Unassociated Document
As filed with the Securities and Exchange Commission on May 10, 2011

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

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

For the quarterly period ended March 31, 2011
 
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
¨
Accelerated filer      x
       
Non-accelerated filer
¨
Smaller reporting company
¨

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

As of May 2, 2011 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,812,500 shares of Class C Non-Voting Common Stock outstanding.

 
 

 

PART I - FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

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

Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010
4
Condensed Consolidated Statements of Equity for the three months ended March 31, 2011 and 2010
5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010
6
Notes to Condensed Consolidated Financial Statements
7

 
-2-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Assets:
           
Cash and cash equivalents
  $ 779,443     $ 729,920  
                 
Investment securities:
               
Available-for-sale, at fair value
    1,976,522       1,677,233  
Trading, at fair value
    88,046       86,096  
Total investment securities
    2,064,568       1,763,329  
                 
Farmer Mac Guaranteed Securities:
               
Available-for-sale, at fair value
    2,909,914       2,907,264  
                 
USDA Guaranteed Securities:
               
Available-for-sale, at fair value
    1,063,540       1,005,679  
Trading, at fair value
    274,561       311,765  
Total USDA Guaranteed Securities
    1,338,101       1,317,444  
Loans:
               
Loans held for sale, at lower of cost or fair value
    408,355       1,212,065  
Loans held for investment, at amortized cost
    1,093,559       90,674  
Loans held for investment in consolidated trusts, at amortized cost
    1,214,249       1,265,663  
Allowance for loan losses
    (11,084 )     (9,803 )
Total loans, net of allowance
    2,705,079       2,558,599  
                 
Real estate owned, at lower of cost or fair value
    2,881       1,992  
Financial derivatives, at fair value
    39,449       41,492  
Interest receivable
    65,576       90,295  
Guarantee and commitment fees receivable
    31,916       34,752  
Deferred tax asset, net
    12,735       14,530  
Prepaid expenses and other assets
    5,950       20,297  
Total Assets
  $ 9,955,612     $ 9,479,914  
                 
Liabilities and Equity:
               
Liabilities:
               
Notes payable:
               
Due within one year
  $ 4,626,382     $ 4,509,419  
Due after one year
    3,806,727       3,430,656  
Total notes payable
    8,433,109       7,940,075  
Debt securities of consolidated trusts held by third parties
    781,971       827,411  
Financial derivatives, at fair value
    97,820       113,687  
Accrued interest payable
    42,855       57,131  
Guarantee and commitment obligation
    28,668       30,308  
Accounts payable and accrued expenses
    74,368       22,113  
Reserve for losses
    8,378       10,312  
Total Liabilities
    9,467,169       9,001,037  
                 
Commitments and Contingencies (Note 5)
               
                 
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, 8,770,092 shares outstanding as of March 31, 2011 and 8,752,711 shares outstanding as of December 31, 2010
    8,770       8,753  
Additional paid-in capital
    100,450       100,050  
Accumulated other comprehensive income
    9,616       18,275  
Retained earnings
    68,645       50,837  
Total Stockholders' Equity
    246,590       237,024  
Non-controlling interest - preferred stock
    241,853       241,853  
Total Equity
    488,443       478,877  
Total Liabilities and Equity
  $ 9,955,612     $ 9,479,914  

See accompanying notes to condensed consolidated financial statements.

 
-3-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
For the Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
   
(in thousands, except per share amounts)
 
Interest income:
           
Investments and cash equivalents
  $ 7,187     $ 6,483  
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    27,775       20,831  
Loans
    29,110       33,418  
Total interest income
    64,072       60,732  
Total interest expense
    37,053       37,115  
Net interest income
    27,019       23,617  
Provision for loan losses
    (1,281 )     (2,850 )
Net interest income after provision for loan losses
    25,738       20,767  
                 
Non-interest income:
               
