					154,788
Less: Comprehensive income attributable to non-controlling interest				15,160					-
Total comprehensive income			$	62,860				$	154,788

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Nine Months Ended
	September 30, 2010			September 30, 2009
	(in thousands)
Cash flows from operating activities:
Net income	$	33,942		$	89,237
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
Net amortization of premiums and discounts on loans, investments, and
Farmer Mac and USDA Guaranteed Securities		8,421			3,123
Amortization of debt premiums, discounts and issuance costs		5,057			10,982
Net change in fair value of trading securities, financial derivatives and loans held for sale		(5,970	)		(104,312	)
Amortization of transition adjustment on financial derivatives		120			124
Other-than-temporary impairment losses		-			3,994
Gains on sale of loans and Farmer Mac Guaranteed Securities		-			(1,581	)
Gains on the sale of available-for-sale investment securities		(264	)		(2,913	)
Total provision for losses		3,072			3,018
Deferred income taxes		809			73,629
Stock-based compensation expense		2,188			2,159
Proceeds from repayment and sale of trading investment securities		586			644
Purchases of loans held for sale		(404,072	)		(122,421	)
Proceeds from repayment of loans held for sale		82,988			51,896
Net change in:
(Increase)/decrease in interest receivable		(246	)		16,852
Decrease in guarantee and commitment fees receivable		20,958			6,637
Decrease in other assets		522			24,287
Increase/(decrease) in accrued interest payable		5,532			(3,082	)
(Decrease)/increase in other liabilities		(17,865	)		11,725
Net cash (used in)/provided by operating activities		(264,222	)		63,998
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(626,678	)		(41,721	)
Purchases of Farmer Mac Guaranteed Securities		(1,151,375	)		(1,952,704	)
Purchases of loans held for investment		(26,367	)		(48,147	)
Purchases of defaulted loans		(5,317	)		(19,631	)
Proceeds from repayment of available-for-sale investment securities		213,315			148,544
Proceeds from repayment of Farmer Mac Guaranteed Securities		372,862			690,741
Proceeds from repayment of loans held for investment		196,424			37,308
Proceeds from sale of available-for-sale investment securities		92,767			207,879
Proceeds from sale of trading securities - fair value option		5,013			-
Proceeds from sale of Farmer Mac Guaranteed Securities		18,860			24,232
Proceeds from sale of real estate owned		-			31,056
Proceeds from sale of loans		-			358,953
Net cash used in investing activities		(910,496	)		(563,490	)
Cash flows from financing activities:
Proceeds from issuance of discount notes		50,774,678			40,680,191
Proceeds from issuance of medium-term notes		1,977,609			2,962,189
Payments to redeem discount notes		(50,262,407	)		(41,077,281	)
Payments to redeem medium-term notes		(1,441,590	)		(2,103,000	)
Tax benefit from tax deduction in excess of compensation cost recognized		747			-
Payments to third parties on debt securities of consolidated trusts		(147,832	)		-
Proceeds from common stock issuance		180			29
Issuance costs on retirement of preferred stock		(5,784	)		-
Proceeds from preferred stock issuance - Farmer Mac II LLC		241,853			-
Proceeds from preferred stock issuance		-			47,800
Retirement of Series B Preferred stock		(144,216	)		-
Dividends paid - Non-controlling interest - preferred stock		(15,097	)		-
Dividends paid on common and preferred stock		(4,944	)		(13,954	)
Net cash provided by financing activities		973,197			495,974
Net decrease in cash and cash equivalents		(201,521	)		(3,518	)
Cash and cash equivalents at beginning of period		654,794			278,412
Cash and cash equivalents at end of period	$	453,273		$	274,894

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1.

Accounting Policies

The interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. The December 31, 2009 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2009 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial statements as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2009 consolidated financial statements of Farmer Mac and subsidiaries included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 16, 2010 (as updated by the Current Report on Form 8-K filed with the SEC on August 4, 2010). Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Below is a summary of Farmer Mac’s significant accounting policies.

