Unassociated Document
As filed with the Securities and Exchange Commission on November 9, 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 September 30, 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)
     
1999 K Street, N.W. 4th Floor, Washington, DC
(Address of principal executive offices)
 
20006
(Zip code)

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

1133 Twenty-First Street, N.W., Suite 600, Washington, DC 20036
(Registrant’s former address)

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           x                                No           ¨

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

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

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

As of November 1, 2011, the registrant had 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock and 8,825,794 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, 2011 and December 31, 2010
3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010
4
Condensed Consolidated Statements of Equity for the nine months ended September 30, 2011 and 2010
5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010
6
Notes to Condensed Consolidated Financial Statements
7
 
 
-2-

 

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

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Assets:
           
Cash and cash equivalents
  $ 825,014     $ 729,920  
                 
Investment securities:
               
Available-for-sale, at fair value
    1,830,155       1,677,233  
Trading, at fair value
    82,722       86,096  
Total investment securities
    1,912,877       1,763,329  
                 
Farmer Mac Guaranteed Securities:
               
Available-for-sale, at fair value
    4,300,000       2,907,264  
                 
USDA Guaranteed Securities:
               
Available-for-sale, at fair value
    1,193,015       1,005,679  
Trading, at fair value
    233,383       311,765  
Total USDA Guaranteed Securities
    1,426,398       1,317,444  
Loans:
               
Loans held for sale, at lower of cost or fair value
    479,690       1,212,065  
Loans held for investment, at amortized cost
    1,189,224       90,674  
Loans held for investment in consolidated trusts, at amortized cost
    1,138,317       1,265,663  
Allowance for loan losses
    (10,699 )     (9,803 )
Total loans, net of allowance
    2,796,532       2,558,599  
                 
Real estate owned, at lower of cost or fair value
    3,898       1,992  
Financial derivatives, at fair value
    46,254       41,492  
Interest receivable (includes $10,650 and $22,845, respectively, related to consolidated trusts)
    79,579       90,295  
Guarantee and commitment fees receivable
    30,247       34,752  
Deferred tax asset, net
    -       14,530  
Prepaid expenses and other assets
    9,708       20,297  
Total Assets
  $ 11,430,507     $ 9,479,914  
                 
Liabilities and Equity:
               
Liabilities:
               
Notes payable:
               
Due within one year
  $ 5,831,259     $ 4,509,419  
Due after one year
    4,060,382       3,430,656  
Total notes payable
    9,891,641       7,940,075  
Debt securities of consolidated trusts held by third parties
    713,546       827,411  
Financial derivatives, at fair value
    166,633       113,687  
Accrued interest payable (includes $8,248 and $14,439, respectively, related to consolidated trusts)
    48,998       57,131  
Guarantee and commitment obligation
    26,903       30,308  
Accounts payable and accrued expenses
    26,863       22,113  
Deferred tax liability, net
    1,871       -  
Reserve for losses
    6,991       10,312  
Total Liabilities
    10,883,446       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, 8,825,594 shares outstanding as of September 30, 2011 and 8,752,711 shares outstanding as of December 31, 2010
    8,826       8,753  
Additional paid-in capital
    101,809       100,050  
Accumulated other comprehensive income
    85,715       18,275  
Retained earnings
    49,749       50,837  
Total Stockholders' Equity
    305,208       237,024  
Non-controlling interest - preferred stock
    241,853       241,853  
Total Equity
    547,061       478,877  
Total Liabilities and Equity
  $ 11,430,507     $ 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
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(in thousands, except per share amounts)
 
Interest income:
                       
Investments and cash equivalents
  $ 6,880     $ 6,430     $ 21,100     $ 19,303  
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    34,398       22,971       91,531       62,597  
Loans
    29,843       29,174       89,414       94,734  
Total interest income
    71,121       58,575       202,045       176,634  
Total interest expense
    39,412       33,526       114,105       106,360  
Net interest income
    31,709       25,049       87,940       70,274  
Release of/(provision for) loan losses
    349       (412 )     (1,092 )     (1,392 )
Net interest income after release of/(provision for) loan losses
    32,058       24,637       86,848       68,882  
                                 
Non-interest loss:
                               
Guarantee and commitment fees
    6,148       5,977       18,855       17,606  
Losses on financial derivatives
    (68,567 )     (6,864 )     (82,368 )     (28,508 )
(Losses)/gains on trading assets
    (3,633 )     (1,722 )     (354 )     6,703  
Gains on sale of available-for-sale investment securities
    74       24       269       264  
(Losses)/gains on sale of real estate owned
    (4 )     -       720       -  
Lower of cost or fair value adjustment on loans held for sale
    9,851       (906 )     8,887       (3,090 )
Other income
    726       140       5,748       1,180  
Non-interest loss
    (55,405 )     (3,351 )     (48,243 )     (5,845 )
                                 
Non-interest expense:
                               
Compensation and employee benefits
    4,805       4,501       13,968       11,919  
General and administrative
    2,505       1,775       7,417       6,329  
Regulatory fees
    550       568       1,714       1,693  
Real estate owned operating costs, net
    142       1,189       741       1,497  
(Release of)/provision for losses
    (452 )     105       (3,321 )     1,680  
Other expense
    -       -       900       -  
Non-interest expense
    7,550       8,138       21,419       23,118  
(Loss)/income before income taxes
    (30,897 )     13,148       17,186       39,919  
Income tax (benefit)/expense
    (14,131 )     885       (2,075 )     5,977  
Net (loss)/income
    (16,766 )     12,263       19,261       33,942  
Less: Net income attributable to non-controlling interest -  preferred stock dividends
    (5,547 )     (5,546 )     (16,641 )     (15,160 )
Net (loss)/income attributable to Farmer Mac
    (22,313 )     6,717       2,620       18,782  
Preferred stock dividends
    (719 )     (720 )     (2,159 )     (3,410 )
Loss on retirement of preferred stock
    -       -       -       (5,784 )
Net (loss)/income attributable to common stockholders
  $ (23,032 )   $ 5,997     $ 461     $ 9,588  
                                 
(Loss)/earnings per common share and dividends:
                               
Basic (loss)/earnings per common share
  $ (2.22 )   $ 0.58     $ 0.04     $ 0.94  
Diluted (loss)/earnings per common share
  $ (2.22 )   $ 0.56     $ 0.04     $ 0.91  
Common stock dividends per common share
  $ 0.05     $ 0.05     $ 0.15     $ 0.15  

See accompanying notes to condensed consolidated financial statements.

 
-4-

 

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

   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 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
    59       59       122       122  
Exercise of stock options and SARs
    14       14       13       13  
Balance, end of period
    10,357     $ 10,357       10,277     $ 10,277  
Additional paid-in capital:
                               
Balance, beginning of period
          $ 100,050             $ 97,090  
Stock-based compensation expense
            2,254               2,187  
Issuance of Class C common stock
            19               33  
Exercise, vesting and cancellation of stock options,
                               
SARs and restricted stock
            (514 )             158  
Balance, end of period
          $ 101,809             $ 99,468  
Retained earnings:
                               
Balance, beginning of period
          $ 50,837             $ 28,127  
Net income attributable to Farmer Mac
            2,620               18,782  
Cash dividends:
                               
Preferred stock, Series B ($8.33 per share)
            -               (1,250 )
Preferred stock, Series C ($37.50 per share)
            (2,159 )             (2,160 )
Common stock ($0.15 per share)
            (1,549 )             (1,534 )
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
          $ 49,749             $ 38,860  
Accumulated other comprehensive income:
                               
Balance, beginning of period
          $ 18,275             $ 3,254  
Change in unrealized gain on available-for-sale securities, net of tax and reclassification adjustments
            67,440               44,000  
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments
            -               78  
Balance, end of period
          $ 85,715             $ 47,332  
Total Stockholders' Equity
          $ 305,208             $ 253,515  
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
          $ 547,061             $ 495,368  
                                 
Comprehensive income:
                               
Net income
          $ 19,261             $ 33,942  
Change in accumulated other comprehensive income, net of tax
            67,440               44,078  
Comprehensive income
          $ 86,701             $ 78,020  
Less: Comprehensive income attributable to non-controlling interest
            16,641               15,160  
Total comprehensive income
          $ 70,060             $ 62,860  

See accompanying notes to condensed consolidated financial statements.

 
-5-

 

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

   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 2010
 
         
(restated)
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
  $ 19,261     $ 33,942  
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
               
Net amortization of premiums and discounts on loans, investments, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    13,923       8,421  
Amortization of debt premiums, discounts and issuance costs
    8,822       5,057  
Net change in fair value of trading securities, financial derivatives and loans held for sale
    48,538       (5,970 )
Amortization of deferred gains on certain Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    (4,216 )     -  
Gains on the sale of available-for-sale investment securities
    (269 )     (264 )
Gains on the sale of real estate owned
    (720 )     -  
Total (release of)/provision for losses
    (2,229 )     3,072  
Deferred income taxes
    (20,734 )     809  
Stock-based compensation expense
    2,254       2,188  
Proceeds from repayment and sale of trading investment securities
    686       586  
Purchases of loans held for sale
    (152,117 )     (404,072 )
Proceeds from repayment of loans purchased as held for sale
    83,361       32,506  
Net change in:
               
Interest receivable
    10,778       (246 )
Guarantee and commitment fees receivable
    4,505       20,958  
Other assets
    2,269       642  
Accrued interest payable
    (8,133 )     5,532  
Other liabilities
    2,838       (17,865 )
Net cash provided by/(used in) operating activities
    8,817       (314,704 )
Cash flows from investing activities:
               
Purchases of available-for-sale investment securities
    (1,276,131 )     (626,678 )
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    (2,105,473 )     (1,151,375 )
Purchases of loans held for investment
    (398,050 )     (26,367 )
Purchases of defaulted loans
    (21,266 )     (5,317 )
Proceeds from repayment of available-for-sale investment securities
    675,566       213,315  
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    699,263       372,862  
Proceeds from repayment of loans purchased as held for investment
    251,471       246,906  
Proceeds from sale of available-for-sale investment securities
    447,864       92,767  
Proceeds from sale of trading securities - fair value option
    -       5,013  
Proceeds from sale of Farmer Mac Guaranteed Securities
    13,869       18,860  
Proceeds from sale of real estate owned
    1,361       -  
Net cash used in investing activities
    (1,711,526 )     (860,014 )
Cash flows from financing activities:
               
Proceeds from issuance of discount notes
    52,174,214       50,774,678  
Proceeds from issuance of medium-term notes
    1,981,109       1,977,609  
Payments to redeem discount notes
    (51,185,913 )     (50,262,407 )
Payments to redeem medium-term notes
    (1,027,000 )     (1,441,590 )
Excess tax benefits related to stock-based awards
    243       747  
Payments to third parties on debt securities of consolidated trusts
    (124,521 )     (147,832 )
Proceeds from common stock issuance
    20       180  
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
    (16,641 )     (15,097 )
Dividends paid on common and preferred stock
    (3,708 )     (4,944 )
Net cash provided by financing activities
    1,797,803       973,197  
Net increase/(decrease) in cash and cash equivalents
    95,094       (201,521 )
Cash and cash equivalents at beginning of period
    729,920       654,794  
Cash and cash equivalents at end of period
  $ 825,014     $ 453,273  

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 June 1, 2011, Farmer Mac filed with the SEC an amendment to its Annual Report on Form 10-K for the year ended December 31, 2010 to correct prior misclassifications of proceeds from the repayments of certain loans between operating activities and investing activities on the consolidated statements of cash flows.  These misclassifications had no impact on the net increase or decrease in cash and cash equivalents as previously reported and had no effect on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of equity.   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 audited 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, as amended by Amendment No. 1 on Form 10-K/A filed on June 1, 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 SEC, 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 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.  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.

 
-7-

 

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 $2.4 million and $6.5 million for the three and nine months ended September 30, 2011, respectively, compared to $1.5 million and $4.7 million for the same periods in 2010, respectively.  The corresponding expense of FMMSC has been eliminated against interest income in consolidation.  All other inter-company balances and transactions have been eliminated in consolidation.

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

Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents.  The carrying value of cash and cash equivalents is a reasonable 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, 2011 and 2010.

   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 2010
 
    
(in thousands)
 
Cash paid during the period for:
           
Interest
  $ 78,598     $ 57,746  
Income taxes
    20,568       12,500  
Non-cash activity:
               
Real estate owned acquired through loan liquidation
    2,723       4,643  
Loans acquired and securitized as loans held for investment in consolidated trusts
    10,656       2,185  
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts
    10,656       1,402,556  
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to debt securities of consolidated trusts held by third parties
    10,656       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 loans held for sale to loans held for investment
    878,798       -  
 
 
-8-

 

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.  Prior to first quarter 2011, 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 restated 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 included the interim periods, by filing Amendment No. 1 on Form 10-K/A on June 1, 2011.  The restatements impacted only the classification of items in operating activities and investing activities and had no impact on the net increase or decrease in cash and cash equivalents as previously reported and had no effect on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity.

(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 by commodity type is performed, where appropriate, in analyzing the need for an allowance for losses.

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

 
-9-

 

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 the first nine months of 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.

Farmer Mac II

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

 
-10-

 

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 September 30, 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 generally 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.

 
-11-

 

A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring (“TDR”).  Farmer Mac has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due, including interest accrued at the original contract rate.  Because the payment of principal at original maturity is primarily dependent on the value of the collateral, Farmer Mac considers the current value of the collateral in determining whether the principal will be paid.  In making its determination of whether a borrower is experiencing financial difficulties, Farmer Mac considers several factors, including (1) whether the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial doubt as to whether the borrower will continue to be a going concern, and (3) whether the borrower can obtain funds from other sources at an effective interest rate at or near a current market interest rate for debt with similar risk characteristics.  Farmer Mac evaluates TDRs similarly to other impaired loans for purposes of the allowance for losses.  For both the three and nine month periods ended September 30, 2011, the recorded investment of loans determined to be TDRs was $0.4 million, both before and after restructuring.  The provision for loan losses related to TDRs was zero and $0.1 million for the three and nine months ended September 30, 2011, respectively.

           As of September 30, 2011 and 2010, Farmer Mac’s specific allowances for losses were $7.5 million and $2.9 million, respectively.

Allowance for Losses

The following is a summary of the changes in the allowance for losses for the three and nine months ended September 30, 2011 and 2010:

    
September 30, 2011
   
September 30, 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)
 
For the Three Months Ended:
                                   
Beginning Balance
  $ 11,053     $ 7,443     $ 18,496     $ 9,495     $ 9,470     $ 18,965  
(Release of)/provision for losses
    (349 )     (452 )     (801 )     412       105       517  
Charge-offs
    (5 )     -       (5 )     (465 )     -       (465 )
Recoveries
    -       -       -       -       -       -  
Ending Balance
  $ 10,699     $ 6,991     $ 17,690     $ 9,442     $ 9,575     $ 19,017  
                                                 
For the Nine Months Ended:
                                               
Beginning Balance
  $ 9,803     $ 10,312     $ 20,115     $ 6,292     $ 7,895     $ 14,187  
Provision for/(release of) losses
    1,092       (3,321 )     (2,229 )     1,392       1,680       3,072  
Charge-offs
    (196 )     -       (196 )     (465 )     -       (465 )
Recoveries
    -       -       -       2,223       -       2,223  
Ending Balance
  $ 10,699     $ 6,991     $ 17,690     $ 9,442     $ 9,575     $ 19,017  

During third quarter 2011, Farmer Mac recorded releases from its allowance for loan losses and its reserve for losses of $0.3 million and $0.5 million, respectively.  The releases from the allowance for losses in third quarter 2011 were primarily due to a decline in estimated probable losses related to Farmer Mac’s exposure to the dairy industry.  For the nine months ended September 30, 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.1 million and releases from its reserve for losses of $3.3 million, respectively.  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 for/(release of) losses for the nine months ended September 30, 2011 reflects this reclassification as well as the decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries.

 
-12-

 

During third quarter 2010, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $0.4 million and $0.1 million, respectively.  Farmer Mac also recorded charge-offs of $0.5 million to its allowance for loan losses during third quarter 2010.  For the nine months ended September 30, 2010, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $1.4 million and $1.7 million, respectively.  These amounts include the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses upon adoption of new consolidation guidance in first quarter 2010.  Farmer Mac also recorded charge-offs of $0.5 million and recoveries of $2.2 million on a loan secured by an ethanol plant to its allowance for loan losses during the nine months ended September 30, 2010.
 
Farmer Mac’s reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of September 30, 2011 was $0.4 million and $6.6 million, respectively, compared to $0.6 million and $9.7 million, respectively, as of December 31, 2010.

 
-13-

 

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 September 30, 2011 and December 31, 2010 and changes in the allowance for losses for the three and nine months ended September 30, 2011.

    
As of September 30, 2011
 
                           
AgStorage and
             
                           
Processing
             
         
Permanent
         
Part-time
   
(including ethanol
             
   
Crops
   
Plantings
   
Livestock
   
Farm
   
facilities)
   
Other
   
Total
 
   
(in thousands)
 
Ending Balance:
                                         
Evaluated collectively for impairment
  $ 1,781,013     $ 809,383     $ 1,246,359     $ 244,587     $ 187,144     $ 20,318     $ 4,288,804  
Evaluated individually for impairment
    29,991       32,029       11,904       11,398       6,000       1,138       92,460  
    $ 1,811,004     $ 841,412     $ 1,258,263     $ 255,985     $ 193,144     $ 21,456     $ 4,381,264  
                                                         
Allowance for Losses:
                                                       
Evaluated collectively for impairment
  $ 1,818     $ 1,178     $ 164     $ 781     $ 6,252     $ 7     $ 10,200  
Evaluated individually for impairment
    2,041       2,610       695       293       1,850       1       7,490  
    $ 3,859     $ 3,788     $ 859     $ 1,074     $ 8,102     $ 8     $ 17,690  
                                                         
For the Three Months Ended:
                                                       
Beginning balance
  $ 3,715     $ 3,803     $ 1,774     $ 1,095     $ 8,100     $ 9     $ 18,496  
Provision for/(release of) losses
    144       (15 )     (915 )     (16 )     2       (1 )     (801 )
Charge-offs
    -       -       -       (5 )     -       -       (5 )
Ending balance
  $ 3,859     $ 3,788     $ 859     $ 1,074     $ 8,102     $ 8     $ 17,690  
                                                         
For the Nine Months Ended:
                                                       
Beginning balance
  $ 3,572     $ 3,537     $ 2,749     $ 445     $ 9,797     $ 15     $ 20,115  
Provision for/(release of) losses
    463       258       (1,882 )     634       (1,695 )     (7 )     (2,229 )
Charge-offs
    (176 )     (7 )     (8 )     (5 )     -       -       (196 )
Ending balance
  $ 3,859     $ 3,788     $ 859     $ 1,074     $ 8,102     $ 8     $ 17,690  
 
 
-14-

 
 
    
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  

Farmer Mac recognized interest income of approximately $0.7 million and $2.1 million on impaired loans during the three months and nine months ended September 30, 2011, respectively, compared to $0.6 million and $1.5 million, respectively, for the same periods in 2010.  During the three and nine months ended September 30, 2011, Farmer Mac’s average investment in impaired loans was $94.2 million and $90.9 million, respectively, compared to $125.4 million and $109.0 million, respectively, for the same periods in 2010.

The following tables present by commodity type the unpaid principal balances, recorded investment and specific allowance for losses related to impaired loans, the recorded investment in loans on nonaccrual status as of September 30, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011.

 
-15-

 

    
As of September 30, 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
  $ 13,274     $ 12,046     $ 4,460     $ 3,635     $ -     $ 970     $ 34,385  
Unpaid principal balance
    13,893       11,936       5,186       3,734       -       902       35,651  
                                                         
With a specific allowance:
                                                       
Recorded investment
    17,401       19,675       7,013       7,755       6,000       239       58,083  
Unpaid principal balance
    16,098       20,093       6,718       7,664       6,000       236       56,809  
Associated allowance
    2,041       2,610       695       293       1,850       1       7,490  
                                                         
Total:
                                                       
Recorded investment
    30,675       31,721       11,473       11,390       6,000       1,209       92,468  
Unpaid principal balance
    29,991       32,029       11,904       11,398       6,000       1,138       92,460  
Associated allowance
    2,041       2,610       695       293       1,850       1       7,490  
                                                         
For the Three Months Ended September 30, 2011:
                                                       
Average recorded investment in impaired loans
    31,639       31,299       12,371       11,511       6,158       1,207       94,185  
Income recognized on impaired loans
    120       480       42       63       -       -       705  
                                                         
For the Nine Months Ended September 30, 2011:
                                                       
Average recorded investment in impaired loans
    30,546       30,070       13,344       9,753       6,439       771       90,923  
Income recognized on impaired loans
    432       857       343       125       382       -       2,139  
                                                         
Recorded investment of loans on nonaccrual status:
    8,389       25,475       4,532       7,464       -       -       45,860  

    
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  
 
 
-16-

 

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 the three and nine months ended September 30, 2011, Farmer Mac purchased 5 defaulted loans having a cumulative unpaid principal balance of $2.9 million and 18 defaulted loans having a cumulative unpaid principal balance of $21.3 million, respectively, from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs.  During the three and nine months ended September 30, 2010, Farmer Mac purchased 9 defaulted loans having a cumulative unpaid principal balance of $1.9 million and 22 defaulted loans having a cumulative unpaid principal balance of $5.3 million, respectively, 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
   
For the Nine Months Ended
 
    
September 30,
   
September 30,
   
September 30,
   
September 30,
 
    
2011
   
2010
   
2011
   
2010
 
   
(in thousands)
 
Defaulted loans purchased underlying Farmer Mac I Guaranteed Securities
  $ 2,921     $ 1,133     $ 7,292     $ 3,456  
Defaulted loans purchased underlying LTSPCs
    -       781       13,974       1,861  
Total defaulted loan purchases
  $ 2,921     $ 1,914     $ 21,266     $ 5,317  
 
 
-17-

 

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 September 30, 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 September 30, 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
  $ 1,719,924     $ 757,635     $ 1,127,206     $ 226,887     $ 120,857     $ 19,043     $ 3,971,552  
Other assets especially mentioned ("OAEM") (2)
    49,594       27,808       74,443       10,143       45,229       1,054       208,271  
Substandard (2)
    41,486       55,969       56,614       18,955       27,058       1,359       201,441  
Total
  $ 1,811,004     $ 841,412     $ 1,258,263     $ 255,985     $ 193,144     $ 21,456     $ 4,381,264  
                                                         
Commodity analysis of past due loans (1)
                                                       
Greater than 90 days
  $ 13,265     $ 19,992     $ 4,057     $ 6,883     $ -     $ 651     $ 44,848  
In bankruptcy and REO
    10,057       5,224       2,432       1,576       -       -       19,289  
Total non-performing
  $ 23,322     $ 25,216     $ 6,489     $ 8,459     $ -     $ 651     $ 64,137  

(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 $3.9 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.

 
-18-

 

Concentrations of Credit Risk

The following table sets forth the commodity/collateral and geographic 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 September 30, 2011 and December 31, 2010:

   
September 30,
   
December 31,
 
    
2011
   
2010
 
   
(in thousands)
 
By commodity/collateral type:
           
Crops
  $ 1,811,004     $ 1,731,380  
Permanent plantings
    841,412       865,475  
Livestock
    1,258,263       1,146,458  
Part-time farm
    255,985       291,145  
AgStorage and processing (including ethanol facilities)
    193,144       246,723  
Other
    21,456       22,939  
Total
  $ 4,381,264     $ 4,304,120  
                 
By geographic region (1):
               
Northwest
  $ 772,640     $ 660,845  
Southwest
    1,581,303       1,626,398  
Mid-North
    865,731       934,879  
Mid-South
    488,703       521,294  
Northeast
    293,047       317,715  
Southeast
    379,840       242,989  
Total
  $ 4,381,264     $ 4,304,120  
                 
By original loan-to-value ratio:
               
0.00% to 40.00%
  $ 1,151,801     $ 1,030,580  
40.01% to 50.00%
    775,705       770,744  
50.01% to 60.00%
    1,229,912       1,246,675  
60.01% to 70.00%
    1,033,696       1,056,132  
70.01% to 80.00%
    137,745       155,363  
80.01% to 90.00%
    52,405       44,626  
Total
  $ 4,381,264     $ 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.