Guarantee and commitment fees
    6,387       5,919  
Gains/(losses) on financial derivatives
    4,005       (5,804 )
Gains on trading assets
    1,311       3,367  
Gains on sale of available-for-sale investment securities
    157       240  
Gains on sale of real estate owned
    97       -  
Lower of cost or fair value adjustment on loans held for sale
    (808 )     (2,274 )
Other income
    3,898       829  
Non-interest income
    15,047       2,277  
                 
Non-interest expense:
               
Compensation and employee benefits
    4,497       3,511  
General and administrative
    2,256       2,503  
Regulatory fees
    591       563  
Real estate owned operating costs, net
    368       10  
Release of reserve for losses
    (1,934 )     (1,468 )
Other expense
    900       -  
Non-interest expense
    6,678       5,119  
Income before income taxes
    34,107       17,925  
Income tax expense
    9,517       4,336  
Net income
    24,590       13,589  
Less: Net income attributable to non-controlling interest - preferred stock dividends
    (5,547 )     (4,068 )
Net income attributable to Farmer Mac
    19,043       9,521  
Preferred stock dividends
    (720 )     (1,970 )
Loss on retirement of preferred stock
    -       (5,784 )
Net income available to common stockholders
  $ 18,323     $ 1,767  
                 
Earnings per common share and dividends:
               
Basic earnings per common share
  $ 1.78     $ 0.17  
Diluted earnings per common share
  $ 1.72     $ 0.17  
Common stock dividends per common share
  $ 0.05     $ 0.05  
 
See accompanying notes to condensed consolidated financial statements.

 
-4-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)

   
For the Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
   
Shares
   
Amount
   
Shares
   
Amount
 
   
(in thousands)
 
Preferred stock:
                       
Balance, beginning of period
    58     $ 57,578       58     $ 57,578  
Issuance of Series C preferred stock
    -       -       -       -  
Balance, end of period
    58     $ 57,578       58     $ 57,578  
Common stock:
                               
Balance, beginning of period
    10,284     $ 10,284       10,142     $ 10,142  
Issuance of Class C common stock
    15       15       2       2  
Exercise of stock options and SARs
    2       2       -       -  
Balance, end of period
    10,301     $ 10,301       10,144     $ 10,144  
Additional paid-in capital:
                               
Balance, beginning of period
          $ 100,050             $ 97,090  
Stock-based compensation expense
            715               760  
Issuance of Class C common stock
            7               11  
Exercise, vesting and cancellation of stock options,
                               
SARs and restricted stock
            (322 )             -  
Balance, end of period
          $ 100,450             $ 97,861  
Retained earnings:
                               
Balance, beginning of period
          $ 50,837             $ 28,127  
Net income attributable to Farmer Mac
            19,043               9,521  
Cash dividends:
                               
Preferred stock, Series B ($8.33 per share)
            -               (1,250 )
Preferred stock, Series C ($12.50 per share)
            (720 )             (720 )
Common stock ($0.05 per share)
            (515 )             (507 )
Loss on retirement of preferred stock
            -               (5,784 )
Cumulative effect of adoption of new accounting standard, net of tax
            -               2,679  
Balance, end of period
          $ 68,645             $ 32,066  
Accumulated other comprehensive income:
                               
Balance, beginning of period
          $ 18,275             $ 3,254  
Change in unrealized (loss)/gain on available-for-sale securities, net of tax and reclassification adjustments
            (8,659 )             4,310  
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments
            -               23  
Balance, end of period
          $ 9,616             $ 7,587  
Total Stockholders' Equity
          $ 246,590             $ 205,236  
Non-controlling interest:
                               
Balance, beginning of period
          $ 241,853             $ -  
Preferred stock - Farmer Mac II LLC
            -               241,853  
Balance, end of period
          $ 241,853             $ 241,853  
Total Equity
          $ 488,443             $ 447,089  
                                 
Comprehensive income:
                               
Net income
          $ 24,590             $ 13,589  
Change in accumulated other comprehensive income, net of tax
            (8,659 )             4,333  
Comprehensive income
            15,931               17,922  
Less: Comprehensive income attributable to non-controlling interest
            5,547               4,068  
Total comprehensive income
          $ 10,384             $ 13,854  

See accompanying notes to condensed consolidated financial statements.