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

Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents. The carrying value of cash and cash equivalents is a reasonable estimate of their fair value. Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows. The following table sets forth information regarding certain cash and non-cash transactions for the nine months ended September 30, 2010 and 2009.

	For the Nine Months Ended
	September 30, 2010		September 30, 2009
	(in thousands)
Cash paid during the period for:
Interest	$	57,746	$	58,994
Income taxes		12,500		10,500
Non-cash activity:
Real estate owned acquired through foreclosure		4,643		41,086
Loans acquired and securitized as Farmer Mac Guaranteed Securities		2,185		17,224
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts		1,402,556		-
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to debt securities of consolidated trusts held by third parties		1,402,556		-
Transfers of available-for-sale Farmer Mac I Guaranteed Securities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		5,385		-
Transfers of trading Farmer Mac Guaranteed Securities - Rural Utilities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		451,448		-
Deconsolidation of loans held for investment in consolidated trusts - transferred to off-balance sheet Farmer Mac I Guaranteed Securities		414,462		-
Deconsolidation of debt securities of consolidated trusts held by third parties - transferred to off-balance sheet Farmer Mac I Guaranteed Securities		414,462		-
Transfers of Farmer Mac I Guaranteed Securities to loans held for sale		-		288,012
Transfers of loans held for investment to loans held for sale		-		617,072
Exchange of GSE preferred stock - transfer from trading to available-for-sale		-		90,657

(b) Allowance for Losses

As of September 30, 2010, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held and loans underlying Long Term Standby Purchase Commitments (“LTSPCs”), Farmer Mac I Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities.

The allowance for losses is increased through periodic provisions for loan losses that are charged against net interest income and provisions for losses that are charged to non-interest expense and is reduced by charge-offs for actual losses, net of recoveries. Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.

-8-

Farmer Mac’s methodology for determining its allowance for losses incorporates the Corporation’s automated loan classification system. That system scores loans based on criteria such as historical repayment performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value ratio. For the purposes of the loss allowance methodology, the loans in the Farmer Mac I portfolio and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs have been scored and classified for each calendar quarter since first quarter 2000. The allowance methodology captures the migration of loan scores across concurrent and overlapping three-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying Farmer Mac I Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of unimpaired loans in Farmer Mac’s portfolio to estimate inherent losses, on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future. Management evaluates this assumption by taking into consideration factors, including:

economic conditions;

geographic and agricultural commodity/product concentrations in the portfolio;

the credit profile of the portfolio;

delinquency trends of the portfolio;

historical charge-off and recovery activities of the portfolio; and

other factors to capture current portfolio trends and characteristics that differ from historical experience.

Management believes that its use of this methodology produces a reliable estimate of probable losses, as of the balance sheet date, for all loans held in the Farmer Mac I portfolio and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs, in accordance with the standard on accounting for contingencies issued by the Financial Accounting Standards Board (“FASB”).

Farmer Mac separately evaluates the rural utilities loans it owns, as well as the lender obligations and loans underlying or securing its Farmer Mac Guaranteed Securities – Rural Utilities, to determine if there are probable losses inherent in those assets. As of September 30, 2010, there were no delinquencies and no probable losses inherent in Farmer Mac’s rural utilities loans held or in any Farmer Mac Guaranteed Securities – Rural Utilities.

Farmer Mac also analyzes assets in its portfolio for impairment in accordance with the FASB standard on measuring individual impairment of a loan. Farmer Mac’s impaired assets include:

non-performing assets (loans 90 days or more past due, in foreclosure, restructured, in bankruptcy – including loans performing under either their original loan terms or a court-approved bankruptcy plan – and real estate owned (“REO”));

loans for which Farmer Mac has adjusted the timing of borrowers’ payment schedules, but still expects to collect all amounts due and has not made economic concessions; and

additional performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress.

-9-

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.

As of September 30, 2010, Farmer Mac individually analyzed $57.7 million of its $103.4 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $45.7 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 $2.9 million as of September 30, 2010 and $0.6 million as of December 31, 2009. Farmer Mac’s non-specific or general allowances were $16.1 million as of September 30, 2010 and $13.6 million as of December 31, 2009.