 
-19-

 

(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, and 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.

The following tables summarize information related to Farmer Mac’s financial derivatives as of September 30, 2011 and December 31, 2010:

    
September 30, 2011
 
                                       
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 non-callable
  $ 2,028,155     $ -     $ (165,072 )     3.73 %     0.28 %           4.45  
Receive fixed non-callable
    3,945,926       47,346       (707 )     0.34 %     1.04 %           1.10  
Basis swaps
    462,694       -       (2,458 )     0.66 %     0.35 %           1.47  
Credit default swaps
    10,000       91       -       1.00 %     0.00 %           0.97  
Agency forwards
    49,828       -       (271 )                     114.74          
Treasury futures
    3,200       -       (10 )                     129.77          
Credit valuation adjustment
    -       (1,183 )     1,885                                  
Total financial derivatives
  $ 6,499,803     $ 46,254     $ (166,633 )                                
 
 
-20-

 

    
December 31, 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
  $ 13,144     $ -     $ (69 )     5.11 %     0.29 %           7.12  
Pay fixed non-callable
    1,275,108       2,814       (108,503 )     4.69 %     0.30 %           3.93  
Receive fixed non-callable
    2,874,534       39,551       (1,828 )     0.44 %     1.40 %           1.70  
Basis swaps
    254,991       52       (3,411 )     1.34 %     0.38 %           1.71  
Credit default swaps
    30,000       -       (216 )     1.00 %     0.00 %           1.05  
Agency forwards
    37,336       -       (174 )                     101.03          
Treasury futures
    1,300       -       (6 )                     119.95          
Credit valuation adjustment
    -       (925 )     520                                  
Total financial derivatives
  $ 4,486,413     $ 41,492     $ (113,687 )                                

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, 2011, 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 $129.7 million.  As of September 30, 2011, Farmer Mac posted cash of $1.7 million and investment securities that the counterparty is contractually prohibited from selling or repledging with a fair value of $39.8 million as collateral for its derivatives in net liability positions.  Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets.  The investment securities posted as collateral are included in the investment securities balances on the condensed consolidated balance sheets.  If Farmer Mac had breached certain provisions of the derivative contracts as of September 30, 2011, it could have been required to settle its obligations under the agreements or post additional collateral of $88.2 million.

 
-21-

 

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, 2011 and 2010:
 
   
Losses on Financial Derivatives
 
    
For the Three Months Ended
   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
    
(in thousands)
 
                          
Interest rate swaps
  $ (65,136 )   $ (5,243 )   $ (76,857 )   $ (24,634 )
Agency forwards
    (3,052 )     (1,089 )     (5,053 )     (3,026 )
Treasury futures
    (512 )     (96 )     (538 )     (737 )
Credit default swaps
    133       (396 )     80       9  
      (68,567 )     (6,824 )     (82,368 )     (28,388 )
Amortization of derivatives transition adjustment
    -       (40 )     -       (120 )
Total
  $ (68,567 )   $ (6,864 )   $ (82,368 )   $ (28,508 )

As of September 30, 2011, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $72.7 million and a fair value of $(2.0) million, compared to $85.0 million and $(3.4) million, respectively, as of December 31, 2010.  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 losses of $0.2 million and unrealized gains of $1.4 million on those outstanding basis swaps for the three and nine months ended September 30, 2011, respectively, compared to unrealized gains of $0.1 million and $32,000, respectively, for the same periods in 2010.

 
-22-

 

(d)       (Loss)/Earnings Per Common Share

Basic (loss)/earnings per common share is based on the weighted-average number of shares of common stock outstanding.  Diluted (loss)/earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights (“SARs”) and non-vested restricted stock awards.  The following schedule reconciles basic and diluted (loss)/earnings per common share (“EPS”) for the three and nine months ended September 30, 2011 and 2010:
 

   
For the Three Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
   
Net
         
$ per
   
Net
         
$ per
 
   
Loss
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(in thousands, except per share amounts)
 
Basic EPS
                                   
Net (loss)/income attributable to common stockholders
  $ (23,032 )     10,354     $ (2.22 )   $ 5,997       10,277     $ 0.58  
Effect of dilutive securities(1):
                                               
Stock options, SARs and restricted stock
            -       -               388       (0.02 )
Diluted EPS
  $ (23,032 )     10,354     $ (2.22 )   $ 5,997       10,665     $ 0.56  

(1)
For the three months ended September 30, 2011 and 2010, stock options and SARs of 1,294,066 and 1,354,800, 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, 2011 and 2010, contingent shares of non-vested restricted stock of 196,076 and 126,000, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive or the performance conditions were not met.

    
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
   
Net
         
$ per
   
Net
         
$ per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(in thousands, except per share amounts)
 
Basic EPS
                                   
Net income attributable to common stockholders
  $ 461       10,328     $ 0.04     $ 9,588       10,211     $ 0.94  
Effect of dilutive securities(1):
                                               
Stock options, SARs and restricted stock
            387       -               365       (0.03 )
Diluted EPS
  $ 461       10,715     $ 0.04     $ 9,588       10,576     $ 0.91  

(1)
For the nine months ended September 30, 2011 and 2010, stock options and SARs of 685,921 and 1,528,938, 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, 2011 and 2010, contingent shares of non-vested restricted stock of 150,353 and 111,500, respectively, were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

 
-23-

 

(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.  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.  There were no stock-based awards granted during third quarter 2011.  SARs granted to officers in 2011 have an exercise price of $18.77 per share.  As of September 30, 2011, there were no outstanding SARs awarded to directors.  Restricted stock awarded to directors during 2011 vests fully on March 31, 2012, approximately one year after grant.  Restricted stock awarded to officers during 2011 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, 2011, Farmer Mac recognized $0.8 million and $2.3 million, respectively, of compensation expense related to stock options, SARs and restricted stock, compared to $0.7 million and $2.2 million, respectively, for the same periods in 2010.

 
-24-

 

The following tables summarize activity related to stock options, SARs and non-vested restricted stock awards for the three and nine months ended September 30, 2011 and 2010:

    
September 30, 2011
   
September 30, 2010
 
   
Stock
   
Weighted-
   
Stock
   
Weighted-
 
   
Options
   
Average
   
Options
   
Average
 
   
and
   
Exercise
   
and
   
Exercise
 
   
SARs
   
Price
   
SARs
   
Price
 
For the Three Months Ended:
                       
Outstanding, beginning of period
    1,328,900     $ 18.57       1,923,050     $ 21.53  
Granted
    -       -       -       -  
Exercised
    (26,334 )     6.88       -       -  
Canceled
    (8,500 )     28.81       (48,250 )     25.43  
Outstanding, end of period
    1,294,066     $ 18.74       1,874,800     $ 21.43  
For the Nine Months Ended:
                               
Outstanding, beginning of period
    1,924,133     $ 21.16       1,799,465     $ 22.68  
Granted
    113,000       18.77       247,000       12.20  
Exercised
    (32,001 )     6.99       (21,331 )     13.15  
Canceled
    (711,066 )     25.83       (150,334 )     22.34  
Outstanding, end of period
    1,294,066     $ 18.74       1,874,800     $ 21.43  
                                 
Options and SARs exercisable at end of period
    914,743     $ 21.12       1,440,211     $ 24.53  

    
September 30, 2011
   
September 30, 2010
 
         
Weighted-
         
Weighted-
 
   
Non-vested
   
Average
   
Non-vested
   
Average
 
   
Restricted
   
Grant-date
   
Restricted
   
Grant-date
 
   
Stock
   
Fair Value
   
Stock
   
Fair Value
 
For the Three Months Ended:
                       
Outstanding, beginning of period
    199,060     $ 12.25       181,986     $ 9.66  
Granted
    -       -       -       -  
Canceled
    (2,003 )     18.77       -       -  
Vested and issued
    (981 )     18.77       -       -  
Outstanding, end of period
    196,076     $ 12.15       181,986     $ 9.66  
For the Nine Months Ended:
                               
Outstanding, beginning of period
    182,609     $ 9.63       200,548     $ 5.93  
Granted
    73,060       18.77       111,085       12.28  
Canceled
    (2,003 )     18.77       (11,599 )     8.15  
Vested and issued
    (57,590 )     12.33       (118,048 )     5.93  
Outstanding, end of period
    196,076     $ 12.15       181,986     $ 9.66  

The cancellations of stock options, SARs and non-vested restricted stock during the first nine months of 2011 were due to non-vested restricted stock and unvested SARs terminating in accordance with the provisions of the applicable plans upon director and employee departures from Farmer Mac and vested stock options terminating unexercised on their expiration dates.

For the three and nine months ended September 30, 2011 the adjustment to additional paid-in capital from exercises or expiration of stock options and SARs and the vesting or expiration of restricted stock was $(0.1) million and $(0.5) million, respectively, compared to $(0.1) million and $0.2 million for the three and nine months ended September 30, 2010.  The reduction of income taxes to be paid as a result of the deduction for exercises of stock options and SARs was $0.5 million for the nine months ended September 30, 2011.  The reduction of income taxes to be paid as a result of the deduction for exercises of stock options and SARs and the vesting or accelerated tax elections of restricted stock was $0.9 million for nine months ended September 30, 2010.

 
-25-

 

The following tables summarize information regarding stock options, SARs and non-vested restricted stock outstanding as of September 30, 2011:

     
Outstanding
 
Exercisable
 
Vested or Expected to Vest
         
Weighted-
     
Weighted-
     
Weighted-
     
Stock
 
Average
 
Stock
 
Average
 
Stock
 
Average
Range of
   
Options
 
Remaining
 
Options
 
Remaining
 
Options
 
Remaining
Exercise
   
and
 
Contractual
 
and
 
Contractual
 
and
 
Contractual
Prices
   
SARs
 
Life
 
SARs
 
Life
 
SARs
 
Life
                           
$ 5.00 - $ 9.99       236,999  
7.5 years
    172,004  
7.5 years
    227,500  
7.5 years
  10.00 - 14.99       300,333  
8.6 years
    99,005  
8.6 years
    272,863  
8.6 years
  15.00 - 19.99       163,786  
7.5 years
    50,786  
2.9 years
    155,876  
7.4 years
  20.00 - 24.99       168,789  
3.5 years
    168,789  
3.5 years
    168,789  
3.5 years
  25.00 - 29.99       400,159  
4.0 years
    400,159  
4.0 years
    400,159  
4.0 years
  30.00 - 34.99       24,000  
6.0 years
    24,000  
6.0 years
    24,000  
6.0 years
          1,294,066         914,743         1,249,187    

     
Outstanding
 
Expected to Vest
         
         
Weighted-
     
Weighted-
         
Weighted-
       
Average
     
Average
         
Average
   
Nonvested
 
Remaining
 
Nonvested
 
Remaining
         
Grant-Date
   
Restricted
 
Contractual
 
Restricted
 
Contractual
         
Fair Value
   
Stock
 
Life
 
Stock
 
Life
         
                             
$ 5.00 - $ 9.99       75,000  
0.5 years
    67,500  
0.5 years
           
  10.00 - 14.99       51,000  
1.5 years
    45,900  
1.5 years
           
  15.00 - 19.99       70,076  
1.3 years
    60,577  
1.4 years
           
          196,076         173,977                

The weighted-average grant date fair value of SARs granted during the first nine months of 2011 and 2010 was $13.75 and $8.31 per share, respectively. The fair values for SARs were estimated using the Black-Scholes option pricing model based on the following assumptions:

   
2011
   
2010
 
Risk-free interest rate
    2.6 %     3.3 %
Expected years until exercise
 
6 years
   
7 years
 
Expected stock volatility
    97.8 %     88.3 %
Dividend yield
    1.0 %     1.8 %
 
 
-26-

 

(f)       Fair Value Measurement

Farmer Mac follows accounting guidance for fair value measurements that defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a fair value hierarchy that ranks the quality and reliability of the inputs to valuation techniques used to measure fair value.  The hierarchy gives highest rank to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest rank to unobservable inputs (level 3 measurements).

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

See Note 7 for more information regarding fair value measurement.
 
(g)  Consolidation of Variable Interest Entities

Farmer Mac has interests in various entities that are considered to be VIEs.  These interests include investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities created pursuant to Farmer Mac’s securitization transactions and mortgage and asset-backed trusts that Farmer Mac did not create.  Effective January 1, 2010, Farmer Mac adopted two new accounting standards that eliminated the concept of qualifying special purpose entities (“QSPEs”) and amended the accounting for transfers of financial assets and the consolidation model for VIEs.  All formerly designated QSPEs were evaluated for consolidation in accordance with the new consolidation model, which changed the method of analyzing which party to a VIE should consolidate the VIE.  The consolidation model uses a qualitative evaluation that requires consolidation of an entity when the reporting enterprise both (1) has the power to direct matters which significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses that could potentially be significant to the entity.  The reporting enterprise that meets both these conditions is deemed the primary beneficiary of the VIE.

The consolidation standard requires the incremental assets and liabilities consolidated upon adoption to initially be reported at their carrying amounts.  Carrying amount refers to the amount at which the assets and liabilities would have been carried in the consolidated financial statements if the new guidance had been effective when Farmer Mac first met the conditions to be the primary beneficiary of the VIE.  If determining the carrying amounts is not practicable, the assets and liabilities of the VIE shall be measured at fair value at the date the new standards first apply.  For the outstanding trusts consolidated effective January 1, 2010, Farmer Mac initially recorded the assets and liabilities on the consolidated balance sheet at their carrying amounts, adjusted, where applicable, for fair value option elections that had been made previously.  Accrued interest and allowance for losses have also been recognized as appropriate.

 
-27-

 

Although these new accounting standards did not change the economic risk to Farmer Mac’s business, specifically Farmer Mac’s liquidity, credit and interest rate risks, the adoption of these new accounting standards had a significant impact on the presentation of Farmer Mac’s consolidated financial statements.  On the consolidated balance sheet, there was an increase in loans held for investment, interest receivable, debt and accrued interest payable, and a decrease in available-for-sale and trading Farmer Mac Guaranteed Securities, the reclassification of a portion of the reserve for losses to allowance for loan losses, and the elimination of the guarantee and commitment fees receivable and guarantee and commitment obligations related to the consolidated trusts.  On the income statement, there was an increase in interest income and interest expense attributable to the assets and liabilities of the consolidated trusts and a reclassification of a portion of guarantee fee income to interest income.

The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts.  The major judgment in determining if Farmer Mac is the primary beneficiary was whether Farmer Mac had the power to direct the activities of the trust that potentially had the most significant impact on the economic performance of the trust.  Generally, the ability to make decisions regarding default mitigation was evidence of that power.  Farmer Mac determined that it was the primary beneficiary for the securitization trusts related to most Farmer Mac I and all Rural Utilities securitization transactions because of its rights as guarantor under both programs to control the default mitigation activities of the trusts.  For certain securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities, Farmer Mac determined that it was not the primary beneficiary since the power to make decisions regarding default mitigation was shared among unrelated parties.  For similar securitization transactions where the power to make decisions regarding default mitigation was shared with a related party, Farmer Mac determined that it was the primary beneficiary because the applicable accounting guidance does not permit parties within a related party group to conclude that the power is shared.

For those trusts for which Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the condensed consolidated balance sheet as “Loans held for investment in consolidated trusts” and “Debt securities of consolidated trusts held by third parties,” respectively.  These assets can only be used to satisfy the obligations of the related trust.

For those trusts where Farmer Mac has a variable interest but has not been determined to be the primary beneficiary, Farmer Mac’s interests are presented as either “Farmer Mac Guaranteed Securities” or “Investment securities” on the condensed consolidated balance sheets.  Farmer Mac’s involvement in on-balance sheet VIEs classified as Farmer Mac Guaranteed Securities include securitization trusts under the Farmer Mac II program and trusts related to AgVantage securities.  In the case of Farmer Mac II trusts, Farmer Mac was not determined to be the primary beneficiary because it does not have the decision-making power over default mitigation activities.  For the AgVantage trusts, Farmer Mac currently does not have the power to direct the activities that have the most significant economic impact to the trust unless, as guarantor, there is a default by the issuer of the trust securities.  Should there be a default, Farmer Mac would reassess whether it is the primary beneficiary of those trusts.  For VIEs classified as investment securities, which include auction-rate certificates, asset-backed securities and GSE-guaranteed mortgage-backed securities, Farmer Mac was determined not to be the primary beneficiary because of the lack of voting rights or other powers to direct the activities of the trust.  As of September 30, 2011, these Farmer Mac Guaranteed Securities trusts and investment securities trusts have carrying amounts on the condensed consolidated balance sheet totaling $67.6 million and $857.5 million, respectively, which is Farmer Mac’s maximum exposure to loss.  In addition, Farmer Mac has a variable interest in off-balance sheet VIEs, which include a guarantee of timely payment of principal and interest, totaling $1.7 billion as of September 30, 2011.

 
-28-

 

(h)       New Accounting Standards

Troubled Debt Restructurings

In January 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (discussed below).  The effective date of the new disclosures about troubled debt restructurings was delayed to coordinate the disclosures with the FASB project on determining what constitutes a troubled debt restructuring.  In April 2011, the FASB completed that project and issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  ASU 2011-02 states that a troubled debt restructuring exists when a creditor concludes that both the restructuring constitutes a concession and the debtor is experiencing financial difficulties and clarifies the guidance on evaluating these criteria.  ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption (i.e., for Farmer Mac, it was effective for third quarter 2011 reporting).  The troubled debt restructuring disclosures in ASU 2010-20 also were effective in third quarter 2011.  Adoption of these standards did not have a significant impact on the Corporation’s financial position, results of operations or cash flows.

Fair Value Measurement and Disclosure

On May 12, 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which provides converged guidance on how to measure fair value and on what disclosures to provide about fair value measurements.  The new guidance is largely consistent with existing fair value measurement principles, but expands existing disclosure requirements for fair value measurement.  ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  Farmer Mac does not expect the adoption of the new accounting guidance to have a material effect on Farmer Mac’s financial position, results of operations, cash flows or its fair value disclosures.

Comprehensive Income

On June 16, 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which revised the manner in which entities present comprehensive income in their financial statements.  The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.  ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011.  Farmer Mac does not expect the adoption of the new accounting guidance to have a material effect on Farmer Mac’s financial position, results of operations or cash flows.

 
-29-

 

(i)       Reclassifications

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

Note 2.
Investment Securities

The following tables present the amortized cost and estimated fair values of Farmer Mac’s investments as of September 30, 2011 and December 31, 2010.

   
September 30, 2011
 
   
Amortized
   
Unrealized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
   
(in thousands)
 
Available-for-sale:
                       
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 74,100     $ -     $ (11,857 )   $ 62,243  
Floating rate asset-backed securities
    174,881       312       (66 )     175,127  
Floating rate corporate debt securities
    52,127       89       (218 )     51,998  
Fixed rate corporate debt securities
    33,927       6       (13 )     33,920  
Floating rate Government/GSE guaranteed mortgage-backed securities
    609,543       5,183       (180 )     614,546  
Fixed rate GSE guaranteed mortgage-backed securities
    3,567       300       -       3,867  
Floating rate GSE subordinated debt
    70,000       -       (7,251 )     62,749  
Fixed rate GSE preferred stock
    79,751       3,558       -       83,309  
Fixed rate senior agency debt
    162,959       15       (2 )     162,972  
Fixed rate U.S. Treasuries
    578,997       433       (6 )     579,424  
Total available-for-sale
    1,839,852       9,896       (19,593 )     1,830,155  
                                 
Trading:
                               
Floating rate asset-backed securities
    5,275       -       (3,512 )     1,763  
Fixed rate GSE preferred stock
    83,179       -       (2,220 )     80,959  
Total trading
    88,454       -       (5,732 )     82,722  
Total investment securities
  $ 1,928,306     $ 9,896     $ (25,325 )   $ 1,912,877  
 
 
-30-

 

   
December 31, 2010
 
   
Amortized
   
Unrealized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
   
(in thousands)
 
Available-for-sale:
                       
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 74,100     $ -     $ (9,765 )   $ 64,335  
Floating rate asset-backed securities
    29,437       24       (3 )     29,458  
Floating rate corporate debt securities
    162,891       422       (125 )     163,188  
Floating rate Government/GSE guaranteed mortgage-backed securities
    573,288       4,173       (681 )     576,780  
Fixed rate GSE guaranteed mortgage-backed securities
    4,525       296       -       4,821  
Floating rate GSE subordinated debt
    70,000       -       (14,671 )     55,329  
Fixed rate GSE preferred stock
    80,001       4,827       -       84,828  
Fixed rate senior agency debt
    5,500       -       -       5,500  
Fixed rate U.S. Treasuries
    692,808       232       (46 )     692,994  
Total available-for-sale
    1,692,550       9,974       (25,291 )     1,677,233  
                                 
Trading:
                               
Floating rate asset-backed securities
    5,961       -       (4,561 )     1,400  
Fixed rate GSE preferred stock
    83,813       883       -       84,696  
Total trading
    89,774       883       (4,561 )     86,096  
Total investment securities
  $ 1,782,324     $ 10,857     $ (29,852 )   $ 1,763,329  

During the three and nine months ended September 30, 2011 and 2010, Farmer Mac did not recognize in earnings any other-than-temporary impairment charges.

During the three months ended September 30, 2011, Farmer Mac received proceeds of $294.7 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $84,000 and gross realized losses of $10,000.  During the nine months ended September 30, 2011, Farmer Mac received proceeds of $447.9 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $279,000 and gross realized losses of $10,000.  During the three months ended September 30, 2010, Farmer Mac received $23.6 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $26,000 and gross realized losses of $2,000.  During the nine months ended September 30, 2010, Farmer Mac received proceeds of $92.8 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.5 million and gross realized losses of $0.2 million.

 
-31-

 

As of September 30, 2011 and December 31, 2010, unrealized losses on available-for-sale investment securities were as follows:

   
September 30, 2011
 
   
Available-for-Sale Securities
 
   
Unrealized loss position for
   
Unrealized loss position for
 
   
less than 12 months
   
more than 12 months
 
         
Unrealized
         
Unrealized
 
   
Fair Value
   
Loss
   
Fair Value
   
Loss
 
   
(in thousands)
 
       
Floating rate corporate debt securities
  $ 24,013     $ (218 )   $ -     $ -  
Fixed rate corporate debt securities
    18,616       (13 )     -       -  
Floating rate asset-backed securities
    57,100       (66 )     -       -  
Floating rate auction-rate certificates backed by Government guaranteed student loans
    -       -       62,243       (11,857 )
Floating rate Government/GSE guaranteed mortgage-backed securities
    88,524       (137 )     15,734       (43 )
Floating rate GSE subordinated debt
    -       -       62,749       (7,251 )
Fixed rate senior agency debt
    12,998       (2 )     -       -  
Fixed rate U.S. Treasuries
    50,192       (6 )     -       -  
Total
  $ 251,443     $ (442 )   $ 140,726     $ (19,151 )

   
December 31, 2010
 
   
Available-for-Sale Securities
 
   
Unrealized loss position for
   
Unrealized loss position for
 
   
less than 12 months
   
more than 12 months
 
         
Unrealized
         
Unrealized
 
   
Fair Value
   
Loss
   
Fair Value
   
Loss
 
   
(in thousands)
 
       
Floating rate corporate debt securities
  $ -     $ -     $ 99,874     $ (125 )
Floating rate asset-backed securities
    -       -       2,779       (3 )
Floating rate auction-rate certificates backed by Government guaranteed student loans
    -       -       64,335       (9,765 )
Floating rate Government/GSE guaranteed mortgage-backed securities
    159,294       (587 )     4,138       (94 )
Floating rate GSE subordinated debt
    -       -       55,329       (14,671 )
Fixed rate U.S. Treasuries
    163,026       (46 )     -       -  
Total
  $ 322,320     $ (633 )   $ 226,455     $ (24,658 )

The temporary unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to September 30, 2011 and December 31, 2010, as applicable.  The resulting decreases in fair values reflect an increase in the perceived risk by the financial markets related to those securities.  As of September 30, 2011 and December 31, 2010, all of the investment securities in an unrealized loss position were rated at least “A-” by a nationally recognized statistical rating organization.  The unrealized losses were on 39 and 47 individual investment securities as of September 30, 2011 and December 31, 2010, respectively.