 
-5-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
For the Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
          (restated)  
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
  $ 24,590     $ 13,589  
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
               
Net amortization of premiums and discounts on loans, investments, and
               
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    4,294       1,632  
Amortization of debt premiums, discounts and issuance costs
    2,790       1,362  
Net change in fair value of trading securities, financial derivatives and loans held for sale
    (15,135 )     (6,262 )
Amortization of deferred gains on certain Farmer Mac Guaranteed
               
Securities and USDA Guaranteed Securities
    (3,081 )     -  
Gains on the sale of available-for-sale investment securities
    (157 )     (240 )
Gains on the sale of real estate owned
    (97 )     -  
Total (release)/provision for losses
    (653 )     1,382  
Deferred income taxes
    5,786       289  
Stock-based compensation expense
    715       760  
Proceeds from repayment and sale of trading investment securities
    382       236  
Purchases of loans held for sale
    (80,517 )     (127,740 )
Proceeds from repayment of loans held for sale
    35,892       10,195  
Net change in:
               
Interest receivable
    24,719       2,384  
Guarantee and commitment fees receivable
    2,836       20,821  
Other assets
    15,342       15,956  
Accrued interest payable
    (14,276 )     7,968  
Other liabilities
    (349 )     (19,931 )
Net cash provided by/(used in) operating activities
    3,081       (77,599 )
Cash flows from investing activities:
               
Purchases of available-for-sale investment securities
    (658,512 )     (284,149 )
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    (617,370 )     (93,197 )
Purchases of loans held for investment
    (215,867 )     (9,226 )
Purchases of defaulted loans
    (16,925 )     (2,490 )
Proceeds from repayment of available-for-sale investment securities
    336,681       57,766  
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    572,505       56,912  
Proceeds from repayment of loans held for investment
    127,693       107,232  
Proceeds from sale of available-for-sale investment securities
    78,573       69,175  
Proceeds from sale of trading securities - fair value option
    -       5,013  
Proceeds from sale of Farmer Mac Guaranteed Securities
    7,363       7,487  
Proceeds from sale of real estate owned
    305       -  
Net cash used in investing activities
    (385,554 )     (85,477 )
Cash flows from financing activities:
               
Proceeds from issuance of discount notes
    17,036,947       14,970,627  
Proceeds from issuance of medium-term notes
    616,503       339,653  
Payments to redeem discount notes
    (17,021,207 )     (15,099,610 )
Payments to redeem medium-term notes
    (142,000 )     (296,590 )
Excess tax benefits related to stock-based awards
    394       -  
Payments to third parties on debt securities of consolidated trusts
    (51,839 )     (72,971 )
Proceeds from common stock issuance
    (20 )     13  
Issuance costs on retirement of preferred stock
    -       (5,784 )
Proceeds from preferred stock issuance - Farmer Mac II LLC
    -       241,853  
Retirement of Series B preferred stock
    -       (144,216 )
Dividends paid - non-controlling interest - preferred stock
    (5,547 )     (4,005 )
Dividends paid on common and preferred stock
    (1,235 )     (2,477 )
Net cash provided by/(used in) financing activities
    431,996       (73,507 )
Net increase/(decrease) in cash and cash equivalents
    49,523       (236,583 )
Cash and cash equivalents at beginning of period
    729,920       654,794  
Cash and cash equivalents at end of period
  $ 779,443     $ 418,211  

See accompanying notes to condensed consolidated financial statements.