Farmer Mac recognized interest income of approximately $0.6 million and $1.5 million on impaired loans during the three and nine months ended September 30, 2010, respectively, compared to $0.4 million and $2.0 million, respectively, during the same periods in 2009. During the three and nine months ended September 30, 2010, Farmer Mac’s average investment in impaired loans was $125.4 million and $109.0 million, respectively, compared to $184.6 million and $168.0 million, respectively, for the same periods in 2009.

The table below summarizes the components of Farmer Mac’s allowance for losses as of September 30, 2010 and December 31, 2009:

	September 30,		December 31,
	2010		2009
	(in thousands)
Allowance for loan losses	$	9,442	$	6,292
Reserve for losses:
Off-balance sheet Farmer Mac I Guaranteed Securities		984		2,033
LTSPCs		8,591		5,862
Total allowance for losses	$	19,017	$	14,187

-10-

The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three and nine months ended September 30, 2010 and 2009:

	September 30, 2010								September 30, 2009
	Allowance					Total			Allowance					Total
	for Loan			Reserve		Allowance			for Loan			Reserve		Allowance
	Losses			for Losses		for Losses			Losses			for Losses		for Losses
	(in thousands)
For the Three Months Ended:
Beginning balance	$	9,495		$	9,470	$	18,965		$	1,810		$	7,496	$	9,306
Provision for losses		412			105		517			3,098			89		3,187
Charge-offs		(465	)		-		(465	)		(16	)		-		(16	)
Recoveries		-			-		-			-			-		-
Ending balance	$	9,442		$	9,575	$	19,017		$	4,892		$	7,585	$	12,477

For the Nine Months Ended:
Beginning balance	$	6,292		$	7,895	$	14,187		$	10,929		$	5,506	$	16,435
Provision for losses		1,392			1,680		3,072			939			2,079		3,018
Charge-offs		(465	)		-		(465	)		(7,741	)		-		(7,741	)
Recoveries		2,223			-		2,223			765			-		765
Ending balance	$	9,442		$	9,575	$	19,017		$	4,892		$	7,585	$	12,477

Upon the adoption of new consolidation guidance on January 1, 2010, Farmer Mac reclassified $2.0 million from the reserve for losses to the allowance for loan losses as a result of Farmer Mac being determined the primary beneficiary of certain variable interest entities (“VIEs”) with beneficial interests owned by third party investors. In June 2010, Farmer Mac deconsolidated certain VIEs with beneficial interests owned by third party investors because Farmer Mac was no longer determined to be the primary beneficiary. This deconsolidation did not result in a material reclassification from the allowance for loan losses to the reserve for losses during second quarter 2010. Consolidated interests in VIEs with beneficial interests owned by third party investors are presented as “Loans held for investment in consolidated trusts” on Farmer Mac’s condensed consolidated balance sheets. Upon deconsolidation, Farmer Mac classifies these interests as off-balance sheet Farmer Mac Guaranteed Securities.

No allowance for losses has been provided for AgVantage securities, securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”), or USDA Guaranteed Securities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans. As of September 30, 2010, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the credit quality of the obligors, as well as the underlying collateral. As of September 30, 2010, Farmer Mac had not experienced any credit losses on any AgVantage securities. The guaranteed portions (“USDA-guaranteed portions”) of certain agricultural, rural development, business & industry and community facilities loans presented as “USDA Guaranteed Securities,” as well as those USDA-guaranteed portions that collateralize Farmer Mac II Guaranteed Securities, are guaranteed by the United States Department of Agriculture (“USDA”). Each USDA guarantee is an obligation backed by the full faith and credit of the United States. As of September 30, 2010, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any USDA Guaranteed Securities held or on any Farmer Mac II Guaranteed Securities.

-11-

Farmer Mac enters into transactions involving financial derivatives principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market. Farmer Mac also recognizes certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative.

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

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Farmer Mac does not designate its financial derivatives as fair value hedges or cash flow hedges; therefore, the changes in the fair values of financial derivatives are reported as gains or losses on financial derivatives in the condensed consolidated statements of operations without any corresponding changes in the fair values of the hedged items.