 
-32-

 

As of September 30, 2011, 11 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $19.2 million.  As of December 31, 2010, 29 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $24.7 million.  Securities in unrealized loss positions 12 months or more have a fair value as of September 30, 2011 that is, on average, approximately 88 percent of their amortized cost basis.  Farmer Mac believes that all these unrealized losses are recoverable within a reasonable period of time through changes in credit spreads or maturity and expects to recover the amortized cost basis of these securities.  Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represent other-than-temporary impairment as of September 30, 2011.  Farmer Mac does not intend to sell these securities and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

Farmer Mac did not own any held-to-maturity investments as of September 30, 2011 and December 31, 2010.  As of September 30, 2011, Farmer Mac owned trading investments with an amortized cost of $88.5 million, a fair value of $82.7 million, and a weighted-average yield of 8.15 percent.  As of December 31, 2010, Farmer Mac owned trading investments with an amortized cost of $89.8 million, a fair value of $86.1 million and a weighted-average yield of 8.12 percent.

The amortized cost, fair value and weighted-average yield of investments by remaining contractual maturity for available-for-sale investment securities as of September 30, 2011 are set forth below.  Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.

   
Investment Securities Available-for-Sale
 
   
as of September 30, 2011
 
   
Amortized
         
Weighted-
 
   
Cost
   
Fair Value
   
Average Yield
 
   
(dollars in thousands)
 
                   
Due within one year
  $ 785,729     $ 786,226       0.99 %
Due after one year through five years
    47,236       47,046       0.81 %
Due after five years through ten years
    413,848       416,191       1.15 %
Due after ten years
    593,039       580,692       2.66 %
Total
  $ 1,839,852     $ 1,830,155       1.56 %
 
 
-33-

 

Note 3.
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities

The following table sets forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities as of September 30, 2011 and December 31, 2010.

   
September 30, 2011
 
   
Available-
             
   
for-Sale
   
Trading
   
Total
 
   
(in thousands)
 
Farmer Mac I
  $ 2,815,467     $ -     $ 2,815,467  
Farmer Mac II
    36,599       -       36,599  
Rural Utilities
    1,447,934       -       1,447,934  
Farmer Mac Guaranteed Securities
    4,300,000       -       4,300,000  
USDA Guaranteed Securities
    1,193,015       233,383       1,426,398  
Total
  $ 5,493,015     $ 233,383     $ 5,726,398  
                         
Amortized cost
  $ 5,357,804     $ 235,572     $ 5,593,376  
Unrealized gains
    135,418       1,483       136,901  
Unrealized losses
    (207 )     (3,672 )     (3,879 )
Fair value
  $ 5,493,015     $ 233,383     $ 5,726,398  

   
December 31, 2010
 
   
Available-
             
   
for-Sale
   
Trading
   
Total
 
   
(in thousands)
 
Farmer Mac I
  $ 942,809     $ -     $ 942,809  
Farmer Mac II
    37,637       -       37,637  
Rural Utilities
    1,926,818       -       1,926,818  
Farmer Mac Guaranteed Securities
    2,907,264       -       2,907,264  
USDA Guaranteed Securities
    1,005,679       311,765       1,317,444  
Total
  $ 3,912,943     $ 311,765     $ 4,224,708  
                         
Amortized cost
  $ 3,880,418     $ 315,655     $ 4,196,073  
Unrealized gains
    50,583       106       50,689  
Unrealized losses
    (18,058 )     (3,996 )     (22,054 )
Fair value
  $ 3,912,943     $ 311,765     $ 4,224,708  

The temporary unrealized losses presented above are principally due to wider spreads on mortgage securities and changes in interest rates from the date of acquisition to September 30, 2011 and December 31, 2010, as applicable.  As of September 30, 2011, the unrealized losses presented above are related to Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.  As of December 31, 2010, the unrealized losses presented above are related to Farmer Mac I, Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.  USDA Guaranteed Securities and the USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities are backed by the full faith and credit of the United States.  Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities and USDA Guaranteed Securities represent other-than-temporary impairment as of September 30, 2011 and December 31, 2010.  Farmer Mac does not intend to sell these securities and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

 
-34-

 

On January 25, 2010, Farmer Mac contributed substantially all of the assets comprising the Farmer Mac II program, in excess of $1.1 billion, to Farmer Mac’s subsidiary, Farmer Mac II LLC.  The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA-guaranteed portions that had not been securitized by Farmer Mac (i.e., not transferred to a trust from which Farmer Mac II Guaranteed Securities were issued) but also included $35.0 million of Farmer Mac II Guaranteed Securities.  Other than the guarantee already in place on the transferred Farmer Mac II Guaranteed Securities, Farmer Mac did not guarantee the timely payment of principal and interest on the $1.1 billion of contributed USDA-guaranteed portions.  The contributed USDA-guaranteed portions had previously been presented as Farmer Mac II Guaranteed Securities on the condensed consolidated financial statements of Farmer Mac and are now presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets.  The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.

Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities for the three and nine months ended September 30, 2011 and 2010.

The table below presents a sensitivity analysis for the Corporation’s on-balance sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities as of September 30, 2011 and December 31, 2010.

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(dollars in thousands)
 
Fair value of beneficial interests retained in
           
Farmer Mac Guaranteed Securities and
           
USDA Guaranteed Securities
  $ 5,726,398     $ 4,224,708  
                 
Weighted-average remaining life (in years)
    3.7       3.5  
                 
Weighted-average prepayment speed (annual rate)
    3.2 %     3.5 %
Effect on fair value of a 10% adverse change
  $ (1,112 )   $ (18 )
Effect on fair value of a 20% adverse change
  $ (2,135 )   $ (17 )
                 
Weighted-average discount rate
    2.3 %     2.3 %
Effect on fair value of a 10% adverse change
  $ (36,114 )   $ (20,257 )
Effect on fair value of a 20% adverse change
  $ (72,098 )   $ (40,315 )

These sensitivities are hypothetical.  Changes in fair value based on 10 percent or 20 percent variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.  Also, the effect of a variation in a particular assumption on the fair values is calculated without changing any other assumption.  In fact, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might amplify or counteract the sensitivities.

 
-35-

 

Farmer Mac securitizes three types of assets: agricultural real estate mortgage loans, USDA-guaranteed portions, and rural utilities loans.  Farmer Mac manages the credit risk of its securitized loans, both on- and off-balance sheet, together with its on-balance sheet loans and the loans underlying its off-balance sheet LTSPCs.

As part of fulfilling its guarantee obligations for Farmer Mac Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90 days delinquent at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet.

 
-36-

 

The table below presents the outstanding principal balances for Farmer Mac loans, LTSPCs, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities as of September 30, 2011 and December 31, 2010.

Outstanding Balance of Loans, Loans Underlying Farmer Mac
Guaranteed Securities and LTSPCs, and USDA Guaranteed Securities
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
On-balance sheet:
           
Farmer Mac I:
           
Loans
  $ 1,192,486     $ 972,206  
Loans held in trusts:
               
Beneficial interests owned by Farmer Mac
    236       3,697  
Beneficial interests owned by third party investors
    712,690       821,411  
Farmer Mac Guaranteed Securities - AgVantage
    2,741,000       941,500  
Farmer Mac II:
               
USDA Guaranteed Securities
    1,380,836       1,297,439  
Farmer Mac Guaranteed Securities
    36,316       39,856  
Rural Utilities:
               
Loans
    474,220       339,963  
Loans held in trusts:
               
Beneficial interests owned by Farmer Mac
    386,800       400,228  
Farmer Mac Guaranteed Securities - AgVantage
    1,410,800       1,887,200  
Total on-balance sheet
  $ 8,335,384     $ 6,703,500  
                 
Off-balance sheet:
               
Farmer Mac I:
               
Farmer Mac Guaranteed Securities - AgVantage
  $ 970,000     $ 2,945,000  
LTSPCs
    1,811,280       1,754,597  
Farmer Mac Guaranteed Securities
    660,673       750,217  
Farmer Mac II:
               
Farmer Mac Guaranteed Securities
    45,977       48,103  
Rural Utilities:
               
Farmer Mac Guaranteed Securities - AgVantage
    18,079       15,292  
Total off-balance sheet
  $ 3,506,009     $ 5,513,209  
Total
  $ 11,841,393     $ 12,216,709  

When particular criteria are met, such as the default of the borrower, Farmer Mac becomes entitled to purchase the defaulted loans underlying Farmer Mac Guaranteed Securities (commonly referred to as “removal-of-account” provisions).  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 gains effective control over the transferred loans.  Subsequent to the purchase, such defaulted loans are treated as nonaccrual loans and, therefore, interest is accounted for on the cash basis.  Any decreases in expected cash flows are recognized as impairment.

 
-37-

 

The following table presents information related to Farmer Mac’s acquisition of defaulted loans for the three and nine months ended September 30, 2011 and 2010 and the outstanding balances and carrying amounts of all such loans as of September 30, 2011 and December 31, 2010, respectively.

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(in thousands)
 
                         
Unpaid principal balance at acquisition date
  $ 2,921     $ 1,914     $ 21,266     $ 5,317  
Contractually required payments receivable
    2,922       1,965       21,314       5,435  
Impairment recognized subsequent to acquisition
    42       376       3,812       2,116  
Recovery/release of allowance for defaulted loans
    5       10       19       2,934  
                                 
   
September 30,
   
December 31,
                 
   
2011
   
2010
                 
   
(in thousands)
                 
                                 
Outstanding balance
  $ 38,641     $ 34,473                  
Carrying amount
    30,816       30,365                  

Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs are presented in the table below.  Information is not presented for loans underlying AgVantage securities, USDA Guaranteed Securities, Farmer Mac II Guaranteed Securities, or rural utilities loans held or underlying Farmer Mac Guaranteed Securities – Rural Utilities.  Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security.  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, 2011, 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, 2011, Farmer Mac had not experienced any credit losses on any AgVantage securities.  The USDA-guaranteed portions presented as USDA Guaranteed Securities, as well as those that collateralize Farmer Mac II Guaranteed Securities, are guaranteed by the USDA.  Each USDA guarantee is an obligation backed by the full faith and credit of the United States.  As of September 30, 2011, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any USDA Guaranteed Securities or Farmer Mac II Guaranteed Securities.  As of September 30, 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.  As of September 30, 2011 and 2010, Farmer Mac had not experienced any credit losses on any of those loans or securities.

 
-38-

 

   
90-Day
   
Net Credit
 
   
Delinquencies (1)
   
Losses/(Recoveries)
 
   
As of
   
As of
   
As of
   
For the Nine Months Ended
 
   
September 30,
   
December 31,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2010
   
2011
   
2010
 
   
(in thousands)
 
On-balance sheet assets:
                             
Farmer Mac I:
                             
Loans
  $ 35,860     $ 37,665     $ 40,846     $ 334     $ (275 )
Total on-balance sheet
  $ 35,860     $ 37,665     $ 40,846     $ 334     $ (275 )
                                         
Off-balance sheet assets:
                                       
Farmer Mac I:
                                       
LTSPCs
  $ 8,988     $ 32,583     $ 23,954     $ -     $ -  
Total off-balance sheet
  $ 8,988     $ 32,583     $ 23,954     $ -     $ -  
                                         
Total
  $ 44,848     $ 70,248     $ 64,800     $ 334     $ (275 )

(1)
Includes Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

 
-39-

 

Note 4. 
Comprehensive Income

Comprehensive income represents all changes in stockholders’ equity except those resulting from investments by or distributions to stockholders, and is comprised primarily of net income and unrealized gains and losses on securities available-for-sale, net of related taxes.

The following table sets forth Farmer Mac’s comprehensive income for the three and nine months ended September 30, 2011 and 2010:

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(in thousands)
 
Net (loss)/income
  $ (16,766 )   $ 12,263     $ 19,261     $ 33,942  
Available-for-sale securities, net of tax:
                               
Net unrealized holding gains
    49,661       15,852       70,573       44,206  
Reclassification adjustment for realized gains (1)
    (383 )     (15 )     (3,133 )     (206 )
Net change from available-for-sale securities (2)
    49,278       15,837       67,440       44,000  
Financial derivatives, net of tax:
                               
Reclassification for amortization of financial derivatives transition adjustment (3)
    -       26       -       78  
Other comprehensive income, net of tax
    49,278       15,863       67,440       44,078  
Comprehensive income
    32,512       28,126       86,701       78,020  
Less: Comprehensive income attributable to non-controlling interest
    5,547       5,546       16,641       15,160  
Total comprehensive income
  $ 26,965     $ 22,580     $ 70,060     $ 62,860  

(1)
Includes the reclassification of deferred gains recognized on certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities of $0.3 million and $3.0 million, after tax, for the three and nine months ended September 30, 2011, respectively.
(2)
Unrealized gains on available for sale securities are shown net of income tax expense of $26.5 million and $8.5 million for the three months ended September 30, 2011 and 2010, respectively, and $36.3 million and $23.7 million for the nine months ended September 30, 2011 and 2010, respectively.
(3)
Amortization of the financial derivatives transition adjustment is shown net of income tax expense of $14,000 and $42,000 for the three and nine months ended September 30, 2010, respectively.
 
During the three and nine months ended September 30, 2011, Farmer Mac reclassified $0.3 million and $3.0 million (of a total $7.0 million), respectively, of after-tax unrealized gains into earnings related to fair value changes of Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities designated as available-for-sale that were transferred to Farmer Mac II LLC in January 2010.  Included in these reclassifications are amortization amounts of $1.8 million that relate to prior periods, beginning with first quarter 2010.  These gains are presented as “Other income” on the condensed consolidated statements of operations.  Farmer Mac will recognize in earnings the remainder of these deferred gains over the estimated remaining lives of the underlying USDA-guaranteed portions.  There will, however, be no net effect on income on a consolidated basis because these gains will be offset by the amortization of premium expense on the assets held by Farmer Mac II LLC.

 
-40-

 

The following table presents Farmer Mac’s accumulated other comprehensive income as of September 30, 2011 and December 31, 2010 and changes in the components of accumulated other comprehensive income for the nine months ended September 30, 2011 and the year ended December 31, 2010.
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Available-for-sale securities:
           
Beginning balance
  $ 18,275     $ 3,300  
Net unrealized gains, net of tax
    67,440       14,975  
Ending balance
  $ 85,715     $ 18,275  
                 
Financial derivatives:
               
Beginning balance
  $ -     $ (46 )
Amortization of financial derivatives transition adjustment, net of tax
    -       46  
Ending balance
  $ -     $ -  
Accumulated other comprehensive income, net of tax
  $ 85,715     $ 18,275  

Note 5.
Off-Balance Sheet Guarantees and Long Term Standby Purchase Commitments

Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans:  (1) Farmer Mac Guaranteed Securities, which are available through the Farmer Mac I program, the Farmer Mac II program or the Rural Utilities program, and (2) LTSPCs, which are available through the Farmer Mac I program or the Rural Utilities program.  For securitization trusts where Farmer Mac is the primary beneficiary, as described in Note 1(g), the trust assets and liabilities are included on Farmer Mac’s condensed consolidated balance sheet.  Upon consolidation, Farmer Mac eliminates the portion of the guarantee and commitment fees receivable and guarantee and commitment obligations related to the consolidated trusts.  For the remainder of these transactions, or in the event of deconsolidation, both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac.  Farmer Mac accounts for these transactions and other financial guarantees in accordance with accounting guidance on accounting for guarantees.  Farmer Mac records, at the inception of a guarantee, a liability for the fair value of its obligation to stand ready to perform under the terms of each guarantee and an asset that is equal to the fair value of the fees that will be received over the life of each guarantee.  The fair values of the guarantee obligation and asset at inception are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved.  Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model.  The guarantee obligation and corresponding asset are subsequently amortized into guarantee and commitment fee income in relation to the decline in the unpaid principal balance on the underlying agricultural real estate mortgage and rural utilities loans.

 
-41-

 

Off-Balance Sheet Farmer Mac Guaranteed Securities

Eligible loans and other eligible assets may be placed into trusts that are used as vehicles for the securitization of the transferred assets and the Farmer Mac-guaranteed beneficial interests in the trusts are sold to investors.  Proceeds from new securitizations during the nine months ended September 30, 2011 and 2010 were $13.9 million and $18.9 million, respectively.  The following table summarizes cash flows received from and paid to trusts used for Farmer Mac securitizations:

 
   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 2010
 
   
(in thousands)
 
Proceeds from new securitizations
  $ 13,869     $ 18,860  
Guarantee fees received
    6,042       5,610  
Purchases of assets from the trusts
    (7,292 )     (3,456 )
Servicing advances
    (28 )     (14 )
Repayments of servicing advances
    24       22  

 
The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of September 30, 2011 and December 31, 2010, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans.
 
Outstanding Balance of Off-Balance Sheet
Farmer Mac Guaranteed Securities
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Farmer Mac I:
           
Farmer Mac Guaranteed Securities - AgVantage
  $ 970,000     $ 2,945,000  
Farmer Mac Guaranteed Securities
    660,673       750,217  
Farmer Mac II:
               
Farmer Mac Guaranteed Securities
    45,977       48,103  
Rural Utilities:
               
Farmer Mac Guaranteed Securities - AgVantage
    18,079       15,292  
Total off-balance sheet Farmer Mac Guaranteed Securities
  $ 1,694,729     $ 3,758,612  

For those securities issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the condensed consolidated balance sheet.  This liability approximated $12.8 million as of September 30, 2011 and $17.7 million as of December 31, 2010.  Upon adoption of the accounting guidance on consolidation on January 1, 2010, Farmer Mac eliminated $15.5 million of the guarantee and commitment obligation related to the consolidated trusts.  During second quarter 2010, Farmer Mac deconsolidated $414.5 million of certain securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities because Farmer Mac was no longer determined to be the primary beneficiary when the counterparty to the transaction ceased being a related party as a result of changes to the membership of Farmer Mac’s board of directors.  This deconsolidation resulted in an increase to the guarantee and commitment obligation of $2.7 million as of June 30, 2010.  See Note 1(g) for more information.  As of September 30, 2011, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 13.5 years.  As of September 30, 2011, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 5.7 years.  For information on Farmer Mac’s methodology for determining the reserve for losses on off-balance sheet Farmer Mac Guaranteed Securities, see Note 1(b).

 
-42-

 

LTSPCs

An LTSPC is a commitment by Farmer Mac to purchase eligible loans from a segregated pool of loans under enumerated circumstances, either for cash or in exchange for Farmer Mac Guaranteed Securities, on one or more undetermined future dates.  As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly in arrears in an amount approximating what would have been the guarantee fee if the transaction were structured as Farmer Mac Guaranteed Securities.

The maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans, was $1.8 billion as of September 30, 2011 and December 31, 2010.

As of September 30, 2011, the weighted-average remaining maturity of all loans underlying LTSPCs was 13.4 years.  For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the condensed consolidated balance sheet.  This liability approximated $14.1 million as of September 30, 2011 and $12.6 million as of December 31, 2010.

 
Note 6.
Equity

Common Stock

Farmer Mac has three classes of common stock outstanding:
 
 
·
Class A voting common stock, which may be held only by banks, insurance companies and other financial institutions or similar entities that are not institutions of the Farm Credit System.  By federal statute, no holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33 percent of the outstanding shares of that class of stock;
 
·
Class B voting common stock, which may be held only by institutions of the Farm Credit System.  There are no restrictions on the maximum holdings of Class B voting common stock; and
 
·
Class C non-voting common stock, which has no ownership restrictions.

 
-43-

 

From first quarter 2009 through third quarter 2011, Farmer Mac paid a quarterly dividend of $0.05 per share on all classes of the Corporation’s common stock.  Farmer Mac’s ability to declare and pay a dividend could be restricted if it failed to comply with regulatory capital requirements.

Preferred Stock

As of September 30, 2011 and December 31, 2010, Farmer Mac had 57,578 shares of Series C preferred stock outstanding.  The Series C preferred stock is a component of Stockholders’ Equity on the condensed consolidated balance sheets.  The 57,578 shares of Series C preferred stock outstanding as of September 30, 2011 and December 31, 2010, were all held by National Rural Utilities Cooperative Finance Corporation (“CFC”), a related party.

Farmer Mac’s ability to declare and pay dividends on its outstanding preferred stock could be restricted if it failed to comply with regulatory capital requirements.  All series of Farmer Mac’s preferred stock are included as components of core capital for regulatory and statutory capital compliance measurements.

Non-Controlling Interest in Farmer Mac II LLC

On January 25, 2010, Farmer Mac completed a private offering of $250.0 million of securities issued by a newly formed Delaware statutory trust.  The trust securities represent undivided beneficial ownership interests in 250,000 shares of non-cumulative perpetual preferred stock (the “Farmer Mac II LLC Preferred Stock”) of Farmer Mac’s subsidiary, Farmer Mac II LLC, a Delaware limited liability company.  The Farmer Mac II LLC Preferred Stock has a liquidation preference of $1,000 per share.

Dividends on the Farmer Mac II LLC Preferred Stock will be payable if, when and as declared by Farmer Mac II LLC’s board of directors, quarterly, on a non-cumulative basis, on March 30, June 30, September 30, and December 30 of each year.  For each quarterly period from the date of issuance to but excluding the payment date occurring on March 30, 2015, the dividend rate on the Farmer Mac II LLC Preferred Stock will be 8.875 percent per annum.  For each quarterly period from March 30, 2015 to but excluding the payment date occurring on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875 percent per annum.  For each quarterly period beginning on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be an annual rate equal to three-month LIBOR plus 8.211 percent.  Dividends on the Farmer Mac II LLC Preferred Stock will be non-cumulative, so dividends that are not declared for a payment date will not accrue.  The Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented as “Non-controlling interest – preferred stock” within permanent equity on the condensed consolidated balance sheets of Farmer Mac.  Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the Farmer Mac II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred stock.  The accrual of declared dividends is presented as “Net income attributable to non-controlling interest – preferred stock dividends” on the condensed consolidated statements of operations on a pre-tax basis.  The consolidated tax benefit is included in income tax expense.

 
-44-

 

Farmer Mac used part of the proceeds from the sale of $250.0 million of the Farmer Mac II LLC Preferred Stock to repurchase and retire all $150.0 million of the outstanding Series B Preferred Stock, which was newly issued during 2008 and reported as Mezzanine Equity on the condensed consolidated balance sheets.

Statutory and Regulatory Capital Requirements

Farmer Mac is subject to, and as of September 30, 2011 was in compliance with, its three statutory and regulatory capital requirements:
 
 
·
Minimum capital – Farmer Mac’s minimum capital level is equal to the sum of 2.75 percent of Farmer Mac’s aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, including Farmer Mac Guaranteed Securities and LTSPCs;
 
·
Critical capital – Farmer Mac’s critical capital level is equal to 50 percent of the minimum capital requirement at that time; and
 
·
Risk-based capital – the Farm Credit Administration (“FCA”) has established a risk-based capital stress test for Farmer Mac.

As of September 30, 2011, Farmer Mac’s minimum and critical capital requirements were $336.6 million and $168.3 million, respectively, and Farmer Mac’s core capital level (common and preferred stock outstanding plus non-controlling interest – preferred stock, additional paid-in-capital and retained earnings) was $461.3 million, $124.7 million above the minimum capital requirement and $293.0 million above the critical capital requirement.  As of December 31, 2010, Farmer Mac’s minimum and critical capital requirements were $301.0 million and $150.5 million, respectively, and its actual core capital level was $460.6 million, $159.6 million above the minimum capital requirement and $310.1 million above the critical capital requirement.

Based on the new risk-based capital stress test that became effective in second quarter 2011, Farmer Mac’s risk-based capital requirement as of September 30, 2011 was $110.9 million and Farmer Mac’s regulatory capital (core capital plus the allowance for losses) of $479.0 million exceeded that requirement by approximately $368.1 million.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters” for more information about changes to the risk-based capital stress test applicable to Farmer Mac.
 
Note 7.
Fair Value Disclosure

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price).

In determining fair value, Farmer Mac uses various valuation approaches, including market, income and/or cost approaches.  The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  When available, the fair value of Farmer Mac’s financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data.  Pricing information obtained from third parties is internally validated for reasonableness prior to use in the condensed consolidated financial statements.