 
-6-

 

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.  On May 10, 2011, Farmer Mac filed with the SEC a report on Form 8-K advising that its 2010 and 2009 consolidated financial statements and its condensed consolidated financial statements for the nine months ended September 30, 2010 and 2009 and for the six months ended June 30, 2010 and 2009 should no longer be relied upon because of incorrect classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows.  These misclassifications have no impact on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity and do not affect core earnings, core capital, minimum capital surplus, or total cash flow.  See Note 1(a) for further information.  The December 31, 2010 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s 2010 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 2010 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, 2010 filed with the SEC on March 16, 2011.  Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.  Below is a summary of Farmer Mac’s significant accounting policies.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1) Farmer Mac Mortgage Securities Corporation (“FMMSC”), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities and to act as a registrant under registration statements filed with the Securities and Exchange Commission, and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the Farmer Mac II program – primarily the acquisition of USDA-guaranteed portions.  Farmer Mac II LLC was formed as a Delaware limited liability company on December 10, 2009.  The business operations of Farmer Mac II LLC began in January 2010.  The condensed consolidated financial statements also include the accounts of variable interest entities (“VIEs”) in which Farmer Mac determined itself to be the primary beneficiary.  See Note 2(g) for more information on consolidated VIEs.

A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities.  When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished.  For Farmer Mac Guaranteed Securities in the Corporation’s portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC.  The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the condensed consolidated statements of operations.  These guarantee fees totaled $2.0 million in the first quarter 2011, compared to $1.7 million in first quarter 2010.  The corresponding expense of FMMSC has been eliminated against interest income in consolidation.  All other inter-company balances and transactions have been eliminated in consolidation.
 
 
-7-

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

Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents.  The carrying value of cash and cash equivalents is a reasonable estimate of their fair value.  Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows.  The following table sets forth information regarding certain cash and non-cash transactions for the three months ended March 31, 2011 and 2010.

   
For the Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
   
(in thousands)
 
Cash paid during the period for:
           
Interest
  $ 26,763     $ 18,799  
Income taxes
    1,000       1,500  
Non-cash activity:
               
Real estate owned acquired through loan liquidation
    1,460       2,393  
Loans acquired and securitized as loans held for investment in consolidated trusts
    6,399       763  
Purchases of investment securities traded, not yet settled
    50,345       -  
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts
    6,399       1,400,371  
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to debt securities of consolidated trusts held by third parties
    6,399       1,400,371  
Transfers of available-for-sale Farmer Mac I Guaranteed Securities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance
    -       5,385  
Transfers of trading Farmer Mac Guaranteed Securities - Rural Utilities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance
    -       451,448  
Transfers of loans held for sale to loans held for investment
    878,798       -  

Effective January 1, 2011, Farmer Mac transferred $878.8 million of loans in the Farmer Mac I program from held for sale to held for investment because Farmer Mac no longer has the intent to securitize or sell these loans in the foreseeable future.  Farmer Mac transferred these loans at their cost, which was lower than the estimated fair value at the time of transfer.
 
At the time of purchase, loans are classified as either held for sale or held for investment depending upon management’s intent and ability to hold the loans for the foreseeable future.  On two occasions, once in first quarter 2009 and again in first quarter 2011, consistent with a change in management’s intent, Farmer Mac reclassified loans from one classification to the other on the balance sheet.  Historically, cash receipts from the repayment of loans were classified within the statements of cash flows consistent with the then current balance sheet classification as opposed to the original balance sheet classification assigned based on management's intent upon purchase of the loan, as prescribed by accounting guidance related to the statement of cash flows.  As a result of these incorrect classifications, Farmer Mac will restate its previously issued interim condensed consolidated statements of cash flows for the six and nine month periods ended June 30, and September 30, 2009 and 2010, respectively, and its consolidated statements of cash flows for the years ended December 31, 2009 and 2010 by amending its Annual Report on Form 10-K for the year ended December 31, 2010, which will include the interim periods, subsequent to this filing but as soon as practicable.  These corrections have no impact on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity and do not affect core earnings, core capital, minimum capital surplus, or total cash flow.  For each of the six, nine and twelve month periods ended June 30, September 30, and December 31, 2009, respectively, the impact of the restatement will increase net cash provided by operating activities by $65.0 million, $46.7 million and $42.2 million, respectively, with offsetting increases in net cash used in investing activities.  For each of the six, nine, and twelve month periods ended June 30, September 30, and December 31, 2010, respectively, the impact of the restatement will increase net cash used in operating activities by $31.6 million, $50.5 million, and $54.6 million, respectively, with offsetting decreases in cash used in investing activities.  The condensed consolidated statement of cash flows for the three months ended March 31, 2010 has been restated in this Form 10-Q to reflect increased net cash used in operating activities of $22.8 million offset by decreased net cash used in investing activities.