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The following tables summarize information related to Farmer Mac’s financial derivatives as of September 30, 2010 and December 31, 2009:

	September 30, 2010
												Weighted-
									Weighted-	Weighted-	Weighted-	Average
									Average	Average	Average	Remaining
	Notional		Fair Value						Pay	Receive	Forward	Life
	Amount		Asset			(Liability)			Rate	Rate	Price	(in years)
	(dollars in thousands)
Interest rate swaps:
Pay fixed callable	$	26,235	$	-		$	(291	)	5.42%	0.42%		7.24
Pay fixed non-callable		1,215,137		26			(140,806	)	4.80%	0.40%		3.82
Receive fixed callable		40,000		14			-		0.29%	0.57%		0.87
Receive fixed non-callable		2,358,083		53,387			(29	)	0.55%	1.56%		1.74
Basis swaps		229,991		71			(3,666	)	1.52%	0.46%		2.00
Credit default swaps		30,000		25			(3	)	1.00%	0.00%		1.30
Agency forwards		117,254		-			(866	)			104.85
Treasury futures		1,700		-			1				126.12
Credit valuation adjustment		-		(1,052	)		945
Total financial derivatives	$	4,018,400	$	52,471		$	(144,715	)

	December 31, 2009
												Weighted-
									Weighted-	Weighted-	Weighted-	Average
									Average	Average	Average	Remaining
	Notional		Fair Value						Pay	Receive	Forward	Life
	Amount		Asset			(Liability)			Rate	Rate	Price	(in years)
	(dollars in thousands)
Interest rate swaps:
Pay fixed callable	$	65,686	$	-		$	(1,725	)	5.70%	0.27%		7.78
Pay fixed non-callable		1,236,156		5			(99,913	)	4.95%	0.26%		4.62
Receive fixed callable		300,000		236			-		0.09%	0.54%		0.76
Receive fixed non-callable		2,262,714		14,298			(2,815	)	0.41%	1.80%		2.25
Basis swaps		262,177		294			(3,673	)	1.63%	0.61%		2.39
Credit default swaps		30,000		-			(214	)	1.00%	0.00%		2.14
Agency forwards		75,511		453			-				101.22
Treasury futures		20,500		3			-				115.47
Credit valuation adjustment		-		(249	)		973
Total financial derivatives	$	4,252,744	$	15,040		$	(107,367	)

In the normal course of business, collateral requirements contained in Farmer Mac’s derivative contracts are enforced by Farmer Mac and its counterparties. Upon enforcement of the collateral requirements, the amount of collateral posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e., derivative assets net of derivative liabilities at the counterparty level. If Farmer Mac were to be in violation of certain provisions of the derivative contracts, the related counterparty could request payment or full collateralization on the derivative contracts. As of September 30, 2010, the fair value of Farmer Mac’s derivatives in a net liability position at the counterparty level, which includes accrued interest but excludes any adjustment for nonperformance risk, was $109.6 million. As of September 30, 2010, Farmer Mac posted assets with a fair value of $31.2 million as collateral for its derivatives in net liability positions. If Farmer Mac had breached certain provisions of the derivative contracts as of September 30, 2010, it could have been required to settle its obligations under the agreements or post additional collateral of $78.4 million.

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The following table summarizes the effects of Farmer Mac’s financial derivatives on the condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009:

	(Losses)/Gains on Financial Derivatives
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
	(in thousands)

Interest rate swaps	$	(5,243	)	$	(6,409	)	$	(24,634	)	$	17,971
Agency forwards		(1,089	)		(1,223	)		(3,026	)		(2,301	)
Treasury futures		(96	)		(47	)		(737	)		28
Credit default swaps		(396	)		-			9			-
		(6,824	)		(7,679	)		(28,388	)		15,698
Amortization of derivatives transition adjustment		(40	)		(54	)		(120	)		(192	)
Total	$	(6,864	)	$	(7,733	)	$	(28,508	)	$	15,506