 
-45-

 

When observable market prices are not readily available, Farmer Mac estimates fair value using techniques that rely on alternate market data or internally-developed models using significant inputs that are generally less readily observable.  Market data includes prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates.  If market data needed to estimate fair value is not available, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach.  Even when market assumptions are not readily available, Farmer Mac’s assumptions reflect those that market participants would likely use in pricing the asset or liability at the measurement date.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The standard describes the following three levels used to classify fair value measurements:

 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 
Level 2
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

 
Level 3
Prices or valuations that require unobservable inputs that are significant to the fair value measurement.

Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the appropriate level based on the transparency of the inputs used in the valuation techniques.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  Farmer Mac’s assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument.  While Farmer Mac believes its valuation methods are appropriate and consistent with those of other market participants, using different methodologies or assumptions to determine fair value could result in a materially different estimate of the fair value of some financial instruments.

 
-46-

 

The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy described above.  Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements.  Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as non-recurring fair value measurements.

Recurring Fair Value Measurements and Classification

Available-for-Sale and Trading Investment Securities

The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets.  Farmer Mac classifies these fair value measurements as level 1.

For a significant portion of Farmer Mac’s investment portfolio, including most asset-backed securities, corporate debt securities, senior agency debt securities, Government/GSE guaranteed mortgage-backed securities and preferred stock issued by GSEs, fair value is primarily determined using a reputable and nationally recognized third party pricing service.  The prices obtained are non-binding and generally representative of recent market trades.  The fair value of certain asset-backed and Government guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers.  Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another independent third party pricing service.  Farmer Mac classifies these fair value measurements as level 2.

For investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach.  Farmer Mac maximizes the use of observable market data, including prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates.  Farmer Mac generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is a limited availability of public market information.  Farmer Mac classifies these fair value measurements as level 3.

Farmer Mac classifies its estimates of fair value for auction-rate certificates (“ARCs”) as level 3 measurements.  Farmer Mac uses unadjusted quotes from a broker specializing in these types of securities to determine the estimated fair value of these investments as of each quarter end.  Farmer Mac believes these quotes are the best indication of fair value as of the measurement date, although there is uncertainty regarding the ability to transact at such levels.  Considering (1) there is no active secondary market for these securities, although limited observable transactions do occasionally occur, (2) price quotes vary significantly among dealers or independent pricing services, if provided at all, and (3) there is little transparency in the price determination, Farmer Mac believes these measurements are appropriately classified as level 3.

 
-47-

 

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets as of the beginning of the quarterly reporting period.  Farmer Mac made no transfers within the fair value hierarchy for the fair value measurements of its investment securities during the three months ended September 30, 2011 and 2010 and during the first nine months of 2011.  During the first nine months of 2010, Farmer Mac transferred its investments in the subordinated debt and preferred stock of CoBank, ACB and its investment in the preferred stock of AgFirst Farm Credit Bank, with par values of $70.0 million, $88.5 million and $88.0 million, respectively, as of December 31, 2009, from level 3 measurements to level 2 measurements.  Taking into consideration its own recently executed trades during first quarter 2010, along with an increase in observable trading activity for these securities, Farmer Mac determined that the best estimates of fair value for these securities as of March 31, 2010 and continuing through September 30, 2011, were the fair values provided by an independent third party pricing service.  Farmer Mac transferred these securities out of level 3 based on their fair values as of the beginning of the first quarter 2010.

Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Guaranteed Securities

Farmer Mac estimates the fair value of its Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by discounting the projected cash flows of these instruments at projected interest rates.  The fair values are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved.  Farmer Mac classifies these measurements as level 3 because there is limited market activity and therefore little or no price transparency.  On a sample basis, Farmer Mac corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by obtaining a secondary valuation from an independent third party service.

Farmer Mac made no transfers within the fair value hierarchy for the fair value measurements of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities for the three months ended September 30, 2011 and 2010 and during the first nine months of 2011.  Transfers out of level 3 for the first nine months of 2010 resulted from the consolidation of certain trusts whereby the underlying assets were no longer reported at fair value on a recurring basis.  Transfers out of level 3 were based on the fair values of the assets as of the beginning of the quarterly reporting period and are described in more detail below.

Upon the adoption of the accounting guidance on consolidation on January 1, 2010, Farmer Mac was deemed to be the primary beneficiary of certain VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of agricultural real estate mortgage loans or rural utilities loans.  Prior to 2010, Farmer Mac presented these beneficial interests as “Farmer Mac Guaranteed Securities” on the condensed consolidated balance sheet and reported them at their fair value.  Upon consolidation, Farmer Mac transferred these assets from “Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated trusts.”  These loans are reported at their amortized cost and are no longer included in recurring fair value measurements.  Farmer Mac transferred these securities out of level 3 based on their fair values as of the beginning of the first quarter 2010.

 
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Financial Derivatives

The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical financial instruments.  Farmer Mac classifies these fair value measurements as level 1.

Farmer Mac’s derivative portfolio consists primarily of interest rate swaps, credit default swaps and forward sales contracts on the debt of other GSEs.  Farmer Mac estimates the fair value of these financial instruments based upon the counterparty valuations.  Farmer Mac internally values its derivative portfolio using a discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps to corroborate the counterparty valuations.  Farmer Mac also regularly reviews the counterparty valuations as part of the collateral exchange process.  Farmer Mac classifies these fair value measurements as level 2.

Certain basis swaps are nonstandard interest rate swap structures and are therefore internally modeled using significant assumptions and unobservable inputs, resulting in level 3 classification.  Farmer Mac uses a discounted cash flow valuation technique, using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discounted rates commensurate with the risks involved.

As of September 30, 2011 and December 31, 2010, the consideration of credit risk related to both Farmer Mac and the counterparties resulted in an adjustment to the valuations of Farmer Mac’s derivative portfolio of $0.7 million and $(0.4) million, respectively.  See Note 1(c) for further information regarding Farmer Mac’s derivative portfolio.

Nonrecurring Fair Value Measurements and Classification

Loans Held for Sale

Loans held for sale are reported at the lower of cost or fair value in the condensed consolidated balance sheets.  Farmer Mac internally models the fair value of loans by discounting the projected cash flows of these instruments at projected interest rates.  The fair values are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved.  The fair values of these instruments are classified as level 3 measurements.  As of September 30, 2011, Farmer Mac had recorded no adjustment to report loans held for sale at the lower of cost or fair value.  As of December 31, 2010, Farmer Mac recorded an adjustment of $8.7 million to report loans held for sale at the lower of cost or fair value.

Loans Held for Investment

Certain loans in Farmer Mac’s held for investment loan portfolio are measured at fair value when they are determined to be impaired.  Impaired loans are reported at fair value less estimated cost to sell.  The fair value of the loan is generally based on the fair value of the underlying property, which is determined by third-party appraisals when available.  When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties.  Farmer Mac classifies these fair values as level 3 measurements.

 
-49-

 

Real Estate Owned (REO)

Farmer Mac initially records REO properties at fair value less costs to sell and subsequently records them at the lower of carrying value or fair value less costs to sell.  The fair value of REO is determined by third-party appraisals when available.  When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties.  Farmer Mac classifies the REO fair values as level 3 measurements.  Farmer Mac uses net realizable value as a reasonable estimation of fair value in the tables below.

Fair Value Classification and Transfers

As of September 30, 2011, Farmer Mac’s assets and liabilities recorded at fair value include financial instruments valued at $5.8 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3).  These financial instruments measured as level 3 represented 51 percent of the total assets and 74 percent of financial instruments measured at fair value as of September 30, 2011.  As of December 31, 2010, Farmer Mac’s asset and liabilities recorded at fair value included financial instruments valued at $4.6 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3).  These financial instruments measured as level 3 represented 49 percent of the total assets and 71 percent of financial instruments measured at fair value as of December 31, 2010.

 
-50-

 

The following tables present information about Farmer Mac’s asset and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2011 and December 31, 2010, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value.
 
Assets and Liabilities Measured at Fair Value as of September 30, 2011 
 
                         
    
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
(in thousands)
 
Recurring:
                       
Assets:
                       
Investment Securities:
                       
Available-for-sale:
                       
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ -     $ -     $ 62,243     $ 62,243  
Floating rate asset-backed securities
    -       175,127       -       175,127  
Floating rate corporate debt securities
    -       51,998       -       51,998  
Floating rate Government/GSE guaranteed mortgage-backed securities
    -       614,546       -       614,546  
Fixed rate GSE guaranteed mortgage-backed securities
    -       3,867       -       3,867  
Floating rate GSE subordinated debt
    -       62,749       -       62,749  
Fixed rate GSE preferred stock
    -       83,309       -       83,309  
Fixed rate corporate debt
    -       33,920       -       33,920  
Fixed rate U.S. Treasuries
    579,424       -       -       579,424  
Fixed rate Senior agency debt
    -       162,972       -       162,972  
Total available-for-sale
    579,424       1,188,488       62,243       1,830,155  
Trading:
                               
Floating rate asset-backed securities
    -       -       1,763       1,763  
Fixed rate GSE preferred stock
    -       80,959       -       80,959  
Total trading
    -       80,959       1,763       82,722  
Total Investment Securities
    579,424       1,269,447       64,006       1,912,877  
Farmer Mac Guaranteed Securities:
                               
Available-for-sale:
                               
Farmer Mac I
    -       -       2,815,467       2,815,467  
Farmer Mac II
    -       -       36,599       36,599  
Rural Utilities
    -       -       1,447,934       1,447,934  
Total Farmer Mac Guaranteed Securities
    -       -       4,300,000       4,300,000  
USDA Guaranteed Securities:
                               
Available-for-sale
    -       -       1,193,015       1,193,015  
Trading
    -       -       233,383       233,383  
Total USDA Guaranteed Securities
    -       -       1,426,398       1,426,398  
Financial derivatives
    -       46,254       -       46,254  
Total Assets at fair value
  $ 579,424     $ 1,315,701     $ 5,790,404     $ 7,685,529  
Liabilities:
                               
Financial derivatives
  $ 10     $ 164,636     $ 1,987     $ 166,633  
Total Liabilities at fair value
  $ 10     $ 164,636     $ 1,987     $ 166,633  
Nonrecurring:
                               
Assets:
                               
Loans held for sale
  $ -     $ -     $ -     $ -  
Loans held for investment
    -       -       11,190       11,190  
REO
    -       -       1,540       1,540  
Total Nonrecurring Assets at fair value
  $ -     $ -     $ 12,730     $ 12,730  
 
 
-51-

 

Assets and Liabilities Measured at Fair Value as of December 31, 2010
 
                          
   
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
(in thousands)
 
Recurring:
                       
Assets:
                       
Investment Securities:
                       
Available-for-sale:
                       
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ -     $ -     $ 64,335     $ 64,335  
Floating rate asset-backed securities
    -       29,458       -       29,458  
Floating rate corporate debt securities
    -       163,188       -       163,188  
Floating rate Government/GSE guaranteed mortgage-backed securities
    -       576,780       -       576,780  
Fixed rate GSE guaranteed mortgage-backed securities
    -       4,821       -       4,821  
Floating rate GSE subordinated debt
    -       55,329       -       55,329  
Fixed rate GSE preferred stock
    -       84,828       -       84,828  
Fixed rate U.S. Treasuries
    692,994       -       -       692,994  
Fixed rate Senior agency debt
    -       5,500       -       5,500  
Total available-for-sale
    692,994       919,904       64,335       1,677,233  
Trading:
                               
Floating rate asset-backed securities
    -       -       1,400       1,400  
Fixed rate GSE preferred stock
    -       84,696       -       84,696  
Total trading
    -       84,696       1,400       86,096  
Total Investment Securities
    692,994       1,004,600       65,735       1,763,329  
Farmer Mac Guaranteed Securities:
                               
Available-for-sale:
                               
Farmer Mac I
    -       -       942,809       942,809  
Farmer Mac II
    -       -       37,637       37,637  
Rural Utilities
    -       -       1,926,818       1,926,818  
Total available-for-sale
    -       -       2,907,264       2,907,264  
Total Farmer Mac Guaranteed Securities
    -       -       2,907,264       2,907,264  
USDA Guaranteed Securities:
                               
Available-for-sale
    -       -       1,005,679       1,005,679  
Trading
    -       -       311,765       311,765  
Total USDA Guaranteed Securities
    -       -       1,317,444       1,317,444  
Financial derivatives
    -       41,492       -       41,492  
Total Assets at fair value
  $ 692,994     $ 1,046,092     $ 4,290,443     $ 6,029,529  
Liabilities:
                               
Financial derivatives
  $ 6     $ 110,291     $ 3,390     $ 113,687  
Total Liabilities at fair value
  $ 6     $ 110,291     $ 3,390     $ 113,687  
Nonrecurring:
                               
Assets:
                               
Loans held for sale
  $ -     $ -     $ 331,076     $ 331,076  
Loans held for investment
    -       -       11,971       11,971  
REO
    -       -       1,925       1,925  
Total Nonrecurring Assets at fair value
  $ -     $ -     $ 344,972     $ 344,972  
 
 
-52-

 

The following tables present additional information about assets and liabilities measured at fair value on a recurring and nonrecurring basis classified as level 3 measurements.  Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the quarterly reporting period.

Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2011

                            
Realized and
   
Unrealized
                   
                           
Unrealized
   
Gains/(Losses)
                   
                           
Gains/(Losses)
   
included in Other
                   
   
Beginning
                     
included in
   
Comprehensive
   
Transfers
   
Transfers
   
Ending
 
   
Balance
   
Purchases
   
Sales
   
Settlements
   
Income
   
Income
   
In
   
Out
   
Balance
 
 
 
(in thousands)
 
 Recurring:      
Assets:
                                                     
Investment Securities:
                                                     
Available-for-sale:
                                                     
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 64,682     $ -     $ -     $ -     $ -     $ (2,439 )   $ -     $ -     $ 62,243  
Trading:
                                                                       
Floating rate asset-backed securities(1)
    2,209       -       -       (136 )     (310 )     -       -       -       1,763  
Total Investment Securities
    66,891       -       -       (136 )     (310 )     (2,439 )     -       -       64,006  
Farmer Mac Guaranteed Securities:
                                                                       
Available-for-sale:
                                                                       
Farmer Mac I
    1,759,205       1,001,500       -       (2,009 )     -       56,771       -       -       2,815,467  
Farmer Mac II
    36,530       1,264       (1,208 )     (990 )     -       1,003       -       -       36,599  
Rural Utilities
    1,448,230       -       -       -       -       (296 )     -       -       1,447,934  
Total Farmer Mac Guaranteed Securities
    3,243,965       1,002,764       (1,208 )     (2,999 )     -       57,478       -       -       4,300,000  
USDA Guaranteed Securities:
                                                                       
Available-for-sale
    1,120,397       85,894       -       (33,179 )     -       19,903       -       -       1,193,015  
Trading(2)
    249,074       -       -       (17,124 )     1,433       -       -       -       233,383  
Total USDA Guaranteed Securities
    1,369,471       85,894       -       (50,303 )     1,433       19,903       -       -       1,426,398  
Total Assets at fair value
  $ 4,680,327     $ 1,088,658     $ (1,208 )   $ (53,438 )   $ 1,123     $ 74,942     $ -     $ -     $ 5,790,404  
Liabilities:
                                                                       
Financial derivatives(3)
  $ (1,755 )   $ -     $ -     $ -     $ (232 )   $ -     $ -     $ -     $ (1,987 )
Total Liabilities at fair value
  $ (1,755 )   $ -     $ -     $ -     $ (232 )   $ -     $ -     $ -     $ (1,987 )
Nonrecurring:
                                                                       
Assets:
                                                                       
Loans held for sale
  $ 441,890     $ -     $ -     $ -     $ -     $ -     $ -     $ (441,890 )   $ -  
Loans held for investment
    12,246       -       -       -       (113 )     -       179       (1,122 )     11,190  
REO
    705       -       (82 )     -       (165 )     -       1,082       -       1,540  
Total Nonrecurring Assets at fair value
  $ 454,841     $ -     $ (82 )   $ -     $ (278 )   $ -     $ 1,261     $ (443,012 )   $ 12,730  

(1)
Unrealized losses are attributable to assets still held as of September 30, 2011 and are recorded in (losses)/gains on trading assets.
(2)
Includes unrealized gains of $0.6 million attributable to assets still held as of September 30, 2011 that are recorded in (losses)/gains on trading assets.
(3)
Unrealized losses are attributable to liabilities still held as of September 30, 2011 and are recorded in losses on financial derivatives.

 
-53-

 

Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2010

    
Beginning
Balance
   
Purchases,
Sales,
Issuances and
Settlements,
net
   
Realized and
Unrealized
Gains/(Losses)
included in
Income
   
Unrealized
Gains/(Losses)
included in Other
Comprehensive
Income
   
Net Transfers In
and/or Out
   
Ending
Balance
 
 
 
(in thousands)
 
 Recurring:      
Assets:
                                   
Investment securities:
                                   
Available-for-sale:
                                   
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 63,344     $ -     $ -     $ 2,342     $ -     $ 65,686  
Floating rate GSE subordinated debt
    -       -       -       -       -       -  
Fixed rate GSE preferred stock
    -       -       -       -       -       -  
Total available-for-sale investment securities
    63,344       -       -       2,342       -       65,686  
Trading:
                                               
Floating rate asset-backed securities(1)
    1,412       (185 )     142       -       -       1,369  
Fixed rate GSE preferred stock
    -       -       -       -       -       -  
Total trading investment securities
    1,412       (185 )     142       -       -       1,369  
Total investment securities
    64,756       (185 )     142       2,342       -       67,055  
Farmer Mac Guaranteed Securities:
                                               
Available-for-sale:
                                               
Farmer Mac I
    47,821       547,942       -       13,031       -       608,794  
Farmer Mac II
    40,436       1,214       -       330       -       41,980  
Rural Utilities
    1,629,883       150,000       -       3,810       -       1,783,693  
Total available-for-sale
    1,718,140       699,156       -       17,171       -       2,434,467  
Trading:
                                               
Farmer Mac II
    -       -       -       -       -       -  
Rural Utilities
    -       -       -       -       -       -  
Total trading
    -       -       -       -       -       -  
Total Farmer Mac Guaranteed Securities
    1,718,140       699,156       -       17,171       -       2,434,467  
USDA Guaranteed Securities:
                                               
Available-for-sale
    880,424       88,117       -       2,360       -       970,901  
Trading(2)
    386,496       (29,890 )     (2,067 )     -       -       354,539  
Total USDA Guaranteed Securities
    1,266,920       58,227       (2,067 )     2,360       -       1,325,440  
Total Assets at fair value
  $ 3,049,816     $ 757,198     $ (1,925 )   $ 21,873     $ -     $ 3,826,962  
Liabilities:
                                               
Financial derivatives(3)
  $ (3,678 )   $ -     $ 57     $ -     $ -     $ (3,621 )
Total Liabilities at fair value
  $ (3,678 )   $ -     $ 57     $ -     $ -     $ (3,621 )
Nonrecurring:
                                               
Assets:
                                               
Loans held for sale, at lower of cost or fair value
  $ 163,065     $ -     $ (906 )   $ -     $ 33,533     $ 195,692  
Loans held for investment, at fair value
    4,256       -       (374 )     -       (406 )     3,476  
REO
    -       -       (1,483 )     -       5,202       3,719  
Total nonrecurring Assets at fair value
  $ 167,321     $ -     $ (2,763 )   $ -     $ 38,329     $ 202,887  

(1)
Unrealized gains are attributable to assets still held as of September 30, 2010 and are recorded in (losses)/gains on trading assets.
(2)
Includes unrealized losses of $3.6 million attributable to assets still held as of September 30, 2010 that are recorded in (losses)/gains on trading assets.
(3)
Unrealized gains are attributable to liabilities still held as of September 30, 2010 and are recorded in losses on financial derivatives.

 
-54-

 

Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2011

                           
Realized and
   
Unrealized
                   
                           
Unrealized
   
Gains/(Losses)
                   
                           
Gains/(Losses)
   
included in Other
                   
   
Beginning
                     
included in
   
Comprehensive
   
Transfers
   
Transfers
   
Ending
 
   
Balance
   
Purchases
   
Sales
   
Settlements
   
Income
   
Income
   
In
   
Out
   
Balance
 
 
 
(in thousands)
 
 Recurring:      
Assets:
                                                     
Investment Securities:
                                                     
Available-for-sale:
                                                     
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 64,335     $ -     $ -     $ -     $ -     $ (2,092 )   $ -     $ -     $ 62,243  
Trading:
                                                                       
Floating rate asset-backed securities(1)
    1,400       -       -       (686 )     1,049       -       -       -       1,763  
Total Investment Securities
    65,735       -       -       (686 )     1,049       (2,092 )     -       -       64,006  
Farmer Mac Guaranteed Securities:
                                                                       
Available-for-sale:
                                                                       
Farmer Mac I
    942,809       1,801,500       -       (2,023 )     -       73,181       -       -       2,815,467  
Farmer Mac II
    37,637       3,268       (3,213 )     (3,484 )     -       2,391       -       -       36,599  
Rural Utilities
    1,926,818       -       -       (476,401 )     -       (2,483 )     -       -       1,447,934  
Total Farmer Mac Guaranteed Securities
    2,907,264       1,804,768       (3,213 )     (481,908 )     -       73,089       -       -       4,300,000  
USDA Guaranteed Securities:
                                                                       
Available-for-sale
    1,005,679       300,705       -       (142,965 )     -       29,596       -       -       1,193,015  
Trading(2)
    311,765       -       -       (80,082 )     1,700       -       -       -       233,383  
Total USDA Guaranteed Securities
    1,317,444       300,705       -       (223,047 )     1,700       29,596       -       -       1,426,398  
Total Assets at fair value
  $ 4,290,443     $ 2,105,473     $ (3,213 )   $ (705,641 )   $ 2,749     $ 100,593     $ -     $ -     $ 5,790,404  
Liabilities:
                                                                       
Financial derivatives(3)
  $ (3,390 )   $ -     $ -     $ -     $ 1,403     $ -     $ -     $ -     $ (1,987 )
Total Liabilities at fair value
  $ (3,390 )   $ -     $ -     $ -     $ 1,403     $ -     $ -     $ -     $ (1,987 )
Nonrecurring:
                                                                       
Assets:
                                                                       
Loans held for sale
  $ 331,076     $ -     $ -     $ (4,617 )   $ (964 )   $ -     $ 116,395     $ (441,890 )   $ -  
Loans held for investment
    11,971       -       -       -       (308 )     -       802       (1,275 )     11,190  
 REO
    1,925       -       (1,088 )     -       (586 )     -       1,289       -       1,540  
Total Nonrecurring Assets at fair value
  $ 344,972     $ -     $ (1,088 )   $ (4,617 )   $ (1,858 )   $ -     $ 118,486     $ (443,165 )   $ 12,730  

(1)
Unrealized gains are attributable to assets still held as of September 30, 2011 and are recorded in (losses)/gains on trading assets.
(2)
Includes unrealized losses of $2.0 million attributable to assets still held as of September 30, 2011 that are recorded in (losses)/gains on trading assets.
(3)
Unrealized gains are attributable to liabilities still held as of September 30, 2011 and are recorded in losses on financial derivatives.