(b) Allowance for Losses

Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held (“allowance for loan losses”) and loans underlying Long Term Standby Purchase Commitments (“LTSPCs”) and Farmer Mac Guaranteed Securities (“reserve for losses”) based on available information.  Farmer Mac’s methodology for determining the allowance for losses separately considers its portfolio segments - Farmer Mac I, Farmer Mac II, and Rural Utilities, and disaggregates its analysis, where relevant, into classes of financing receivables, which currently include loans and AgVantage securities.  Further disaggregation to commodity type is performed, where appropriate, in analyzing the need for an allowance for losses.
 
 
-8-

 
 
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 are 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.

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

General Allowance for Losses

Farmer Mac I

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 reasonable 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.  There were no purchases or sales during first quarter 2011 that materially affected the credit profile of the Farmer Mac I portfolio.

Farmer Mac has not provided an allowance for losses for loans underlying Farmer Mac I AgVantage 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, with some level of overcollateralization also required for Farmer Mac I AgVantage securities.  Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans.
 
 
-9-

 
 
Farmer Mac II

No allowance for losses has been provided for USDA Guaranteed Securities or Farmer Mac II Guaranteed Securities.  The portions of loans (the “USDA-guaranteed portions”) guaranteed by the U.S. Department of Agriculture (“USDA”) presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets, as well as those that collateralize Famer 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.  Farmer Mac excludes these guaranteed portions from the credit risk metrics it discloses because of the USDA guarantee.

Rural Utilities

Farmer Mac separately evaluates the rural utilities loans it owns, as well as the lender obligations and loans underlying or securing its Farmer Mac Guaranteed Securities – Rural Utilities, including AgVantage securities, to determine if there are probable losses inherent in those assets.  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.  No allowance for losses has been provided for this portfolio segment based on the credit quality of the collateral supporting rural utilities assets and Farmer Mac’s counterparty risk analysis.  As of March 31, 2011, 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.

Specific Allowance for Impaired Loans

Farmer Mac also analyzes assets in its portfolio for impairment in accordance with the Financial Accounting Standards Board (“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);
 
·  
loans for which Farmer Mac has adjusted the timing of borrowers’ payment schedules, but still expects to collect all amounts due and has not made economic concessions; and
 
·  
additional performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress.

For loans with an updated appraised value, other updated collateral valuation or management’s estimate of discounted collateral value, this analysis includes the measurement of the fair value of the underlying collateral for individual loans relative to the total recorded investment, including principal, interest and advances and net of any charge-offs.  In the event that the collateral value does not support the total recorded investment, Farmer Mac provides an allowance for the loan 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.
 
 
-10-

 
 
As of March 31, 2011 and 2010, Farmer Mac’s specific allowances for losses were $7.5 million and $2.4 million, respectively.

Allowance for Losses

The following is a summary of the changes in the allowance for losses for three months ended March 31, 2011 and 2010:

   
For the Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
   
Allowance
         
Total
   
Allowance
         
Total
 
   
for Loan
   
Reserve
   
Allowance
   
for Loan
   
Reserve
   
Allowance
 
   
Losses
   
for Losses
   
for Losses
   
Losses
   
for Losses
   
for Losses
 
   
(in thousands)
 
                                     
Beginning Balance
  $ 9,803     $ 10,312     $ 20,115     $ 6,292     $ 7,895     $ 14,187  
Provision/(recovery) for losses
    1,281       (1,934 )     (653 )     2,850       (1,468 )     1,382  
Charge-offs
    -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -  
Ending Balance
  $ 11,084     $ 8,378     $ 19,462     $ 9,142     $ 6,427     $ 15,569  

During first quarter 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.3 million and releases from its reserve for losses of $1.9 million.  In first quarter 2011, Farmer Mac purchased two defaulted loans pursuant to the terms of an LTSPC agreement.  This resulted in the reclassification of $1.8 million of specific allowance, which had been recorded in fourth quarter 2010, from the reserve for losses to the allowance for loan losses.  The provision/(recovery) for losses for first quarter 2011 reflects this reclassification as well as a  decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol industry.