As of September 30, 2010 and December 31, 2009, Farmer Mac had approximately $32,000 of net after-tax unrealized gains and $0.1 million of net after-tax unrealized losses on financial derivatives, respectively, included in accumulated other comprehensive income related to the financial derivatives transition adjustment. These amounts will be reclassified into earnings in the same period or periods during which the hedged forecasted transactions (either the payment of interest or the issuance of discount notes) affect earnings or immediately when it becomes probable that the original hedged forecasted transaction will not occur within two months of the originally specified date. Over the next 12 months, Farmer Mac estimates that $39,000 of unrealized losses currently reported in accumulated other comprehensive income will be reclassified into earnings.

As of September 30, 2010, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $85.0 million and a fair value of $(3.6) million, compared to $105.2 million and $(3.7) million, respectively, as of December 31, 2009. Under the terms of those basis swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. Those swaps economically hedge most of the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant Maturity Treasury based-rate and the discount notes Farmer Mac issues to fund the loan purchases (the pricing of discount notes is closely correlated to LIBOR rates). Farmer Mac recorded unrealized gains on those outstanding basis swaps for the three and nine months ended September 30, 2010 of $0.1 million and $32,000 respectively, compared to unrealized losses of $0.6 million and $0.2 million, respectively, for the same periods in 2009.

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(d) Earnings Per Common Share

Basic earnings per common share is based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights (“SARs”) and nonvested restricted stock awards. The following schedule reconciles basic and diluted earnings per common share (“EPS”) for the three and nine months ended September 30, 2010 and 2009:

	For the Three Months Ended
	September 30, 2010							September 30, 2009
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available to common stockholders	$	5,997		10,277	$	0.58		$	17,900		10,140	$	1.77
Effect of dilutive securities:
Stock options, SARs and restricted stock (1)				388		(0.02	)				146		(0.03	)
Diluted EPS	$	5,997		10,665	$	0.56		$	17,900		10,286	$	1.74

(1)

For the three months ended September 30, 2010 and 2009, stock options and SARs of 1,354,800 and 1,590,965, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended September 30, 2010, 126,000 contingent shares of nonvested restricted stock were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

-15-

	For the Nine Months Ended
	September 30, 2010							September 30, 2009
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available to common stockholders	$	9,588		10,211	$	0.94		$	76,803		10,138	$	7.58
Effect of dilutive securities:
Stock options, SARs and restricted stock (1)				365		(0.03	)				49		(0.04	)
Diluted EPS	$	9,588		10,576	$	0.91		$	76,803		10,187	$	7.54

(1)

For the nine months ended September 30, 2010 and 2009, stock options and SARs of 1,528,938 and 1,784,912, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the nine months ended September 30, 2010, 111,500 contingent shares of nonvested restricted stock were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

(e) Stock-Based Compensation

Farmer Mac’s 2008 Omnibus Incentive Compensation Plan 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. No SARs to directors are outstanding. If not exercised or terminated earlier due to the termination of employment, SARs granted to officers or employees expire after ten years. For all SARs granted, the exercise price is equal to the closing price of Farmer Mac’s Class C Non-Voting Common Stock on the date of grant. SARs granted to officers during 2010 have exercise prices of $12.20 per share. As of September 30, 2010, there are no outstanding SARs awarded to directors. Restricted stock awarded to directors during 2010 vests fully after approximately one year. Restricted stock awarded to officers during 2010 vests after approximately three years and only vests if certain performance conditions are met. Restricted stock awards granted to both directors and officers are not issued until full vesting occurs.

For the three and nine months ended September 30, 2010, Farmer Mac recognized $0.7 million and $2.2 million, respectively, of compensation expense related to stock options, SARs and restricted stock, compared to $0.6 million and $2.2 million, respectively, for the same periods in 2009.

-16-

The following tables summarize activity related to stock options, SARs and nonvested restricted stock awards for the three and nine months ended September 30, 2010 and 2009:

September 30, 2010

September 30, 2009

Stock

Weighted-

Stock

Weighted-

Options

Average

Options