 
-55-

 

Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2010

    
Beginning
Balance
   
Purchases,
Sales,
Issuances and
Settlements,
net
   
Realized and
Unrealized
Gains/(Losses)
included in
Income
   
Unrealized
Gains/(Losses)
included in Other
Comprehensive
Income
   
Net Transfers In
and/or Out
   
Ending
Balance
 
 
 
(in thousands)
 
 Recurring:      
Assets:
                                   
Investment securities:
                                   
Available-for-sale:
                                   
Floating rate auction-rate certificates backed by Government guaranteed student loans
  $ 72,884     $ -     $ -     $ (7,198 )   $ -     $ 65,686  
Floating rate GSE subordinated debt
    47,562       -       -       -       (47,562 )     -  
Fixed rate GSE preferred stock
    89,211       -       -       -       (89,211 )     -  
Total available-for-sale investment securities
    209,657       -       -       (7,198 )     (136,773 )     65,686  
Trading:
                                               
Floating rate asset-backed securities(1)
    1,824       (587 )     132       -       -       1,369  
Fixed rate GSE preferred stock
    88,148       -               -       (88,148 )     -  
Total trading investment securities
    89,972       (587 )     132       -       (88,148 )     1,369  
Total investment securities
    299,629       (587 )     132       (7,198 )     (224,921 )     67,055  
Farmer Mac Guaranteed Securities:
                                               
Available-for-sale:
                                               
Farmer Mac I
    56,864       542,677       -       14,638       (5,385 )     608,794  
Farmer Mac II
    764,792       1,411       -       (1,039 )     (723,184 )     41,980  
Rural Utilities
    1,703,211       62,201       -       18,281       -       1,783,693  
Total available-for-sale
    2,524,867       606,289       -       31,880       (728,569 )     2,434,467  
Trading:
                                               
Farmer Mac II
    422,681       -               -       (422,681 )     -  
Rural Utilities
    451,448       -       -       -       (451,448 )     -  
Total trading
    874,129       -       -       -       (874,129 )     -  
Total Farmer Mac Guaranteed Securities
    3,398,996       606,289       -       31,880       (1,602,698 )     2,434,467  
USDA Guaranteed Securities:
                                               
Available-for-sale
    -       225,696       -       22,021       723,184       970,901  
Trading(2)
    -       (76,679 )     8,537       -       422,681       354,539  
Total USDA Guaranteed Securities
    -       149,017       8,537       22,021       1,145,865       1,325,440  
Total Assets at fair value
  $ 3,698,625     $ 754,719     $ 8,669     $ 46,703     $ (681,754 )   $ 3,826,962  
Liabilities:
                                               
Financial derivatives(3)
  $ (3,653 )   $ -     $ 32     $ -     $ -     $ (3,621 )
Total Liabilities at fair value
  $ (3,653 )   $ -     $ 32     $ -     $ -     $ (3,621 )
Nonrecurring:
                                               
Assets:
                                               
Loans held for sale, at lower of cost or fair value
  $ 28,505     $ -     $ (3,090 )   $ -     $ 170,277     $ 195,692  
Loans held for investment, at fair value
    -       -       (1,042 )     -       4,518       3,476  
        REO     -               (1,483 )             5,202       3,719  
Total Nonrecurring Assets at fair value
  $ 28,505     $ -     $ (5,615 )   $ -     $ 179,997     $ 202,887  

(1)
Unrealized gains are attributable to assets still held as of September 30, 2010 and are recorded in (losses)/gains on trading assets.
(2)
Includes unrealized gains of $4.0 million attributable to assets still held as of September 30, 2010 that are recorded in (losses)/gains on trading assets.
(3)
Unrealized gains are attributable to liabilities still held as of September 30, 2010 and are recorded in losses on financial derivatives.

Fair Value Option

Accounting guidance on the fair value option for financial instruments permits entities to make a one-time irrevocable election to report financial instruments at fair value with changes in fair value recorded in earnings as they occur.  This guidance provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

 
-56-

 

Farmer Mac made no fair value option elections for the three and nine months ended September 30, 2011 and 2010.  For the three and nine months ended September 30, 2011, Farmer Mac recorded net losses on trading assets of $3.3 million and $1.4 million, respectively, for changes in fair values of assets previously selected for the fair value option, compared to net losses of $1.9 million and net gains of $6.6 million, respectively, for the same periods ended September 30, 2010.  These changes in fair value are presented as “(Losses)/gains on trading assets” in the condensed consolidated statements of operations.

Disclosures about Fair Value of Financial Instruments

The following table sets forth the estimated fair values and the carrying amounts for financial assets, liabilities and guarantees and commitments as of September 30, 2011 and December 31, 2010 in accordance with accounting guidance on disclosures about fair value of financial instruments.

   
September 30, 2011
   
December 31, 2010
 
   
Fair Value
   
Carrying
Amount
   
Fair Value
   
Carrying
Amount
 
   
(in thousands)
 
Financial assets:
                       
Cash and cash equivalents
  $ 825,014     $ 825,014     $ 729,920     $ 729,920  
Investment securities
    1,912,877       1,912,877       1,763,329       1,763,329  
Farmer Mac Guaranteed Securities
    4,300,000       4,300,000       2,907,264       2,907,264  
USDA Guaranteed Securities
    1,426,398       1,426,398       1,317,444       1,317,444  
Loans
    2,890,590       2,796,532       2,642,399       2,558,599  
Financial derivatives
    46,254       46,254       41,492       41,492  
Interest receivable
    79,579       79,579       90,295       90,295  
Guarantee and commitment fees receivable:
                               
LTSPCs
    22,018       14,980       14,191       13,666  
Farmer Mac Guaranteed Securities
    17,922       15,267       19,058       21,086  
Financial liabilities:
                               
Notes payable:
                               
Due within one year
    5,835,888       5,831,259       4,510,758       4,509,419  
Due after one year
    4,255,812       4,060,382       3,530,656       3,430,656  
Debt securities of consolidated trusts held by third parties
    774,518       713,546       883,669       827,411  
Financial derivatives
    166,633       166,633       113,687       113,687  
Accrued interest payable
    48,998       48,998       57,131       57,131  
Guarantee and commitment obligations:
                               
LTSPCs
    21,123       14,085       13,152       12,627  
Farmer Mac Guaranteed Securities
    15,473       12,818       15,653       17,681  

The carrying amount of cash and cash equivalents, certain short-term investment securities, interest receivable and accrued interest payable is a reasonable estimate of their approximate fair value.  Farmer Mac estimates the fair value of its loans, guarantee and commitment fees receivable/obligation and notes payable by discounting the projected cash flows of these instruments at projected interest rates.  The fair values are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved.  Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model.  Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.

 
-57-

 

Note 8.
Business Segment Reporting

Farmer Mac accomplishes its congressional mission of providing liquidity and lending capacity to rural lenders through three programs – Farmer Mac I, Farmer Mac II and Rural Utilities.  Prior to first quarter 2010, Farmer Mac reported its financial results as a single segment using GAAP-basis income.  Beginning in first quarter 2010, Farmer Mac revised its segment financial reporting, by using core earnings, a non-GAAP financial measure, to reflect the manner in which management has begun assessing the Corporation’s performance since the contribution of substantially all of the Farmer Mac II program business to a subsidiary, Farmer Mac II LLC.  Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management’s view, core earnings is a valuable alternative measure in understanding Farmer Mac’s economic performance, transaction economics and business trends.  Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance, which are not expected to have a permanent effect on capital.  Core earnings also differs from GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of the Corporation’s core business.  This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies.

The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis.  Accordingly, the core earnings for Farmer Mac’s reportable operating segments will differ from the stand-alone financial statements of Farmer Mac’s subsidiaries.  These differences will be due to various factors, including the reversal of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the incurrence of indebtedness managed at the corporate level.  The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences.  The assets of Farmer Mac’s subsidiary Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.  As of September 30, 2011, Farmer Mac II LLC held assets with a fair value of $1.5 billion, had debt outstanding of $167.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million and had $1.0 billion of common stock outstanding, all of which is held by Farmer Mac.

Management has determined that the Corporation’s operations consist of three reportable segments – Farmer Mac I, Farmer Mac II and Rural Utilities.  Farmer Mac uses these three segments to generate revenue and manage business risk, and each segment is based on distinct products and distinct business activities.  In addition to these three program operating segments, a corporate segment is presented.  That segment represents activity in Farmer Mac’s liquidity investment portfolio and other corporate activities.  The segment financial results include directly attributable revenues and expenses.  Corporate charges for administrative expenses that are not directly attributable to an operating segment are allocated based on headcount.

 
-58-

 

Each of the program operating segments generates revenue through purchasing loans or securities, committing to purchase loans or guaranteeing securities backed by eligible loans.  Purchases of both program assets and assets held in Farmer Mac’s liquidity investment portfolio are funded through debt issuance of various maturities.  Management makes decisions about pricing, funding and guarantee and commitment fee levels based on inherent credit risks, resource allocation and target returns on equity separately for each segment.

Under the Farmer Mac I program, Farmer Mac purchases or commits to purchase eligible mortgage loans secured by first liens on agricultural real estate, including through the issuance of LTSPCs.  Farmer Mac also guarantees securities representing interests in, or obligations secured by, pools of eligible agricultural real estate mortgage loans, and may purchase those securities.

Under the Farmer Mac II program, Farmer Mac II LLC purchases USDA-guaranteed portions of loans, which are presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets.  Farmer Mac currently operates only that part of the Farmer Mac II program that involves the guarantee of Farmer Mac II Guaranteed Securities to investors other than Farmer Mac or Farmer Mac II LLC.

Under the Rural Utilities program, Farmer Mac’s business activities include loan purchases, guarantees and purchases of securities with respect to eligible rural utilities loans.  To date, all of the business under the Rural Utilities program has been with one lender, CFC, a related party.

 
-59-

 

The following tables present non-GAAP core earnings for Farmer Mac’s reportable operating segments and a reconciliation to GAAP net income for the three and nine months ended September 30, 2011 and 2010.

Core Earnings by Business Segment
For the Three Months Ended September 30, 2011

                            
Reconciling
   
GAAP
 
   
Farmer Mac I
   
Farmer Mac II
   
Rural Utilities
   
Corporate
   
Adjustments
   
Amounts
 
   
(in thousands)
 
Interest income (1)
  $ 38,949     $ 14,370     $ 13,135     $ 6,880     $ (2,213 )   $ 71,121  
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
    (782 )     -       -       -       782       -  
Interest expense (2)
    (24,625 )     (11,665 )     (10,089 )     (3,408 )     10,375       (39,412 )
Net effective spread
    13,542       2,705       3,046       3,472       8,944       31,709  
                                                 
Guarantee and commitment fees
    5,562       51       1,317       -       (782 )     6,148  
Other income/(expense) (3)
    236       26       -       (946 )     (60,869 )     (61,553 )
Non-interest income/(loss)
    5,798       77       1,317       (946 )     (61,651 )     (55,405 )
                                                 
Release of loan losses
    349       -       -       -       -       349  
                                                 
Release of losses
    452       -       -       -       -       452  
Other non-interest expense
    (3,891 )     (710 )     (1,319 )     (2,082 )     -       (8,002 )
Non-interest expense (4)
    (3,439 )     (710 )     (1,319 )     (2,082 )     -       (7,550 )
Core earnings before income taxes
    16,250       2,072       3,044       444       (52,707 ) (5)     (30,897 )
Income tax (expense)/benefit
    (5,687 )     (725 )     (1,065 )     3,161       18,447       14,131  
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
    10,563       1,347       1,979       3,605       (34,260 ) (5)     (16,766 )
Preferred stock dividends
    -       -       -       (719 )     -       (719 )
Non-controlling interest
    -       -       -       (5,547 )     -       (5,547 )
Segment core earnings
  $ 10,563     $ 1,347     $ 1,979     $ (2,661 )   $ (34,260 ) (5)   $ (23,032 )
                                                 
Total assets at carrying value
  $ 4,790,409     $ 1,483,750     $ 2,356,590     $ 2,799,758     $ -     $ 11,430,507  
Total principal balance of on- and off-balance sheet program assets
    8,088,365       1,463,129       2,289,899       -       -       11,841,393  

(1)
Includes reconciling adjustments for yield maintenance income, discount amortization on certain prepaid loans and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in losses on financial derivatives on the GAAP financial statements.
(3)
Includes reconciling adjustments for the reclassification of yield maintenance income, discount amortization on certain prepaid loans, expenses related to interest rate swaps and fair value adjustments on loans held for sale, financial derivatives and trading assets.  Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding GAAP measures: income before income taxes, net income and net income available to common stockholders, respectively.

 
-60-

 
 

Core Earnings by Business Segment
For the Three Months Ended September 30, 2010

                            
Reconciling
   
GAAP
 
   
Farmer Mac I
   
Farmer Mac II
   
Rural Utilities
   
Corporate
   
Adjustments
   
Amounts
 
   
(in thousands)
 
Interest income (1)
  $ 24,748     $ 14,430     $ 14,074     $ 6,430     $ (1,107 )   $ 58,575  
Interest income related to consolidated trusts owned by third parties reclassified  to guarantee fee income
    (952 )     -       -       -       952       -  
Interest expense (2)
    (16,130 )     (11,773 )     (10,959 )     (3,625 )     8,961       (33,526 )
Net effective spread
    7,666       2,657       3,115       2,805       8,806       25,049  
                                                 
Guarantee and commitment fees
    5,492       52       1,385       -       (952 )     5,977  
Other income/(expense) (3)
    1,548       295       1       (385 )     (10,787 )     (9,328 )
Non-interest income/(loss)
    7,040       347       1,386       (385 )     (11,739 )     (3,351 )
                                                 
Provision for loan losses
    (412 )     -       -       -       -       (412 )
                                                 
Provision for losses
    (105 )     -       -       -       -       (105 )
Other non-interest expense
    (4,632 )     (579 )     (1,170 )     (1,652 )     -       (8,033 )
Non-interest expense (4)
    (4,737 )     (579 )     (1,170 )     (1,652 )     -       (8,138 )
                                                 
Core earnings before income taxes
    9,557       2,425       3,331       768       (2,933 ) (5)     13,148  
Income tax (expense)/benefit
    (3,345 )     (849 )     (1,166 )     3,448       1,027       (885 )
Core earnings before preferred stock dividends, attribution of income to non-controlling interest, and loss on retirement of preferred stock
    6,212       1,576       2,165       4,216       (1,906 ) (5)     12,263  
Preferred stock dividends
    -       -       -       (720 )     -       (720 )
Non-controlling interest
    -       -       -       (5,546 )     -       (5,546 )
Segment core earnings
  $ 6,212     $ 1,576     $ 2,165     $ (2,050 )   $ (1,906 ) (5)   $ 5,997  
                                                 
Total assets at carrying value
  $ 2,393,213     $ 1,388,054     $ 2,431,811     $ 2,009,664     $ -     $ 8,222,742  
Total principal balance of on- and off-balance sheet program assets
    7,761,847       1,365,993       2,353,453       -       -       11,481,293  

(1)
Includes reconciling adjustments for yield maintenance income, discount amortization on certain prepaid loans and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in losses on financial derivatives on the GAAP financial statements.
(3)
Includes reconciling adjustments for the reclassification of yield maintenance income, discount amortization on certain prepaid loans, expenses related to interest rate swaps and fair value adjustments on loans held for sale, financial derivatives and trading assets.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends, attribution of income to non-controlling interest, and loss on retirement of preferred stock; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income available to common stockholders, respectively.

 
-61-

 

Core Earnings by Business Segment
For the Nine Months Ended September 30, 2011

                            
Reconciling
   
GAAP
 
   
Farmer Mac I
   
Farmer Mac II
   
Rural Utilities
   
Corporate
   
Adjustments
   
Amounts
 
   
(in thousands)
 
Interest income (1)
  $ 105,583     $ 42,080     $ 39,928     $ 21,100     $ (6,646 )   $ 202,045  
Interest income related to consolidated  trusts owned by third parties reclassified  to guarantee fee income
    (2,495 )     -       -       -       2,495       -  
Interest expense (2)
    (67,301 )     (33,984 )     (30,793 )     (10,722 )     28,695       (114,105 )
Net effective spread
    35,787       8,096       9,135       10,378       24,544       87,940  
                                                 
Guarantee and commitment fees
    17,151       154       4,045       -       (2,495 )     18,855  
Other income/(expense) (3)
    2,459       131       -       (1,686 )     (68,002 )     (67,098 )
Non-interest income/(loss)
    19,610       285       4,045       (1,686 )     (70,497 )     (48,243 )
                                                 
Provision for loan losses
    (1,092 )     -       -       -       -       (1,092 )
                                                 
Release of losses
    3,321       -       -       -       -       3,321  
Other non-interest expense
    (12,651 )     (2,085 )     (3,698 )     (6,306 )     -       (24,740 )
Non-interest expense (4)
    (9,330 )     (2,085 )     (3,698 )     (6,306 )     -       (21,419 )
Core earnings before income taxes
    44,975       6,296       9,482       2,386       (45,953 ) (5)     17,186  
Income tax (expense)/benefit
    (15,741 )     (2,203 )     (3,319 )     7,255       16,083       2,075  
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
    29,234       4,093       6,163       9,641       (29,870 ) (5)     19,261  
Preferred stock dividends
    -       -       -       (2,159 )     -       (2,159 )
Non-controlling interest
    -       -       -       (16,641 )     -       (16,641 )
Segment core earnings
  $ 29,234     $ 4,093     $ 6,163     $ (9,159 )   $ (29,870 ) (5)   $ 461  
                                                 
Total assets at carrying value
  $ 4,790,409     $ 1,483,750     $ 2,356,590     $ 2,799,758     $ -     $ 11,430,507  
Total principal balance of on- and off-balance sheet program assets
    8,088,365       1,463,129       2,289,899       -       -       11,841,393  

(1)
Includes reconciling adjustments for yield maintenance income, discount amortization on certain prepaid loans and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in losses on financial derivatives on the GAAP financial statements.
(3)
Includes reconciling adjustments for the reclassification of yield maintenance income, discount amortization on certain prepaid loans, expenses related to interest rate swaps and fair value adjustments on loans held for sale, financial derivatives and trading assets.  Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding GAAP measures: income before income taxes, net income and net income available to common stockholders, respectively.

 
-62-

 

Core Earnings by Business Segment
For the Nine Months Ended September 30, 2010

                            
Reconciling
   
GAAP
 
   
Farmer Mac I
   
Farmer Mac II
   
Rural Utilities
   
Corporate
   
Adjustments
   
Amounts
 
   
(in thousands)
 
Interest income (1)
  $ 80,512     $ 40,863     $ 42,011     $ 19,303     $ (6,055 )   $ 176,634  
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
    (3,701 )     -       -       -       3,701       -  
Interest expense (2)
    (54,461 )     (33,495 )     (33,557 )     (10,876 )     26,029       (106,360 )
Net effective spread
    22,350       7,368       8,454       8,427       23,675       70,274  
                                                 
Guarantee and commitment fees
    16,527       403       4,377       -       (3,701 )     17,606  
Other income/(expense) (3)
    2,823       298       1       (1,599 )     (24,974 )     (23,451 )
Non-interest income/(loss)
    19,350       701       4,378       (1,599 )     (28,675 )     (5,845 )
                                                 
Provision for loan losses
    (1,392 )     -       -       -       -       (1,392 )
                                                 
Provision for losses
    (1,680 )     -       -       -       -       (1,680 )
Other non-interest expense
    (11,267 )     (2,159 )     (3,322 )     (4,690 )     -       (21,438 )
Non-interest expense (4)
    (12,947 )     (2,159 )     (3,322 )     (4,690 )     -       (23,118 )
Core earnings before income taxes
    27,361       5,910       9,510       2,138       (5,000 ) (5)     39,919  
Income tax (expense)/benefit
    (9,577 )     (2,068 )     (3,329 )     7,247       1,750       (5,977 )
Core earnings before preferred stock dividends, attribution of income to non-controlling interest, and loss on retirement of preferred stock
    17,784       3,842       6,181       9,385       (3,250 ) (5)     33,942  
Preferred stock dividends
    -       -       -       (3,410 )     (5,784 )     (9,194 )
Non-controlling interest
    -       -       -       (15,160 )     -       (15,160 )
Segment core earnings
  $ 17,784     $ 3,842     $ 6,181     $ (9,185 )   $ (9,034 ) (5)   $ 9,588  
                                                 
Total assets at carrying value
  $ 2,393,213     $ 1,388,054     $ 2,431,811     $ 2,009,664     $ -     $ 8,222,742  
Total principal balance of on- and off-balance sheet program assets
    7,761,847       1,365,993       2,353,453       -       -       11,481,293  

(1)
Includes reconciling adjustments for yield maintenance income, discount amortization on certain prepaid loans and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in losses on financial derivatives on the GAAP financial statements.
(3)
Includes reconciling adjustments for the reclassification of yield maintenance income, discount amortization on certain prepaid loans, expenses related to interest rate swaps and fair value adjustments on loans held for sale, financial derivatives and trading assets.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends, attribution of income to non-controlling interest, and loss on retirement of preferred stock; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income available to common stockholders, respectively.

 
-63-

 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial information included in this report is consolidated to include the accounts of Farmer Mac and its subsidiaries, Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC.  Farmer Mac II LLC was formed as a Delaware limited liability company in December 2009 to operate substantially all of the business related to the Farmer Mac II program – primarily the acquisition of USDA-guaranteed portions.  The business operations of Farmer Mac II LLC began in January 2010.  Since then, Farmer Mac has operated only that part of the Farmer Mac II program that involves the issuance of Farmer Mac II Guaranteed Securities to investors other than Farmer Mac or Farmer Mac II LLC.

This discussion and analysis of financial condition and results of operations should be read together with:  (1) the interim unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 16, 2011, as amended by Amendment No. 1 on Form 10-K/A filed on June 1, 2011.  Farmer Mac amended its Annual Report on Form 10-K for the year ended December 31, 2010 to correct prior misclassifications of proceeds from the repayments of certain loans between operating activities and investing activities on the consolidated statements of cash flows.  These misclassifications had no impact on the net increase or decrease in cash and cash equivalents as previously reported and had no effect on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity.  See Note 1(a) to the condensed consolidated financial statements for further information.

The discussion below is not necessarily indicative of future results.
 
Forward-Looking Statements

Some statements made in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management’s current expectations about Farmer Mac’s future financial results, business prospects and business developments.  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and typically are accompanied by, and identified with, such terms as “anticipates,” “believes,” “expects,” “intends,” “should” and similar phrases.  The following management’s discussion and analysis includes forward-looking statements addressing Farmer Mac’s:
 
 
·
prospects for earnings;
 
·
prospects for growth in loan purchase, guarantee, securitization, and LTSPC volume;
 
·
trends in net interest income;
 
·
trends in portfolio credit quality, delinquencies, and provisions for losses;
 
·
trends in expenses;
 
·
trends in investment securities;
 
·
prospects for asset impairments and allowance for losses;
 
·
changes in capital position; and
 
·
other business and financial matters.

 
-64-

 

Management’s expectations for Farmer Mac’s future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties.  Various factors or events could cause Farmer Mac’s actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under “Risk Factors” in Part I, Item 1A of Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011, as well as uncertainties regarding:
 
 
·
the availability to Farmer Mac and Farmer Mac II LLC of debt financing and, if available, the reasonableness of rates and terms;
 
·
legislative or regulatory developments that could affect Farmer Mac, including those related to the Dodd-Frank Act;
 
·
fluctuations in the fair value of assets held by Farmer Mac and Farmer Mac II LLC;
 
·
the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the Farmer Mac secondary market;
 
·
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
 
·
the impact of economic conditions and real estate values on agricultural mortgage lending;
 
·
developments in the financial markets, including possible investor, analyst and rating agency reactions to events involving GSEs, including Farmer Mac; and
 
·
financial market volatility, including the future level and direction of interest rates, commodity prices, and export demand for U.S. agricultural products.

In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report.  Furthermore, Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements that may be made to reflect new information or any future events or circumstances, except as otherwise mandated by the SEC.

Overview

Farmer Mac remains well positioned to continue to fulfill its congressional mission to provide capital and liquidity to rural America.  During the quarter, 90-day delinquencies improved and Farmer Mac’s capital position remained well above its minimum capital and risk-based capital requirements despite a GAAP net loss for third quarter 2011, which was attributable to changes in the fair values of the Corporation’s financial derivatives.  Although Farmer Mac’s overall program business volume decreased during third quarter 2011, the Corporation added $1.5 billion of new program volume that partially offset the maturity of two large AgVantage securities and principal paydowns on other program assets.  The decrease in overall program volume was primarily attributable to the maturity of a $475.0 million AgVantage security that was not replaced with new business, as well as a strong agricultural economy in which borrowers had more cash and fewer borrowing needs, resulting in a decreased need by lenders for the secondary market tools offered by Farmer Mac.  This decrease in overall program volume did not have an overall negative effect on Farmer Mac’s core earnings, a non-GAAP measure, as core earnings increased during third quarter 2011 compared to both the previous quarter and third quarter 2010.