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

Farmer Mac’s reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of March 31, 2011 were $0.6 million and $7.8 million, respectively, compared to $0.6 million and $9.7 million, respectively as of December 31, 2010.
 
 
-11-

 
 
The following tables present the ending balances of Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities and the related allowance for losses by impairment method and commodity type as of March 31, 2011 and December 31, 2010.

    
As of March 31, 2011
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Ending Balance
                                         
Evaluated collectively for impairment
  $ 1,732,773     $ 819,134     $ 1,153,805     $ 275,628     $ 226,131     $ 21,173     $ 4,228,644  
Evaluated individually for impairment
    29,260       29,672       12,789       7,170       6,553       240       85,684  
    $ 1,762,033     $ 848,806     $ 1,166,594     $ 282,798     $ 232,684     $ 21,413     $ 4,314,328  
                                                         
Allowance for Losses
                                                       
Beginning balance
  $ 3,572     $ 3,537     $ 2,749     $ 445     $ 9,797     $ 15     $ 20,115  
Provision/(recovery) for losses
    350       265       (899 )     608       (974 )     (3 )     (653 )
Charge-offs
    -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -  
Ending balance  
  $ 3,922     $ 3,802     $ 1,850     $ 1,053     $ 8,823     $ 12     $ 19,462  
                                                         
Evaluated collectively for impairment
  $ 1,645     $ 1,209     $ 1,320     $ 760     $ 6,973     $ 11     $ 11,918  
Evaluated individually for impairment
    2,277       2,593       530       293       1,850       1       7,544  
    $ 3,922     $ 3,802     $ 1,850     $ 1,053     $ 8,823     $ 12     $ 19,462  

    
As of December 31, 2010
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Ending Balance
                                         
Evaluated collectively for impairment
  $ 1,699,477     $ 835,254     $ 1,130,466     $ 282,400     $ 239,933     $ 22,514     $ 4,210,044  
Evaluated individually for impairment
    31,903       30,221       15,992       8,745       6,790       425       94,076  
    $ 1,731,380     $ 865,475     $ 1,146,458     $ 291,145     $ 246,723     $ 22,939     $ 4,304,120  
                                                         
Allowance for Losses
                                                       
Evaluated collectively for impairment
  $ 1,499     $ 783     $ 2,236     $ 222     $ 7,947     $ 13     $ 12,700  
Evaluated individually for impairment
    2,073       2,754       513       223       1,850       2       7,415  
    $ 3,572     $ 3,537     $ 2,749     $ 445     $ 9,797     $ 15     $ 20,115  
 
 
-12-

 
 
Farmer Mac recognized interest income of approximately $0.8 million and $0.5 million on impaired loans during the three months ended March 31, 2011 and 2010, respectively.  During first quarter 2011 and 2010, Farmer Mac’s average investment in impaired loans was $87.7 million and $92.6 million, respectively.

The following tables present by commodity type the unpaid principal balances, recorded investment and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status  as of March 31, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on impaired loans as of March 31, 2011.

    
As of March 31, 2011
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Impaired Loans:
                                         
With no specific allowance:
                                         
Recorded investment
  $ 13,850     $ 10,510     $ 7,240     $ 859     $ -     $ 117     $ 32,576  
Unpaid principal balance
    15,954       11,017       7,445       945       -       116       35,477  
                                                         
With a specific allowance:
                                                       
Recorded investment
    13,627       17,674       5,471       6,292       6,600       125       49,789  
Unpaid principal balance
    13,306       18,655       5,344       6,225       6,553       124       50,207  
Associated allowance
    2,277       2,593       530       293       1,850       1       7,544  
                                                         
Total:
                                                       
Recorded investment
    27,477       28,184       12,711       7,151       6,600       242       82,365  
Unpaid principal balance
    29,260       29,672       12,789       7,170       6,553       240       85,684  
Associated allowance
    2,277       2,593       530       293       1,850       1       7,544  
                                                         
Average recorded investment in impaired loans
    29,452       28,841       14,318       7,995       6,720       336       87,662  
Income recognized on impaired loans
    156       27       217       41       382       -       823  
Recorded investment of loans on Nonaccrual status:
    11,756       24,348       3,490       4,987       -       -       44,581  
 
 
-13-

 
 
   
As of December 31, 2010
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Impaired Loans:
                                         
With no specific allowance:
                                         
Recorded investment
  $ 16,015     $ 10,549     $ 6,873     $ 1,050     $ -     $ -     $ 34,487  
Unpaid principal balance
    17,274       10,895       7,087       1,072       -       -       36,328  
                                                         
With a specific allowance:
                                                       
Recorded investment
    15,414       18,949       9,052       7,788       6,839       430       58,472  
Unpaid principal balance
    14,630       19,326       8,905       7,672       6,790       425       57,748  
Associated allowance
    2,073       2,754       513       223       1,850       2       7,415  
                                                         
Total:
                                                       
Recorded investment
    31,429       29,498       15,925       8,838       6,839       430       92,959  
Unpaid principal balance
    31,904       30,221       15,992       8,744       6,790       425       94,076  
Associated allowance
    2,073       2,754       513       223       1,850       2       7,415  
                                                         
Recorded Investment of Loans on Nonaccrual Status:
  $ 13,828     $ 8,793     $ 3,267     $ 4,380     $ 8,796     $ -     $ 39,064  

In accordance with the terms of all applicable trust agreements, Farmer Mac generally acquires all loans that collateralize Farmer Mac Guaranteed Securities that become and remain either 90 or 120 days or more past due (depending on the provisions of the applicable agreement) on the next subsequent loan payment date.  In accordance with the terms of all LTSPCs, Farmer Mac acquires loans that are either 90 days or 120 days delinquent (depending on the provisions of the applicable agreement) upon the request of the counterparty.

Farmer Mac records all such defaulted loans at their unpaid principal balance during the period in which Farmer Mac becomes entitled to purchase the loans and therefore regains effective control over the transferred loans.

During first quarter 2011, Farmer Mac purchased 8 defaulted loans having an unpaid principal balance of $16.9 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs.  During first quarter 2010, Farmer Mac purchased 5 defaulted loans having a principal balance of $2.5 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs.  The following table presents Farmer Mac’s purchases of defaulted loans underlying Farmer Mac I Guaranteed Securities and LTSPCs.

   
For the Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Defaulted loans purchased underlying off-balance sheet Farmer Mac I
           
Guaranteed Securities
    1,369       2,323  
Defaulted loans purchased underlying LTSPCs
    15,556       167  
Total loan purchases
  $ 16,925     $ 2,490  

 
-14-

 

Credit Quality Indicators

The following tables present credit quality indicators related to Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) as of March 31, 2011 and December 31, 2010.  Farmer Mac uses 90-day delinquency information to evaluate its credit risk exposure on these assets because historically it has been the best measure of borrower credit quality deterioration.  Most of the Farmer Mac I loans held and underlying LTSPCs and Farmer Mac I Guaranteed Securities have annual (January 1) or semi-annual (January 1 and July 1) payment dates and are supported by less frequent and less predictable revenue sources, such as the cash flows generated from the maturation of crops, sales of livestock and government farm support programs.  Taking into account the reduced frequency of payment due dates and revenue sources, Farmer Mac considers the 90-day delinquency point to be the most significant observation point when evaluating its credit risk exposure.