 
-65-

 

During third quarter 2011, Farmer Mac had a net loss attributable to common stockholders of $23.0 million ($2.22 per diluted common share), compared to net income of $6.0 million ($0.56 per diluted common share) in third quarter 2010.  The decline in Farmer Mac’s third quarter 2011 GAAP financial results was almost entirely attributable to the effects of fair value changes on its financial derivatives.  Although Farmer Mac’s financial derivatives provide effective economic hedges of interest rate risk, they are not designated in hedge relationships for accounting purposes and are required to be reported at fair value, with changes in fair value recorded in earnings as they occur.  The fair values of Farmer Mac’s financial derivatives are sensitive to changes in long-term interest rates.  If long-term interest rates increase, Farmer Mac’s financial derivatives generally increase in fair value.  Conversely, if long-term interest rates decrease, Farmer Mac’s financial derivatives generally decrease in fair value.  For example, the 10-year Treasury rate decreased approximately 124 basis points in third quarter 2011.  During this period, Farmer Mac recorded unrealized fair value losses on its financial derivatives of $55.2 million. Although these fair value changes are expected to have no permanent effect on earnings or capital if held to maturity, as is expected, they can contribute significant volatility in periodic GAAP earnings, as evident during third quarter 2011.

During third quarter 2011, Farmer Mac’s new program volume totaled $1.5 billion, bringing total year-to-date new program volume to $3.0 billion and total outstanding loans, guarantees and commitments to $11.8 billion.  This compares to new program volume of $1.1 billion and $1.7 billion, respectively, for the same periods in 2010 and total outstanding loans, guarantees and commitments of $11.5 billion as of September 30, 2010.  Third quarter new business volume included purchases of $1.0 billion of AgVantage securities issued by Metropolitan Life Insurance Company (“MetLife”) with maturities ranging between three and ten years, which replaced maturing AgVantage securities of $1.0 billion issued by MetLife that had been held by third party investors and accounted for as off-balance sheet guarantees by Farmer Mac.  Although the third quarter 2011 MetLife transactions did not increase the overall level of outstanding program volume, they effectively extended the duration of the AgVantage securities that had matured and should provide increased future profitability because the net interest margin earned by Farmer Mac holding these securities on-balance sheet is expected to exceed the guarantee fee earned on the prior off-balance sheet guarantees.

As of September 30, 2011, Farmer Mac’s excess core capital above its statutory minimum capital requirement was $124.7 million.  This compares to excess core capital levels of $162.3 million and $183.2 million as of June 30, 2011 and September 30, 2010, respectively.  The decrease in Farmer Mac’s excess core capital above its statutory minimum capital requirement in third quarter 2011 was primarily attributable to (1) decreased retained earnings of $35.9 million resulting from the after-tax effect of the unrealized fair value losses on Farmer Mac’s financial derivatives and (2) an incremental increase of $20.0 million on Farmer Mac’s statutory minimum capital requirement resulting from Farmer Mac purchasing and holding on-balance sheet $1.0 billion of AgVantage securities issued by MetLife, which replaced $1.0 billion of AgVantage securities issued by MetLife previously accounted for as off-balance sheet guarantees.  As described above, these unrealized fair value losses on financial derivatives are not expected to have a permanent effect on capital if Farmer Mac holds the derivatives until maturity, as is expected.

 
-66-

 

As of the end of third quarter 2011, Farmer Mac’s 90-day delinquencies improved compared to both the previous quarter and the prior year.  Historically, from quarter to quarter, Farmer Mac’s 90-day delinquencies have fluctuated, both in dollars and as a percentage of the outstanding portfolio, with higher levels likely at the end of the first and third quarters of each year corresponding to the annual (January 1st) and semi-annual (January 1st and July 1st) payment characteristics of most Farmer Mac I loans.  As of the end of third quarter 2011, 90-day delinquencies were $44.9 million (1.02 percent), uncharacteristically lower than $54.6 million (1.27 percent) as of June 30, 2011.  Additionally, the September 30, 2011 90-day delinquencies were also down compared to $70.2 million (1.63 percent) as of December 31, 2010 and $64.8 million (1.53 percent) as of September 30, 2010.  Notably, as of September 30, 2011, there continued to be no 90-day delinquencies in Farmer Mac’s portfolio of ethanol facility loans, a segment of the portfolio that has included heightened levels of delinquencies for several years.

When analyzing delinquencies in its program business, Farmer Mac takes into account more than the Farmer Mac I agricultural loan delinquency percentages provided above.  The total program business includes AgVantage securities and rural utilities loans, neither of which have any delinquencies, and the USDA Guaranteed Securities and USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities, which are backed by the full faith and credit of the United States.  When these are included in the calculation, the overall level of 90-day delinquent loans in Farmer Mac’s programs as of September 30, 2011 is 0.38 percent.

Farmer Mac’s non-GAAP core earnings for third quarter 2011 was $11.2 million, up from $7.9 million in third quarter 2010.  Third quarter 2011 core earnings benefited from increased outstanding business volume compared to a year earlier, increased net interest income of $31.7 million, compared to $25.0 million in third quarter 2010 and net releases from the allowance for losses of $0.8 million as opposed to provisions of $0.5 million in the prior year.  Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management’s view, core earnings is a valuable alternative measure in understanding Farmer Mac’s economic performance, transaction economics and business trends.  Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance, which are not expected to have a permanent effect on capital.  Core earnings also differs from GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of the Corporation’s core business.  This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies.  Farmer Mac’s disclosure of this non-GAAP measure is not intended to replace GAAP information but, rather, to supplement it.

 
-67-

 

Critical Accounting Policies and Estimates

The preparation of Farmer Mac’s condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented.  Actual results could differ from those estimates.  The critical accounting policies that are both important to the portrayal of Farmer Mac’s financial condition and results of operations and require complex, subjective judgments are the accounting policies for:  (1) the allowance for losses, (2) fair value measurement, and (3) other-than-temporary impairment.

For a discussion of Farmer Mac’s critical accounting policies related to the allowance for losses, fair value measurement and other-than-temporary impairment and the related use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” 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 of Operations

Farmer Mac’s net loss attributable to common stockholders for third quarter 2011 was $23.0 million or $(2.22) per diluted common share, compared to net income of $6.0 million or $0.56 per diluted common share for third quarter 2010.  For the nine months ended September 30, 2011, Farmer Mac’s net income attributable to common stockholders was $0.5 million or $0.04 per diluted common share, compared to $9.6 million or $0.91 per diluted common share for the nine months ended September 30, 2010.  Farmer Mac’s non-GAAP core earnings for third quarter 2011 was $11.2 million or $1.04 per diluted common share, compared to $7.9 million or $0.74 per diluted common share for third quarter 2010.  Core earnings for the nine months ended September 30, 2011 was $30.3 million or $2.83 per diluted common share, compared to $18.6 million or $1.76 per diluted common share for the nine months ended September 30, 2010.

 
-68-

 

A reconciliation of Farmer Mac’s GAAP net (loss)/income attributable to common stockholders to core earnings is presented in the following table, and the adjustments to GAAP net (loss)/income are described in more detail below the table.

Reconciliation of GAAP Net (Loss)/Income Attributable to Common Stockholders to Core Earnings
    
For the Three Months Ended
 
    
September 30, 2011
   
September 30, 2010
 
    
(in thousands, except per share amounts)
 
              
GAAP net (loss)/income attributable to common stockholders
  $ (23,032 )   $ 5,997  
Less the net of tax effects of:
               
Unrealized (losses)/gains on financial derivatives
    (35,857 )     2,106  
Unrealized losses on trading assets
    (2,361 )     (1,119 )
Amortization of premiums on assets consolidated at fair value
    (1,489 )     (1,863 )
Recognition of deferred gains related to certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities
    335       -  
Net effects of settlements on agency forward contracts
    (1,291 )     (441 )
Lower of cost or fair value adjustment on loans held for sale
    6,403       (589 )
Sub-total
    (34,260 )     (1,906 )
Core earnings
  $ 11,228     $ 7,903  
                 
Core earnings per share:
               
Basic
  $ 1.08     $ 0.77  
Diluted
    1.04       0.74  
                 
Weighted-average shares:
               
Basic
    10,354       10,277  
Diluted
    10,760       10,665  

   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 2010
 
    
(in thousands, except per share amounts)
 
             
GAAP net income attributable to common stockholders
  $ 461     $ 9,588  
Less the net of tax effects of:
               
Unrealized losses on financial derivatives
    (31,316 )     (23 )
Unrealized (losses)/gains on trading assets
    (230 )     4,357  
Amortization of premiums on assets consolidated at fair value
    (4,775 )     (5,246 )
Recognition of deferred gains related to certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities
    2,958       -  
Net effects of settlements on agency forward contracts
    (2,283 )     (329 )
Lower of cost or fair value adjustment on loans held for sale
    5,776       (2,009 )
Issuance costs on the retirement of preferred stock
    -       (5,784 )
Sub-total
    (29,870 )     (9,034 )
Core earnings
  $ 30,331     $ 18,622  
                 
Core earnings per share:
               
Basic
  $ 2.94     $ 1.82  
Diluted
    2.83       1.76  
                 
Weighted-average shares:
               
Basic
    10,328       10,211  
Diluted
    10,715       10,576  
 
 
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Farmer Mac excludes the after-tax effect of unrealized (losses)/gains resulting from changes in the fair values of financial derivatives and trading assets from core earnings.  Changes in the fair values of financial derivatives and trading assets have historically contributed significant volatility to Farmer Mac’s periodic GAAP earnings.  Consistent with that trend, for the three and nine months ended September 30, 2011, Farmer Mac recorded unrealized losses of $55.2 million ($35.9 million after-tax) and $48.2 million ($31.3 million after-tax), respectively, for fair value changes on its financial derivatives, compared to unrealized gains of $3.2 million ($2.1 million after-tax) and unrealized losses of $35,000 ($23,000 after-tax) for the same periods in 2010, respectively.  Fair value losses on trading assets totaled $3.6 million ($2.4 million after tax) and $0.4 million ($0.2 million after-tax) for the three and nine months ended September 30, 2011, respectively, compared to losses of $1.7 million ($1.1 million after-tax) and gains of $6.7 million ($4.4 million after-tax) for the three and nine months ended September 30, 2010, respectively.  While these volatile changes in fair values of derivatives and trading assets may at times produce significant income, they may also produce significant losses.  Future changes in those values cannot be reliably predicted; however, as of September 30, 2011, the cumulative fair value of after-tax losses recorded on financial derivatives was $78.2 million.  Over time, Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap contracts, which will on its own produce either income or expense, but is expected to generate positive effective net spread when combined with the interest received and paid on the assets and liabilities Farmer Mac holds on its balance sheet.  Any positive effective net spread would continue to build retained earnings and capital over time.  Although the unrealized fair value fluctuations experienced throughout the term of the financial derivatives will temporarily impact earnings and capital, those fluctuations are not expected to have any permanent effect if the financial derivatives are held to maturity, as is expected.

Farmer Mac also excludes from core earnings the amortization of premiums on assets consolidated at fair value.  Upon the adoption of accounting guidance on consolidation on January 1, 2010, Farmer Mac determined itself to be the primary beneficiary of VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of rural utilities loans.  Upon consolidation, Farmer Mac transferred these assets from “Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated trusts” on its condensed consolidated balance sheet.  Farmer Mac transferred these assets at their fair value, which resulted in an unamortized premium of $42.7 million.  This premium is being amortized over the contractual lives of the underlying loans.

In January 2010, Farmer Mac contributed substantially all of the assets, in excess of $1.1 billion, comprising the Farmer Mac II program to a subsidiary, Farmer Mac II LLC.  Farmer Mac transferred these assets at their fair value, which resulted in an unamortized premium of $39.1 million being recorded by Farmer Mac II LLC.  This premium is being amortized over the estimated remaining lives of the USDA-guaranteed portions that were transferred.  The after-tax effect of this premium, along with the premium described above, is excluded from Farmer Mac’s core earnings.

At the time of transfer of the assets to Farmer Mac II LLC, Farmer Mac had after-tax unrealized gains of $7.0 million recorded in accumulated other comprehensive income related to fair value changes of Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities designated as available-for-sale.  For the three and nine months ended September 30, 2011, Farmer Mac reclassified $0.5 million ($0.3 million after-tax) and $4.6 million ($3.0 million after-tax) of these gains into earnings based on the estimated remaining lives of the related USDA-guaranteed portions.  These gains are presented as “Other income” on the condensed consolidated statements of operations.  Farmer Mac will recognize in earnings the remainder of these deferred gains over the estimated remaining lives of the USDA-guaranteed portions.  These gains, along with the premium amortization described above, are excluded from Farmer Mac’s core earnings because they will have no economic effect on Farmer Mac’s financial performance if the assets are held to maturity, as is expected.

 
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Farmer Mac routinely enters into forward sales contracts on the debt of other GSEs to reduce its interest rate exposure on forecasted future debt issuances.  In its calculation of core earnings, Farmer Mac reverses the gains or losses resulting from the net settlement of these contracts in the period of settlement and amortizes them over the estimated lives of the associated debt issuances.  The after-tax net effect of these items is shown as a reconciling item in the table above.

Unrealized gains and losses recorded to adjust the carrying value of loans held for sale to the lower of cost or fair value are also excluded from core earnings.  Farmer Mac recorded gains of $9.9 million ($6.4 million after-tax) and $8.9 million ($5.8 million after-tax) during the three and nine months ended September 30, 2011, respectively.  During the three and nine months ended September 30, 2010, Farmer Mac recorded losses of $0.9 million ($0.6 million after-tax) and losses of $3.1 million ($2.0 million after-tax), respectively.  The after-tax net effect of these gains and losses is omitted from Farmer Mac’s core earnings.

Farmer Mac repurchased and retired all of the outstanding shares of Series B preferred stock with proceeds from the $250.0 million Farmer Mac II LLC Preferred Stock issued in January 2010.  As a result of the repurchase, Farmer Mac wrote off $5.8 million of deferred issuance costs related to the Series B preferred stock.  This write-off is presented as “Loss on retirement of preferred stock” on the condensed consolidated statements of operations and is excluded from Farmer Mac’s core earnings.

The following sections provide more detail regarding specific components of Farmer Mac’s results of operations.

Net Interest Income.  Net interest income for the three and nine months ended September 30, 2011 was $31.7 million and $87.9 million, respectively, compared to $25.0 million and $70.3 million, respectively, for the same periods during 2010.  Net interest income includes guarantee fees related to certain Farmer Mac Guaranteed Securities with beneficial interests owned by third party investors.  For the three and nine months ended September 30, 2011, these guarantee fees resulted in an increase in net interest income of $0.8 million and $2.5 million, respectively, and a decrease in the net interest yield of 5 basis points and 6 basis points, respectively.  For the three and nine months ended September 30, 2010, these guarantee fees resulted in an increase in net interest income of $1.0 million and $3.7 million, respectively, and a decrease in the net interest yield of 13 basis points and 17 basis points, respectively.  The decrease in the net interest yield is the result of the average rate earned on guarantee fees being lower than the net interest spread earned on assets Farmer Mac purchases and holds on-balance sheet.  Excluding the impacts of these guarantee fees, the net interest yield was 126 basis points for the nine months ended September 30, 2011, compared to 150 basis points for the nine months ended September 30, 2010.

 
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The following table provides information regarding interest-earning assets and funding for the nine months ended September 30, 2011 and 2010.  The balance of non-accruing loans is included in the average balance of interest-earning loans and Farmer Mac Guaranteed Securities and USDA Guaranteed Securities presented, though the related income is accounted for on a cash basis.  Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly.  The balance of consolidated loans with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities.  The interest income and expense associated with these trusts are shown net in the net effect of consolidated trusts.  The average rate earned on cash and investments reflects lower short-term market rates during the first nine months of 2011 compared to the first nine months of 2010.  The lower average rate on loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities during the nine months ended September 30, 2011 reflects the decline in market rates reflected in the rates on loans acquired or reset during the past year.  The lower average rate on Farmer Mac’s notes payable due within one year is consistent with general trends in average short-term rates during the periods presented.  The downward trend in the average rate on notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower market rates.

    
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
   
Average
   
Income/
   
Average
   
Average
   
Income/
   
Average
 
   
Balance
   
Expense
   
Rate
   
Balance
   
Expense
   
Rate
 
   
(dollars in thousands)
 
Interest-earning assets:
                                   
Cash and investments
  $ 2,447,032     $ 21,100       1.15%     $ 1,576,100     $ 19,303       1.63%  
Loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities (1)
    6,569,953       152,599       3.10%       4,328,706       112,070       3.45%  
Total interest-earning assets
  $ 9,016,985     $ 173,699       2.57%     $ 5,904,806     $ 131,373       2.97%  
Funding:
                                               
Notes payable due within one year
  $ 4,019,952     $ 6,962       0.23%     $ 2,981,082     $ 7,353       0.33%  
Notes payable due after one year (2)
    4,529,535       81,292       2.39%       2,502,849       57,447       3.06%  
Total interest-bearing liabilities (3)
    8,549,487       88,254       1.38%       5,483,931       64,800       1.58%  
Net non-interest-bearing funding
    467,498       -               420,875       -          
Total funding
    9,016,985       88,254       1.31%       5,904,806       64,800       1.46%  
Net interest income/yield prior to consolidation of certain trusts
    9,016,985       85,445       1.26%       5,904,806       66,573       1.50%  
Net effect of consolidated trusts (4)
    760,581       2,495       0.44%       1,158,766       3,701       0.43%  
Adjusted net interest income/yield
  $ 9,777,566     $ 87,940       1.20%     $ 7,063,572     $ 70,274       1.33%  

(1)
Excludes interest income of $28.3 million and $45.3 million in 2011 and 2010, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(2)
Includes current portion of long-term notes.
(3)
Excludes interest expense of $25.9 million and $41.6 million in 2011 and 2010, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(4)
Includes the effect of consolidated trusts with beneficial interests owned by third party investors.
 
 
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The following table sets forth information regarding the changes in the components of Farmer Mac’s net interest income for the periods indicated.  For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume).  Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size.  The decreases in income due to changes in rate reflect the reset of variable-rate investments and adjustable-rate mortgages to lower rates and the acquisition of new lower-yielding investments, loans and Farmer Mac Guaranteed Securities and USDA Guaranteed Securities, as described above.  The decreases in expense reflect the decreased cost of funding due to lower interest rates in the debt markets.

   
For the Nine Months Ended September 30, 2011
 
    
Compared to the Nine Months Ended
 
    
September 30, 2010
 
    
Increase/(Decrease) Due to
 
    
Rate
   
Volume
   
Total
 
    
(in thousands)
 
Income from interest-earning assets:
                 
Cash and investments
  $ (12,603 )   $ 14,400     $ 1,797  
Loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
    (27,477 )     68,006       40,529  
Total
    (40,080 )     82,406       42,326  
Expense from interest-bearing liabilities
    (19,428 )     42,882       23,454  
Change in net interest income prior to consolidation of certain trusts (1)
  $ (20,652 )   $ 39,524     $ 18,872  

(1) Excludes the effect of consolidated trusts with beneficial interests owned by third parties.

In addition to the guarantee fees described above, the net interest yield includes yield maintenance payments received upon the early payoff of certain borrowers’ loans and the amortization of premiums on assets consolidated at fair value and excludes the accrual of income and expense related to the payments on financial derivatives.  The following paragraphs describe the effects of these items on the net interest yield and the table below presents them as adjustments to reconcile to the net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net funding costs, including payments for income and expense related to financial derivatives.

Farmer Mac uses interest rate swap contracts to manage its interest rate risk exposure by modifying the interest rate reset or maturity characteristics of certain assets and liabilities.  Farmer Mac accounts for its financial derivatives as undesignated financial derivatives.  Accordingly, the Corporation records the income or expense related to financial derivatives as gains and losses on financial derivatives.  For the three months ended September 30, 2011, this accounting for financial derivatives increased the net interest yield by $10.4 million (42 basis points), compared to $9.0 million (57 basis points) for the three months ended September 30, 2010.  For the nine months ended September 30, 2011, the accounting for financial derivatives increased the net interest yield by $28.7 million (42 basis points), compared to $26.0 million (59 basis points) for the nine months ended September 30, 2010.

 
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Farmer Mac’s net interest income and net interest yields for the three months ended September 30, 2011 and 2010 included the benefits of yield maintenance payments of $0.1 million (less than one basis point) and $0.3 million (2 basis points), respectively.  The net interest income and net interest yields for the nine months ended September 30, 2011 and 2010 included the benefits of yield maintenance payments of $0.7 million (1 basis point) and $0.6 million (1 basis point), respectively.  Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans.  Because the timing and size of these payments vary greatly, variations do not necessarily indicate positive or negative trends to gauge future financial results.

Upon the adoption of accounting guidance on consolidation on January 1, 2010, Farmer Mac determined itself to be the primary beneficiary of certain VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of agricultural real estate mortgage loans or rural utilities loans.  Upon consolidation, Farmer Mac reclassified these assets from “Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated trusts” on the condensed consolidated balance sheet.  The reclassified assets on January 1, 2010 included Farmer Mac Guaranteed Securities – Rural Utilities with an unpaid principal balance of $412.9 million and a fair value of $455.6 million.  Farmer Mac was reporting these assets at their fair values, with changes in fair value recorded in earnings, based on its election of the fair value option in 2008.  Upon consolidation of the underlying rural utilities loans, Farmer Mac reclassified the unrealized gain of $42.7 million as of January 1, 2010 to unamortized premiums on loans held for investment.  The related premium is being amortized over the contractual lives of the underlying rural utilities loans.

On January 25, 2010, Farmer Mac contributed substantially all of the assets, in excess of $1.1 billion, comprising the Farmer Mac II program to Farmer Mac’s subsidiary, Farmer Mac II LLC.  Farmer Mac transferred these assets at their fair value which resulted in an unamortized premium of $39.1 million being recorded by Farmer Mac II LLC.  This premium is being amortized over the estimated remaining lives of the USDA-guaranteed portions that were contributed.

Farmer Mac’s net interest income and net interest yield for the three months ended September 30, 2011 and 2010 included expenses of $2.3 million (9 basis points) and $2.9 million (18 basis points), respectively, related to the amortization of the premiums described above.  The net interest income and net interest yields for the nine months ended September 30, 2011 and 2010 included expenses of $7.3 million (11 basis points) and $8.1 million (18 basis points), respectively, related to this amortization.

The following table presents the net effective spread between Farmer Mac’s interest-earning assets and its net funding costs.  This spread is measured by including expense related to financial derivatives and excluding yield maintenance payments, the amortization of premiums on assets consolidated at fair value and the amortization of discounts on certain prepaid loans.  New on-balance sheet program volume added throughout 2010 and the first nine months of 2011 increased Farmer Mac’s net effective spread for the three and nine months ended September 30, 2011 to $22.8 million and $63.4 million, respectively, up from $16.2 million and $46.6 million, respectively, for the same periods in 2010.  However, the net yields were reduced to 0.93 percent and 0.94 percent for the three and nine months ended September 30, 2011, respectively, from 1.04 percent and 1.05 percent, respectively, for the same periods in 2010.  The declines in the net yields for the periods presented are mainly attributable to the addition of (1) lower yielding assets in Farmer Mac’s liquidity investment portfolio, such as U.S. Treasuries, which have a negative net yield but offer a source of contingent liquidity, and (2) on-balance sheet AgVantage securities at lower net yields than the average net yield on Farmer Mac’s existing portfolio.  The new AgVantage securities purchased by Farmer Mac during third quarter effectively replaced the business volume of maturing AgVantage securities previously accounted for as off-balance sheet guarantees that did not previously contribute to net interest income and net yield.  These new AgVantage securities should provide increased future profitability because the net interest margin earned by Farmer Mac holding these securities on-balance sheet is expected to exceed the guarantee fee earned on the prior off-balance sheet guarantees.  See Note 8 to the condensed consolidated financial statements for more information regarding net effective spread for Farmer Mac’s individual business segments.

 
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For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
   
Dollars
   
Yield
   
Dollars
   
Yield
   
Dollars
   
Yield
   
Dollars
   
Yield
 
   
(dollars in thousands)
 
Net interest income/yield prior to consolidation of certain trusts
  $ 30,927       1.26%     $ 24,097       1.54%     $ 85,445       1.26%     $ 66,573       1.50%  
Expense related to financial derivatives
    (10,375 )     -0.42%       (8,961 )     -0.57%       (28,695 )     -0.42%       (26,029 )     -0.59%  
Yield maintenance payments
    (77 )     0.00%       (339 )     -0.02%       (699 )     -0.01%       (595 )     -0.01%  
Amortization of premiums on assets consolidated at fair value
    2,290       0.09%       2,867       0.18%       7,346       0.11%       8,071       0.18%  
Amortization of discounts on certain prepaid loans (1)
    -       0.00%       (1,421 )     -0.09%       -       0.00%       (1,421 )     -0.03%  
Net effective spread
  $ 22,765       0.93%     $ 16,243       1.04%     $ 63,397       0.94%     $ 46,599       1.05%  

(1) Includes income recognition as a result of an early payoff of a loan secured by an ethanol plant.