    
As of March 31, 2011
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Credit risk profile by internally assigned grade (1)
                                         
Grade:
                                         
Acceptable
  $ 1,660,846     $ 778,460     $ 1,003,739     $ 259,363     $ 113,369     $ 18,746     $ 3,834,523  
Other assets especially mentioned ("OAEM") (2)
    55,386       21,460       99,590       9,755       76,276       1,298       263,765  
Substandard (2)
    45,801       48,886       63,265       13,680       43,039       1,369       216,040  
Total
  $ 1,762,033     $ 848,806     $ 1,166,594     $ 282,798     $ 232,684     $ 21,413     $ 4,314,328  
                                                         
Commodity analysis of past due loans (1)
                                                       
Greater than 90 days
  $ 23,890     $ 22,730     $ 6,975     $ 3,093     $ -     $ 636     $ 57,324  
In bankruptcy and REO
    4,519       4,692       1,379       1,792       -       -       12,382  
Total non-performing
  $ 28,409     $ 27,422     $ 8,354     $ 4,885     $ -     $ 636     $ 69,706  

(1)
Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its Farmer Mac I portfolio, and recorded investment of past due loans.  Amounts include real estate owned, at lower of cost or fair value less estimated selling costs, of $2.9 million.
(2)
Assets in the OAEM category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured. Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.

    
As of December 31, 2010
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Credit risk profile by internally assigned grade (1)
                                         
Grade:
                                         
Acceptable
  $ 1,625,995     $ 792,061     $ 993,542     $ 268,111     $ 116,248     $ 20,321     $ 3,816,278  
Other assets especially mentioned ("OAEM")(2)
    59,768       17,112       86,500       9,652       76,947       639       250,618  
Substandard(2)
    45,617       56,302       66,416       13,382       53,528       1,979       237,224  
Total
  $ 1,731,380     $ 865,475     $ 1,146,458     $ 291,145     $ 246,723     $ 22,939     $ 4,304,120  
                                                         
Commodity analysis of past due loans (1)
                                                       
Greater than 90 days
  $ 21,423     $ 26,312     $ 7,177     $ 3,803     $ 10,892     $ 641     $ 70,248  
In bankruptcy and REO
    4,886       3,712       1,395       1,537       -       -       11,530  
Total non-performing
  $ 26,309     $ 30,024     $ 8,572     $ 5,340     $ 10,892     $ 641     $ 81,778  

(1)
Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its Farmer Mac I portfolio, and recorded investment of past due loans.  Amounts include real estate owned, at lower of cost or fair value less estimated selling costs, of $2.0 million.
(2)
Assets in the OAEM category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured. Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.
 
 
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Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs as of March 31, 2011 and December 31, 2010:

   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
By commodity/collateral type:
           
Crops
  $ 1,762,033     $ 1,731,380  
Permanent plantings
    848,806       865,475  
Livestock
    1,166,594       1,146,458  
Part-time farm
    282,798       291,145  
AgStorage and processing (including ethanol facilities)
    232,684       246,723  
Other
    21,413       22,939  
Total
  $ 4,314,328     $ 4,304,120  
                 
By geographic region (1):
               
Northwest
  $ 728,679     $ 660,845  
Southwest
    1,599,361       1,626,398  
Mid-North
    915,699       934,879  
Mid-South
    519,753       521,294  
Northeast
    308,956       317,715  
Southeast
    241,880       242,989  
Total
  $ 4,314,328     $ 4,304,120  
                 
By original loan-to-value ratio:
               
0.00% to 40.00%
  $ 1,054,957     $ 1,030,580  
40.01% to 50.00%
    753,240       770,744  
50.01% to 60.00%
    1,242,452       1,246,675  
60.01% to 70.00%
    1,068,524       1,056,132  
70.01% to 80.00%
    151,284       155,363  
80.01% to 90.00%
    43,871       44,626  
Total
  $ 4,314,328     $ 4,304,120  

 
(1) 
Geographic regions:  Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); Southeast (AL, AR, FL, GA, LA, MS, SC).

The original loan-to-value ratio is calculated by dividing the loan principal balance at the time of guarantee, purchase or commitment by the appraised value at the date of loan origination or, when available, the updated appraised value at the time of guarantee, purchase or commitment.  Current loan-to-value ratios may be higher or lower than the original loan-to-value ratios.
 
 
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(c)       Financial Derivatives

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 March 31, 2011 and December 31, 2010:
 
    
March 31, 2011