Release of and Provision for Loan Losses.  During the three months ended September 30, 2011, Farmer Mac recorded releases from its allowance for loan losses of $0.3 million and charge-offs of $5,000.  During the nine months ended September 30, 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.1 million and charge-offs of $0.2 million.  The releases recorded in third quarter 2011 were primarily due to a decline in estimated probable losses related to Farmer Mac’s exposure to the dairy industry.  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 for loan losses for the first nine months of 2011 reflects this reclassification as well as a decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries.

During the three months ended September 30, 2010, Farmer Mac recorded provisions to its allowance for loan losses of $0.4 million and charge-offs of $0.5 million.  During the nine months ended September 30, 2010, Farmer Mac recorded provisions to its allowance for losses of $1.4 million, charge-offs of $0.5 million and recoveries of $2.2 million on a loan secured by an ethanol plant.  During the first nine months of 2010, Farmer Mac’s provision for loan losses also included the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses upon adoption of new consolidation guidance in first quarter 2010.

 
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As of September 30, 2011, Farmer Mac’s total allowance for loan losses was $10.7 million, compared to $9.8 million as of December 31, 2010 and $9.4 million as of September 30, 2010.  See “—Risk Management—Credit Risk – Loans.”

Release of and Provision for Losses.  During the three and nine months ended September 30, 2011, Farmer Mac recorded releases from its reserve for losses of $0.5 million and $3.3 million, respectively, compared to provisions of $0.1 million and $1.7 million for the three and nine months ended September 30, 2010, respectively.  The releases recorded in third quarter 2011 were primarily due to a decline in estimated probable losses related to Farmer Mac’s exposure to the dairy industry.  The releases recorded during the first nine months of 2011 were primarily the result of the reclassification of the $1.8 million specific allowance described above as well as a decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries.  The provisions recorded in the first nine months of 2010 primarily related to Farmer Mac’s exposure to the ethanol industry on loans underlying LTSPCs, partially offset by the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses described above.

As of September 30, 2011, Farmer Mac’s reserve for losses was $7.0 million, compared to $10.3 million as of December 31, 2010 and $9.6 million as of September 30, 2010. See “—Risk Management—Credit Risk – Loans.”

Guarantee and Commitment Fees.  Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs, were $6.1 million for third quarter 2011 and $18.9 million for the nine months ended September 30, 2011, compared to $6.0 million for third quarter 2010 and $17.6 million for the nine months ended September 30, 2010.  Guarantee and commitment fees for the three and nine months ended September 30, 2011 reflect the reclassification to net interest income related to Farmer Mac Guaranteed Securities previously reported as off-balance sheet as a result of the adoption of accounting guidance on consolidation of $0.8 million and $2.5 million, respectively, compared to $1.0 million and $3.7 million, respectively for the same periods ended September 30, 2010.

Gains and Losses on Financial Derivatives.  Farmer Mac accounts for its financial derivatives as undesignated financial derivatives and does not apply hedge accounting.  The net effect of gains and losses on financial derivatives for the three and nine months ended September 30, 2011 was a net loss of $68.6 million and $82.4 million, respectively, compared to a net loss of $6.9 million and $28.5 million, respectively, for the three and nine months ended September 30, 2010.  The components of losses on financial derivatives for the three and nine months ended September 30, 2011 and 2010 are summarized in the following table:

   
For the Three Months Ended
   
For the Nine Months Ended
 
    
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
    
(in thousands)
 
Realized:
                       
Expense related to financial derivatives
  $ (10,375 )   $ (8,961 )   $ (28,695 )   $ (26,029 )
Losses due to terminations or net settlements
    (2,988 )     (1,172 )     (5,489 )     (2,441 )
Unrealized (losses)/gains due to fair value changes
    (55,204 )     3,309       (48,184 )     82  
Amortization of financial derivatives transition adjustment
    -       (40 )     -       (120 )
Losses on financial derivatives
  $ (68,567 )   $ (6,864 )   $ (82,368 )   $ (28,508 )
 
 
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The accrual of periodic cash settlements for interest paid or received from Farmer Mac’s interest rate swap contracts is shown as expense related to financial derivatives in the table above.  Payments or receipts to terminate derivative positions or net cash settle forward sales contracts on the debt of other GSEs and U.S. Treasury futures are included in losses due to terminations or net settlements.  Changes in the fair value of Farmer Mac’s open derivative positions are captured in unrealized losses due to fair value changes and are primarily the result of fluctuations in long-term interest rates.  The amortization of the financial derivatives transition adjustment reflects the reclassification into earnings of the unrealized losses on financial derivatives included in accumulated other comprehensive income as a result of the adoption of accounting guidance on derivatives.  Farmer Mac reclassified the remaining derivatives transition adjustment into earnings during 2010.

For the three and nine months ended September 30, 2011 and 2010, Farmer Mac was a party to interest rate swap contracts with one related party, Zions First National Bank.  Farmer Mac realized expenses of $0.5 million and $1.4 million for the three and nine months ended September 30, 2011, respectively, related to these interest rate swap contracts, compared to realized expenses of $0.6 million and $2.2 million, respectively, for the same periods in 2010.  Farmer Mac recognized unrealized losses of $0.2 million and unrealized gains of $1.4 million, for the three and nine months ended September 30, 2011, respectively, compared to unrealized gains of $0.1 million and $32,000, respectively, for the same periods in 2010, due to changes in the fair value of these interest rate swap contracts.

Gains and Losses on Trading Assets.  During the three and nine months ended September 30, 2011, Farmer Mac recognized losses on trading assets of $3.6 million and $0.4 million, respectively, compared to losses of $1.7 million and gains of $6.7 million, respectively, for the same periods in 2010.  For the three and nine months ended September 30, 2011, Farmer Mac recorded trading losses of $4.8 million and $3.1 million, respectively, related to the change in the fair value of its investment in AgFirst Farm Credit Bank preferred stock.  For the three and nine months ended September 30, 2010, Farmer Mac recorded $0.2 million of trading gains and $2.0 million of trading losses, respectively, related to the change in the fair value of its investment in AgFirst Farm Credit Bank preferred stock.

During the three and nine months ended September 30, 2011, Farmer Mac also recorded trading gains of $1.4 million and $1.7 million, respectively, related to the change in the fair value of the USDA Guaranteed Securities contributed to its subsidiary, Farmer Mac II LLC, which had previously been selected for the fair value option.  During the three and nine months ended September 30, 2010, Farmer Mac recorded trading losses of $2.1 million and trading gains of $8.5 million, respectively, related to the change in the fair value of the USDA Guaranteed Securities contributed to its subsidiary, Farmer Mac II LLC.

Of the total $3.6 million and $0.4 million of unrealized losses recognized on trading assets during the three and nine months ended September 30, 2011, respectively, losses of $3.3 million and $1.4 million, respectively, related to assets selected for the fair value option.  Of the total $1.7 million of unrealized losses and $6.7 million of unrealized gains recognized on trading assets during the three and nine months ended September 30, 2010, respectively, $1.9 million of trading losses and $6.6 million of trading gains, respectively, related to assets selected for the fair value option.

 
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Farmer Mac made no fair value option elections during the three and nine months ended September 30, 2011 and 2010.

Gains on Sale of Available-for-Sale Investment Securities.  During the three and nine months ended September 30, 2011, Farmer Mac realized net gains of $0.1 million and $0.3 million, respectively, on sales of investment securities from its available-for-sale portfolio.  During the three and nine months ended September 30, 2010, Farmer Mac realized net gains of $24,000 and $0.3 million, respectively, on sales of investment securities from its available-for-sale portfolio.
 
Lower of Cost or Fair Value Adjustment on Loans Held for Sale. During the three and nine months ended September 30, 2011, Farmer Mac recorded unrealized gains of $9.9 million and $8.9 million, respectively, to adjust the carrying value of loans held for sale to the lower of cost or fair value, compared to unrealized losses of $0.9 million and $3.1 million, respectively, for the same periods in 2010. The unrealized gains recorded during 2011 resulted from the reversal of previously recognized unrealized losses as the fair value of these loans increased above their cost amounts.
 
Other Income.  For the three and nine months ended September 30, 2011, other income totaled $0.7 million and $5.7 million, respectively, compared to $0.1 million and $1.2 million, respectively, for the same periods in 2010.  The increase in the first nine months of  2011 was due to the recognition of $4.6 million of gains previously deferred in accumulated other comprehensive income related to fair value changes of certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities contributed to Farmer Mac II LLC in January 2010.
 
Compensation and Employee Benefits. Compensation and employee benefits were $4.8 million and $14.0 million for the three and nine months ended September 30, 2011, respectively, compared to $4.5 million and $11.9 million, respectively, for the same periods in 2010.  The increase in 2011 compared to 2010 was due to increased employee headcount, employee incentive compensation and increased costs for employee health insurance.

General and Administrative Expenses.  General and administrative expenses, including legal, independent audit, and consulting fees, were $2.5 million and $7.4 million for the three and nine months ended September 30, 2011, respectively, compared to $1.8 million and $6.3 million for the same periods in 2010.  The increase in general and administrative expenses in 2011 compared to 2010 was primarily attributable to higher rent expense beginning with the construction phase of Farmer Mac’s new office space and increased costs associated with information technology initiatives.

Other Expense.  During first quarter 2011, Farmer Mac recorded $0.9 million of expense related to the termination of an agreement with a third-party that previously provided services related to loan and security administration for certain Farmer Mac I assets.  Farmer Mac incurred no comparable termination charge in third quarter 2011 or in prior periods.  During 2010, Farmer Mac paid $0.5 million in fees to the third-party service provider.  Farmer Mac is currently performing those services in-house and expects to continue to do so in the future.

 
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Regulatory Fees.  Regulatory fees for the three and nine months ended September 30, 2011 were $0.6 million and $1.7 million, respectively, compared to $0.6 million and $1.7 million, respectively, for the same periods in 2010.  FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2012 will be $2.3 million, unchanged from the federal fiscal year ended September 30, 2011.  After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.

Income Tax Expense and Benefit.  Income tax benefit totaled $14.1 million and $2.1 million for the three and nine months ended September 30, 2011, respectively, compared to income tax expense of $0.9 million and $6.0 million for the same periods in 2010, respectively.  Income tax benefit in the three months ended September 30, 2011 resulted primarily from a net loss in pre-tax income during third quarter 2011.  Income tax benefit in the nine months ended September 30, 2011 resulted primarily from a negative effective tax rate.  Farmer Mac’s effective tax rates for the three and nine months ended September 30, 2011 were 45.7 percent and (12.1) percent, respectively, compared to 6.7 percent and 15.0 percent, respectively, for the same periods in 2010.  The effective tax rate varies from the statutory federal rate of 35 percent primarily due to the income attributed to the non-controlling interest in Farmer Mac II LLC, for which Farmer Mac does not accrue income tax expense and the tax benefit received from the Corporation’s dividend received deduction for both periods.

 
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Business Volume.  During third quarter 2011, Farmer Mac added $1.5 billion of new program volume in the form of:
 
 
·
purchases of $68.2 million of Farmer Mac I loans;
 
·
purchases of $1.0 billion of Farmer Mac I AgVantage securities;
 
·
the placement of $266.9 million of Farmer Mac I loans under LTSPCs;
 
·
purchases of $87.1 million of USDA-guaranteed portions of loans; and
 
·
purchases of $32.4 million of rural utilities loans.
 
Farmer Mac’s outstanding program volume was $11.8 billion as of September 30, 2011, a decrease of $375.3 million from December 31, 2010.  During the first nine months of 2011, Farmer Mac added $3.0 billion of new program volume that partially replaced maturing AgVantage securities and principal paydowns on other program assets.  Farmer Mac completed a $159.9 million LTSPC transaction during third quarter 2011, which was the largest LTSPC transaction since March 2007.  The expressed motivation of the counterparty in that transaction was to reduce its commodity concentration levels.  Farmer Mac has recently observed increased lender interest in the LTSPC product as a tool for lenders to manage their commodity concentration and borrower exposure levels as well as overall credit risk.

The following table sets forth Farmer Mac I, Farmer Mac II and Rural Utilities loan purchase, LTSPC and guarantee activities for newly originated and current seasoned loans during the periods indicated:

Farmer Mac Loan Purchases, Guarantees and LTSPCs
   
For the Three Months Ended
   
For the Nine Months Ended
 
    
September 30,
   
September 30,
   
September 30,
   
September 30,
 
    
2011
   
2010
   
2011
   
2010
 
   
(in thousands)
 
Farmer Mac I:
                       
Loans
  $ 68,201     $ 82,270     $ 397,030     $ 258,453  
LTSPCs
    266,906       25,416       374,306       134,989  
Farmer Mac Guaranteed Securities - AgVantage
    1,001,500       550,000       1,801,500       550,000  
Farmer Mac II:
                               
USDA Guaranteed Securities
    85,787       132,991       300,311       334,663  
Farmer Mac Guaranteed Securities
    1,264       6,676       3,268       20,354  
Rural Utilities:
                               
Loans
    32,387       35,242       148,782       171,986  
Farmer Mac Guaranteed Securities - AgVantage
    -       250,000       2,796       250,000  
Total purchases, guarantees and commitments
  $ 1,456,045     $ 1,082,595     $ 3,027,993     $ 1,720,445  
 
 
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The outstanding principal balance of loans held, loans underlying LTSPCs and on- and off-balance sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities was $11.8 billion as of September 30, 2011 compared to $12.2 billion as of December 31, 2010.  The following table sets forth information regarding those outstanding balances as of the dates indicated:

Outstanding Balance of Loans, Loans Underlying Farmer Mac
Guaranteed Securities and LTSPCs, and USDA Guaranteed Securities
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
On-balance sheet:
           
Farmer Mac I:
           
Loans
  $ 1,192,486     $ 972,206  
Loans held in trusts:
               
Beneficial interests owned by Farmer Mac
    236       3,697  
Beneficial interests owned by third party investors
    712,690       821,411  
Farmer Mac Guaranteed Securities - AgVantage
    2,741,000       941,500  
Farmer Mac II:
               
USDA Guaranteed Securities
    1,380,836       1,297,439  
Farmer Mac Guaranteed Securities
    36,316       39,856  
Rural Utilities:
               
Loans
    474,220       339,963  
Loans held in trusts:
               
Beneficial interests owned by Farmer Mac
    386,800       400,228  
Farmer Mac Guaranteed Securities - AgVantage
    1,410,800       1,887,200  
Total on-balance sheet
  $ 8,335,384     $ 6,703,500  
                 
Off-balance sheet:
               
Farmer Mac I:
               
Farmer Mac Guaranteed Securities - AgVantage
  $ 970,000     $ 2,945,000  
LTSPCs
    1,811,280       1,754,597  
Farmer Mac Guaranteed Securities
    660,673       750,217  
Farmer Mac II:
               
Farmer Mac Guaranteed Securities
    45,977       48,103  
Rural Utilities:
               
Farmer Mac Guaranteed Securities - AgVantage
    18,079       15,292  
Total off-balance sheet
  $ 3,506,009     $ 5,513,209  
Total
  $ 11,841,393     $ 12,216,709  

Of the $11.8 billion outstanding principal balance of volume included in Farmer Mac’s three programs as of September 30, 2011, $5.1 billion are Farmer Mac Guaranteed Securities structured as AgVantage securities.  Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security.  Unlike business volume in the form of purchased loans, USDA Guaranteed Securities and loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, the Farmer Mac Guaranteed Securities structured as AgVantage securities do not pay down principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due.

 
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The following table summarizes by maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as of September 30, 2011.

AgVantage Balances by Year of Maturity
 
   
As of
 
    
September 30, 2011
 
    
(in thousands)
 
       
2012
  $ 498,500  
2013
    307,250  
2014
    1,060,900  
2015
    550,250  
2016
    1,002,000  
Thereafter
    1,720,979  
Total
  $ 5,139,879  

Of the AgVantage securities that matured during third quarter 2011, $1.0 billion issued by MetLife matured in July 2011 and $475.0 million issued by M&I Bank matured in August 2011, both of which were off-balance sheet Farmer Mac guarantees.  A portion of these maturing off-balance sheet guarantees were replaced by Farmer Mac’s purchase during third quarter 2011 of the following AgVantage securities issued by MetLife (1) a $500.0 million five-year AgVantage security, (2) a $150.0 million seven-year AgVantage security, (3) a $150.0 million ten-year AgVantage security and (4) a $200.0 million three-year AgVantage security.  All of these securities, totaling $1.0 billion, were accounted for by Farmer Mac as on-balance sheet Farmer Mac Guaranteed Securities in third quarter 2011.  Although these new issuances do not increase the overall level of outstanding program volume, they should provide increased future profitability because the net interest margin earned by Farmer Mac on the new AgVantage securities is expected to exceed the guarantee fee earned on the off-balance sheet guarantees that matured during third quarter 2011.  The maturity of the AgVantage security issued by M&I Bank resulted in a reduction of the level of outstanding AgVantage securities; however, the effect on income of the maturity of an AgVantage security, particularly off-balance sheet transactions, is not necessarily proportional to the amount of the decrease in business volume.

The weighted-average ages of the Farmer Mac I newly originated and current seasoned loans purchased during third quarter 2011 and 2010 was four months and less than one month, respectively.  Of the Farmer Mac I newly originated and current seasoned loans purchased during third quarter 2011 and 2010, 79 percent and 88 percent, respectively, had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 15.7 years and 16.7 years, respectively.

 
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As part of fulfilling its guarantee obligations for Farmer Mac I Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90 days delinquent or in material non-monetary default at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet.  The purchase price for defaulted loans purchased out of Farmer Mac I Guaranteed Securities is the current outstanding principal balance of the loan plus accrued and unpaid interest.  The purchase price for defaulted loans purchased under an LTSPC is the then-current outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds as received.  The purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors affect expected loss, if any, on loans so purchased.  The weighted-average age of delinquent loans purchased out of securitized pools and LTSPCs during third quarter 2011 and third quarter 2010 was 9.9 years and 4.6 years, respectively.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans” 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.

The following table presents Farmer Mac’s loan purchases of newly originated and current seasoned loans and defaulted loans purchased underlying Farmer Mac I Guaranteed Securities and LTSPCs:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
    
September 30,
   
September 30,
   
September 30,
   
September 30,
 
    
2011
   
2010
   
2011
   
2010
 
   
(in thousands)
 
Farmer Mac I newly originated and current seasoned loan purchases
  $ 68,201     $ 82,270     $ 397,030     $ 258,453  
Defaulted loans purchased underlying Farmer Mac I Guaranteed Securities
    2,921       1,133       7,292       3,456  
Defaulted loans purchased underlying LTSPCs
    -       781       13,974       1,861  
Total loan purchases   71,122      84,184      418,296      263,770  

Farmer Mac II LLC.  In January 2010, Farmer Mac contributed substantially all of the assets comprising the Farmer Mac II program (in excess of $1.1 billion) to Farmer Mac’s subsidiary, Farmer Mac II LLC.  The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA-guaranteed portions that had not been securitized by Farmer Mac but also included $35.0 million of Farmer Mac II Guaranteed Securities.  Farmer Mac did not and will not guarantee the timely payment of principal and interest on the $1.1 billion of contributed USDA-guaranteed portions.  The contributed USDA-guaranteed portions had previously been presented as Farmer Mac II Guaranteed Securities on the condensed consolidated financial statements of Farmer Mac and are now presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets.  The financial information presented in this report reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis.  Accordingly, Farmer Mac’s reportable operating segments presented in this report will differ from the stand-alone financial statements of Farmer Mac II LLC.  Those separate financial statements are available on the website of Farmer Mac II LLC and are not incorporated in this report by reference.

The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.  As of September 30, 2011, Farmer Mac II LLC held assets with a fair value of $1.5 billion, had debt outstanding of $167.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock outstanding held by Farmer Mac.  For more information about the formation and operations of Farmer Mac II LLC and the features of the preferred stock issued by Farmer Mac II LLC in January 2010, see Notes 3, 6 and 8 to the condensed consolidated financial statements.

 
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Outlook.  Farmer Mac continues to represent a potential source of liquidity, capital, and risk management to help lenders meet the borrowing needs of their customers.  Farmer Mac foresees opportunities for continued business growth in both the agricultural and rural utilities segments, though the pace of growth will be dictated by the capital and liquidity demands of the lenders and industries, lenders’ commodity concentrations and borrower exposure limits, and the stability of the financial markets.

The agricultural sector is made up of diverse industries that respond in different ways to changes in economic conditions.  Those industries often are affected differently, sometimes positively and sometimes negatively, by prevailing economic conditions, which results in cycles where one or more industries may be under stress at any one time.  These industries are also affected by commodity inventories, largely as a result of weather patterns and harvest conditions.  For example, volatility in the prices of feed grains such as corn, soybeans, and wheat continued during the first nine months of 2011.  The price increase of feed grains is positive for producers of these commodities but also has the potential to put pressure on the profit margins in the protein sector due to increased feed costs.

Farmer Mac’s support of the renewable energy sector is centered in ethanol production, an industry that continues to demonstrate inconsistent profitability.  Improved ethanol margins provided profit opportunities through the first nine months of 2011.  Federal support of this industry, in the form of an excise tax credit and an import tariff, are set to expire at the end of 2011, and it appears highly unlikely that the industry will see an extension of this support as it did at the end of 2010.  The Renewable Fuel Standard currently mandates targeted use of fuel from renewable sources, most especially ethanol.  However, it is uncertain whether the Renewable Fuel Standard will remain in place or be revised in the near term, especially in light of opposition from various legislators and the meat and poultry industries due to increasing feed costs.  It is also uncertain how the changes in federal support, combined with the price volatility of both corn feedstock and oil, will ultimately impact the industry.  Profit margins at the ethanol production level will likely remain relatively tight and, at times, elusive.

Conditions in the agricultural sector during the first nine months of 2011 continued to be more robust than the national economy in general.  However, agriculture is not insulated from the effects of general economic and market conditions such as the recent economic downturn and the related weak and uncertain economic conditions in the United States.  Indeed, the agricultural sector remains subject to traditional commodity price cycles, artificial influences on commodity prices such as the effect that interest rate changes have on supply and demand of commodities and their prices, and government policies concerning biofuels and import tariffs.  In addition, producers that rely on non-farm sources of income as a significant percentage of overall income may experience stress as the weakness in the general economy persists.  Farmer Mac will continue to closely monitor developments in industries and geographic areas experiencing stress.  The cyclical credit issues related to the agricultural sector are expected to remain within Farmer Mac’s historical experience.

 
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Farmer Mac continues to closely monitor land value trends and the underlying economic effects within the marketplace, and to tailor underwriting practices to these conditions.  Although Farmer Mac underwrites loans with an emphasis on the borrower’s repayment capacity, it is noteworthy that the weighted average original LTV (based on original appraised value that has not been indexed to provide a current market value) for loans in the Farmer Mac I program (excluding loans pledged to secure AgVantage bonds) was approximately 54 percent as of September 30, 2011.  Farmer Mac also monitors the establishment and evolution of governmental policies and regulations that affect farmers, ranchers, and lenders, including agricultural polices contained in the current Farm Bill due to expire in 2012.  The USDA has begun gathering input in preparation for the expiration of the current Farm Bill.

Farmer Mac believes that the rural utilities sector is a strong and growing industry with significant needs for future financing over the next ten years, as capital will be needed for industry growth, modernization, and compliance with environmental regulation.  The rural utilities industry’s demand for loans tends to follow the state of the general economy.  Recently, electric consumption has been reduced, which has slowed loan demand.  Farmer Mac expects that loan demand will increase as the economy strengthens.

Much of the electrical power generated by and for rural electric cooperatives uses coal as a fuel.  The industry is expected to require additional capital as it invests in demand-side management and clean energy projects such as natural gas-fired generating projects in response to low natural gas fuel costs.  The industry will also have to deal with future public policy initiatives, including any clean energy initiatives that may develop.  As green energy sources continue to be developed, new power transmission lines will be needed to support the development and operation of new wind and solar power plants to transfer their power from remote locations to the ultimate consumer.  These developments could lead to increased or decreased business volume for Farmer Mac in the rural utilities sector depending on how any new initiatives, legislation, or regulations are implemented and their effect on rural utilities cooperative borrowers.
 
In the near term, Farmer Mac expects that the majority of any new rural utilities business will be in the form of direct credit exposures to both electric distribution and generation and transmission (“G&T”) loans through purchases of those loans, rather than indirect credit exposures to those loans through AgVantage transactions.  Farmer Mac’s ability to grow the rural utilities portion of its business may be limited by Farmer Mac’s limits on borrower exposures, its overall risk tolerance, and the ability of Farmer Mac to maintain its funding costs at levels conducive to competitively price rural utilities loans.

Balance Sheet Review

During first quarter 2010, Farmer Mac adopted two new accounting standards that eliminated the concept of QSPEs and amended the accounting for transfers of financial assets and the consolidation model for VIEs.  The impact upon adoption was an increase in consolidated assets and liabilities of $1.5 billion, which resulted in an incremental increase in Farmer Mac’s statutory minimum capital requirement of $30.4 million.  Pursuant to this new guidance, Farmer Mac routinely assesses its securitization trusts to determine whether it is the primary beneficiary and thereby required to consolidate the assets and liabilities of the trust onto its balance sheet, or if determined not to be the primary beneficiary of a previously consolidated trust, deconsolidate the assets and liabilities from its balance sheet.

 
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As of January 1, 2010, Farmer Mac consolidated $1.1 billion of its outstanding securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities at the request of program participants.  Those securitization transactions contain provisions resulting in shared power over default mitigation decisions.  For those transactions where the power is shared with a related party (as defined by applicable accounting guidance), Farmer Mac determined itself to be the primary beneficiary and thus is required to consolidate the assets and liabilities of the trust onto its balance sheet.  For those transactions where the power was shared with an unrelated party, Farmer Mac was not determined to be the primary beneficiary and is not required to consolidate the assets and liabilities of the trust onto its balance sheet.

Determinations about which business partners of Farmer Mac are related parties often depend on whether an officer or director of that business partner is a member of Farmer Mac’s board of directors, ten of whom are elected on an annual basis by the holders of Farmer Mac’s outstanding voting common stock.  Changes in the membership of the board of directors may result in Farmer Mac consolidating a trust previously disclosed as off-balance sheet, or deconsolidating a trust previously consolidated on balance sheet.  Although this will have no net effect on Farmer Mac’s net income, it may, at times, produce volatility in the statutory minimum capital Farmer Mac is required to hold.

At Farmer Mac’s Annual Meeting of Stockholders on June 2, 2011, ten directors were elected to serve one-year terms, all of whom were re-elected as directors of Farmer Mac.  At its Annual Meeting of Stockholders on June 3, 2010, ten directors were elected to serve one-year terms, nine of whom were re-elected as directors of Farmer Mac and one of whom was new to Farmer Mac’s board.  As a result of the change in membership of the board of directors during second quarter 2010, Farmer Mac deconsolidated $0.4 billion of securitization transactions with a business partner that was no longer a related party (as defined by applicable accounting guidance).  For more information on Farmer Mac’s policy relating to the consolidation of VIEs, see Note 1(g) to the condensed consolidated financial statements.  For a discussion of Farmer Mac’s related party transactions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions” and Note 3 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, as amended by Amendment No. 1 on Form 10-K/A filed on June 1, 2011.  See Note 1(a) to the condensed consolidated financial statements for further information.

Assets.  Total assets were $11.4 billion as of September 30, 2011, compared to $9.5 billion as of December 31, 2010.  This increase was primarily attributable to Farmer Mac’s purchases of $1.8 billion of Farmer Mac I AgVantage securities during 2011, all of which are held on-balance sheet and accounted for as Farmer Mac Guaranteed Securities.  As of September 30, 2011, Farmer Mac had $4.3 billion of Farmer Mac Guaranteed Securities, $1.4 billion of USDA Guaranteed Securities, $2.8 billion of loans and $1.9 billion of investment securities, compared to $2.9 billion of Farmer Mac Guaranteed Securities, $1.3 billion of USDA Guaranteed Securities, $2.6 billion of loans and $1.8 billion of investment securities as of December 31, 2010.

Liabilities and Total Equity.  During the nine months ended September 30, 2011, total liabilities increased $1.9 billion as a result of debt issued to support the growth in assets.  Total equity increased $68.2 million during the same period due to increased accumulated other comprehensive income primarily resulting from an increase in the fair value of Farmer Mac I Guaranteed Securities designated as available-for-sale due to a decline in long-term interest rates.

 
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Regulatory Capital Compliance.  Farmer Mac was in compliance with its statutory minimum capital requirement and its risk-based capital standard as of September 30, 2011.  Farmer Mac is required to hold capital at the higher of its statutory minimum capital requirement and the amount required by its risk-based capital stress test.  As of September 30, 2011, Farmer Mac’s core capital totaled $461.3 million and exceeded its statutory minimum capital requirement of $336.6 million by $124.7 million.  As of December 31, 2010, Farmer Mac’s core capital totaled $460.6 million and exceeded its statutory minimum capital requirement of $301.0 million by $159.6 million.  On April 27, 2011, FCA published a final rule implementing changes to the method for calculating Farmer Mac’s risk-based capital requirement, which was effective in second quarter 2011.  As of September 30, 2011, Farmer Mac’s new risk-based capital stress test generated a risk-based capital requirement of $110.9 million.  Farmer Mac’s regulatory capital of $479.0 million exceeded that amount by approximately $368.1 million.  Accumulated other comprehensive income is not a component of Farmer Mac’s core capital or regulatory capital.  For further discussion of this regulatory change and for more information, see “—Regulatory Matters.”
 
Off-Balance Sheet Program Activities

Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans:  (1) Farmer Mac Guaranteed Securities, which are available through each of the Farmer Mac I, Farmer Mac II and Rural Utilities programs; and (2) LTSPCs, which are available only through the Farmer Mac I and Rural Utilities programs.  For securitization trusts where Farmer Mac is the primary beneficiary, the trust assets and liabilities are included on Farmer Mac’s condensed consolidated balance sheet.  For the remainder of these transactions, and in the event of deconsolidation, both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac.  See Note 5 to the condensed consolidated financial statements for further information regarding Farmer Mac’s off-balance sheet program activities.
 
Risk Management

Credit Risk – Loans.  Farmer Mac is exposed to credit risk resulting from the inability of borrowers to repay their loans in conjunction with a deficiency in the value of the collateral relative to the outstanding balance of the loan and the costs of liquidation.  Farmer Mac is exposed to credit risk on:
 
 
·
loans held;
 
·
loans underlying Farmer Mac Guaranteed Securities; and
 
·
loans underlying LTSPCs.

 
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Farmer Mac generally assumes 100 percent of the credit risk on loans held and loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities.  Farmer Mac has direct credit exposure on loans in non-AgVantage transactions and indirect credit exposure on loans that secure AgVantage transactions, which involve a general obligation of a lender secured by qualified loans.  The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA-guaranteed portions is covered by the full faith and credit of the United States.  Farmer Mac believes that the Corporation and Farmer Mac II LLC have little or no credit risk exposure to USDA-guaranteed portions because of the USDA guarantee.  As of September 30, 2011, neither Farmer Mac nor Farmer Mac II LLC had experienced credit losses on business under the Farmer Mac II program and does not expect that the Corporation or Farmer Mac II LLC will incur any such losses in the future.

Farmer Mac has established underwriting, collateral valuation and documentation standards (including interest rate shock tests for adjustable rate mortgages with initial reset periods of five years or less) for agricultural real estate mortgage loans and rural utilities loans to mitigate the risk of loss from borrower defaults and to provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating sellers and potential sellers in its programs.  These standards were developed on the basis of industry norms for agricultural real estate mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower, as well as the value of the collateral securing the loan.  Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions.  Farmer Mac also requires sellers to make representations and warranties regarding the conformity of eligible mortgage loans to these standards, the accuracy of loan data provided to Farmer Mac and other requirements related to the loans.  Sellers are responsible to Farmer Mac for breaches of those representations and warranties, and Farmer Mac has the legal right to require a seller to cure, replace or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac’s decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac.  Pursuant to contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central servicers service loans in accordance with Farmer Mac requirements.  Central servicers are responsible to Farmer Mac for serious errors in the servicing of those mortgage loans.  Detailed information regarding Farmer Mac’s underwriting and collateral valuation standards and seller eligibility requirements are presented in “Business—Farmer Mac Programs—Farmer Mac I—Underwriting and Collateral Valuation (Appraisal) Standards” and “Business—Farmer Mac Programs—Farmer Mac I—Sellers” and “Business—Farmer Mac Programs—Rural Utilities” 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.

Farmer Mac AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured 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 such, all AgVantage securities are secured by current loans representing at least 100 percent of the outstanding amount of the security.  As of September 30, 2011, Farmer Mac had not experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in the future.  See “—Credit Risk – Institutional” for more information about Farmer Mac’s credit risk on AgVantage securities.

 
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Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative.  As of September 30, 2011, there were no delinquencies or non-performing assets in Farmer Mac’s portfolio of rural utilities loans, which includes rural utilities loans held and rural utilities loans underlying or securing Farmer Mac Guaranteed Securities – Rural Utilities.  Farmer Mac’s direct credit exposure to rural utilities loans as of September 30, 2011 was $861.0 million, of which $833.4 million were loans to electric distribution cooperatives and $27.6 million were loans to G&T cooperatives.  Farmer Mac also had indirect credit exposure to the rural utilities loans securing Farmer Mac Guaranteed Securities – Rural Utilities structured as AgVantage securities, some of which were secured by loans to G&T cooperatives.  For more information, see “—Credit Risk – Institutional.”

Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans underlying LTSPCs and Farmer Mac Guaranteed Securities.  The methodology that Farmer Mac uses to determine the level of its allowance for losses is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Allowance for Losses” 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.  Management believes that this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying Farmer Mac Guaranteed Securities and LTSPCs, in accordance with FASB standards on accounting for contingencies and on measuring impairment of individual loans.

The following table summarizes the components of Farmer Mac’s allowance for losses as of September 30, 2011 and December 31, 2010:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Allowance for loan losses
  $ 10,699     $ 9,803  
Reserve for losses:
               
Off-balance sheet Farmer Mac I Guaranteed Securities
    363       635  
LTSPCs
    6,628       9,677  
Total allowance for losses
  $ 17,690     $ 20,115  
 
 
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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, 2011 and 2010:

    
September 30, 2011
   
September 30, 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)
 
For the Three Months Ended:
                                   
Beginning Balance
  $ 11,053     $ 7,443     $ 18,496     $ 9,495     $ 9,470     $ 18,965  
Provision for/(release of) losses
    (349 )     (452 )     (801 )     412       105       517  
Charge-offs
    (5 )     -       (5 )     (465 )     -       (465 )
Recoveries
    -       -       -       -       -       -  
Ending Balance
  $ 10,699     $ 6,991     $ 17,690     $ 9,442     $ 9,575     $ 19,017  
                                                 
For the Nine Months Ended:
                                               
Beginning Balance
  $ 9,803     $ 10,312     $ 20,115     $ 6,292     $ 7,895     $ 14,187  
Provision for/(release of) losses
    1,092       (3,321 )     (2,229 )     1,392       1,680       3,072  
Charge-offs
    (196 )     -       (196 )     (465 )     -       (465 )
Recoveries
    -       -       -       2,223       -       2,223  
Ending Balance
  $ 10,699     $ 6,991     $ 17,690     $ 9,442     $ 9,575     $ 19,017  

During the three and nine months ended September 30, 2011, Farmer Mac recorded releases from its allowance for losses of $0.8 million and $2.2 million, respectively, compared to provisions of $0.5 million and $3.1 million, respectively, for the same periods in 2010.  Farmer Mac recorded charge-offs of $5,000 and $0.2 million for the three and nine months ended September 30, 2011, respectively, compared to $0.5 million of charge-offs during the same periods in 2010.  Farmer Mac had no recoveries during the first nine months of 2011, compared to $2.2 million of recoveries during the first nine months of 2010.  There was no previously accrued or advanced interest on loans or Farmer Mac I Guaranteed Securities charged off in third quarter 2011 or 2010.  As of September 30, 2011, Farmer Mac’s allowance for losses totaled $10.7 million, or 24 basis points of the outstanding principal balance of loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs, compared to $20.1 million or 47 basis points as of December 31, 2010.

As of September 30, 2011, Farmer Mac’s 90-day delinquencies were $44.9 million (1.02 percent), compared to $64.8 million (1.53 percent) as of September 30, 2010.  As of September 30, 2011 there were no ethanol loans in the 90-day delinquencies, compared to $10.9 million as of September 30, 2010.  As of September 30, 2011, Farmer Mac’s non-performing assets totaled $64.1 million (1.46 percent), compared to $78.4 million (1.86 percent) as of September 30, 2010.  Loans that have been restructured were insignificant and are included within the reported 90-day delinquency and non-performing asset disclosures.  Historically, from quarter to quarter, Farmer Mac’s 90-day delinquencies and non-performing assets have fluctuated, both in dollars and as a percentage of the outstanding portfolio, with higher levels likely at the end of the first and third quarters of each year corresponding to the annual (January 1st) and semi-annual (January 1st and July 1st) payment characteristics of most Farmer Mac I loans, although 90-day delinquencies decreased slightly at the end of third quarter 2011.

 
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When analyzing delinquencies in its program business, Farmer Mac takes into account more than the Farmer Mac I agricultural loan delinquency percentages provided above.  The total program business includes AgVantage securities and rural utilities loans, neither of which have any delinquencies, and the USDA Guaranteed Securities and USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities, which are backed by the full faith and credit of the United States.  When these are included in the calculation, the overall level of 90-day delinquent loans in Farmer Mac’s programs is 0.38 percent as of September 30, 2011.

As of September 30, 2011, Farmer Mac’s ethanol exposure, which includes loans held and loans subject to LTSPCs, was $180.6 million on 27 different plants, with an additional $31.7 million of undisbursed commitments.  Other than the undisbursed commitments and the servicing of troubled ethanol loans, Farmer Mac does not expect to add additional ethanol loans to its portfolio.

The following table presents historical information regarding Farmer Mac’s non-performing assets and 90-day delinquencies in the Farmer Mac I program compared to the principal balance of all Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs:

   
Outstanding
                               
    
Loans,
               
Less:
             
    
Guarantees(1),
   
Non-
         
REO and
             
    
LTSPCs
   
performing
         
Performing
   
90-day
       
   
and REO
   
Assets
   
Percentage
   
Bankruptcies
   
Delinquencies
   
Percentage
 
    
(dollars in thousands)
 
As of:
                                   
September 30, 2011
  $ 4,381,264     $ 64,137       1.46%     $ 19,289     $ 44,848       1.02%  
June 30, 2011
    4,315,987       67,254       1.56%       12,621       54,633       1.27%  
March 31, 2011
    4,314,328       69,706       1.62%       12,382       57,324       1.33%  
December 31, 2010
    4,304,120       81,778       1.90%       11,530       70,248       1.63%  
September 30, 2010
    4,225,346       78,448       1.86%       13,648       64,800       1.53%  
June 30, 2010
    4,299,417       71,300       1.66%       15,289       56,011       1.30%  
March 31, 2010
    4,303,663       83,977       1.95%       13,542       70,435       1.64%  
December 31, 2009
    4,396,642       62,020       1.41%       12,494       49,526       1.13%  
September 30, 2009
    4,379,450       84,779       1.94%       25,341       59,438       1.36%  

(1) Excludes loans underlying AgVantage securities.

As of September 30, 2011, Farmer Mac individually analyzed $57.7 million of its $92.5 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values.  Farmer Mac evaluated the remaining $34.8 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics.  As of September 30, 2011, Farmer Mac had recorded specific allowances of $7.5 million for under-collateralized assets.  As of September 30, 2011, Farmer Mac’s non-specific or general allowances were $10.2 million.

As of September 30, 2011, the weighted-average original loan-to-value ratio (“LTV”) for Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) was 54.3 percent, and the weighted-average original LTV for all non-performing assets was 54.7 percent.
 
 
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The following table presents outstanding Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and non-performing assets as of September 30, 2011 by year of origination, geographic region and commodity/collateral type.

Farmer Mac I Non-performing Assets as of September 30, 2011
 
   
Distribution of
   
Outstanding
             
    
Outstanding
   
Loans,
             
    
Loans,
   
Guarantees,
   
Non-
   
Non-
 
    
Guarantees,
   
LTSPCs
   
performing
   
performing
 
    
LTSPCs and REO
   
and REO (1)
   
Assets (2)
   
Asset
 
    
(dollars in thousands)
 
By year of origination:
                       
Before 2000
    14%     $ 606,488     $ 16,983       2.80%  
2000
    2%       97,276       1,087       1.12%  
2001
    4%       177,961       7,044       3.96%  
2002
    5%       238,165       4,586       1.93%  
2003
    7%       285,467       3,974       1.39%  
2004
    7%       288,065       1,497       0.52%  
2005
    8%       370,554       3,344       0.90%  
2006
    9%       408,516       7,741       1.89%  
2007
    9%       388,983       14,096       3.62%  
2008
    9%       393,702       2,007       0.51%  
2009
    7%       290,385       1,778       0.61%  
2010
    11%       480,223       -       0.00%  
2011
    8%       355,479       -       0.00%  
Total
    100%     $ 4,381,264     $ 64,137       1.46%  
                                 
By geographic region (3):
                               
Northwest
    18%     $ 772,640     $ 14,706       1.90%  
Southwest
    35%       1,581,303       8,744       0.55%  
Mid-North
    20%       865,731       16,892       1.95%  
Mid-South
    11%       488,703       10,426       2.13%  
Northeast
    7%       293,047       10,236       3.49%  
Southeast
    9%       379,840       3,133       0.82%  
Total
    100%     $ 4,381,264     $ 64,137       1.46%  
                                 
By commodity/collateral type:
                               
Crops
    41%     $ 1,811,004     $ 23,322       1.29%  
Permanent plantings
    19%       841,412       25,216       3.00%  
Livestock
    30%       1,258,263       6,489       0.52%  
Part-time farm
    6%       255,985       8,459       3.30%  
AgStorage and processing
                               
(including ethanol facilities)
    4%       193,144       -       0.00%  
Other
    0%       21,456       651       3.03%  
Total
    100%     $ 4,381,264     $ 64,137       1.46%  

 
(1)
Excludes loans underlying AgVantage securities.
 
(2)
Includes loans 90 days or more past due, in foreclosure, restructured after delinquency, in bankruptcy (including loans performing under either their original loan terms or a court-approved bankruptcy plan) and real estate owned.
 
(3)
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); and Southeast (AL, AR, FL, GA, LA, MS, SC).

 
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The following table presents Farmer Mac’s cumulative net credit losses relative to the cumulative original balance for all Farmer Mac I loans purchased and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) as of September 30, 2011, by year of origination, geographic region and commodity/collateral type.  The purpose of this information is to present information regarding losses relative to original Farmer Mac I purchases, guarantees and commitments.

Farmer Mac I Credit Losses Relative to all
Cumulative Original Loans, Guarantees and LTSPCs
as of September 30, 2011
   
Cumulative
             
    
Original Loans,
   
Cumulative
   
Cumulative
 
    
Guarantees and
   
Net Credit
   
Loss
 
    
LTSPCs
   
Losses
   
Rate
 
   
(dollars in thousands)
 
By year of origination:
                 
Before 2000
  $ 6,546,356     $ 9,025       0.14 %
2000
    770,713       2,936       0.38 %
2001
    1,133,645       177       0.02 %
2002
    1,160,165       -       0.00 %
2003
    968,305       58       0.01 %
2004
    705,114       116       0.02 %
2005
    841,940       69       0.01 %
2006
    862,438       7,714       0.89 %
2007
    635,058       1,523       0.24 %
2008
    629,125       3,257       0.52 %
2009
    398,061       1,193       0.30 %
2010
    527,674       -       0.00 %
2011
    375,256       -       0.00 %
Total
  $ 15,553,850     $ 26,068       0.17 %
By geographic region (1):
                       
Northwest
  $ 2,928,947     $ 11,027       0.38 %
Southwest
    5,870,551       7,495       0.13 %
Mid-North
    2,662,412       6,815       0.26 %
Mid-South
    1,420,470       (356 )     -0.03 %
Northeast
    1,387,404       83       0.01 %
Southeast
    1,284,066       1,004       0.08 %
Total
  $ 15,553,850     $ 26,068       0.17 %
By commodity/collateral type:
                       
Crops
  $ 6,331,449     $ 2,733       0.04 %
Permanent plantings
    3,434,761       9,714       0.28 %
Livestock
    4,049,997       3,616       0.09 %
Part-time farm
    1,036,009       503       0.05 %
AgStorage and processing
                       
(including ethanol facilities) (2)
    555,499       9,502       1.71 %
Other
    146,135       -       0.00 %
Total
  $ 15,553,850     $ 26,068       0.17 %

 
(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); and Southeast (AL, AR, FL, GA, LA, MS, SC).
 
(2)
Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of September 30, 2011, approximately $31.7 million of the loans were not yet disbursed by the lender.

 
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Analysis of the performance of the Farmer Mac I portfolio by commodity distribution indicates that losses and collateral deficiencies have been less prevalent in the loans secured by real estate producing agricultural commodities that receive significant government support (such as cotton, soybeans, wheat and corn) and more prevalent in those that do not receive such support (such as the protein sector, permanent plantings and vegetables).  However, the level of government support may vary and is not necessarily the primary factor to forecast future losses and collateral deficiencies.  In Farmer Mac’s experience, another significant determinant of ultimate losses on loans is the degree to which the collateral is specialized or highly improved, such as permanent plantings and facilities.

As adverse economic conditions persist for the agricultural commodities or products related to those types of collateral, the prospective sale value of the collateral is likely to decrease and the related loans may become under-collateralized.  This analysis is consistent with corresponding commodity analyses, which indicate that Farmer Mac has experienced higher loss and collateral deficiency rates in its loans classified as permanent plantings as well as storage and processing loans, which include Farmer Mac’s exposure to loans on ethanol plants.  Most of the loans classified as permanent plantings do not receive significant government support, and are therefore more susceptible to adverse commodity-specific economic trends, and the collateral for storage and processing loans is typically highly improved and specialized.  Farmer Mac anticipates that one or more particular commodity groups will be under economic pressure at any one time and actively manages its portfolio to mitigate concentration risks while preserving Farmer Mac’s ability to meet the financing needs of all commodity groups.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Outlook.”

Analysis of portfolio performance by geographic distribution indicates that, while commodities are the primary determinant of exposure to loss, within most commodity groups certain geographic areas allow greater economies of scale or proximity to markets than others and, consequently, result in more successful operators within the commodity group.  Likewise, certain geographic areas offer better growing conditions than others and, consequently, result in more versatile and more successful operators within a given commodity group – and the ability to switch crops among commodity groups.  As of September 30, 2011, the properties that secure Farmer Mac’s non-performing assets were not concentrated in any region of the country.

Farmer Mac’s methodologies for pricing its guarantee and commitment fees, managing credit risks and providing adequate allowances for losses consider all of the foregoing factors and information.

Credit Risk – Institutional.  Farmer Mac is also exposed to credit risk arising from its business relationships with other institutions, including:
 
 
·
issuers of AgVantage securities and other investments held or guaranteed by Farmer Mac;
 
·
sellers and servicers; and
 
·
interest rate swap contract counterparties.

 
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Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security, with some level of overcollateralization also required for Farmer Mac I AgVantage securities.  The required collateralization level is established at the time of issuance and does not change during the life of the security.  In AgVantage transactions, the corporate obligor is required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to substitute an eligible loan that is current in payment to maintain the minimum required collateralization level.  In the event of a default on the general obligation, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing borrower payments of principal and interest.  For a more detailed description of AgVantage securities, see “Business—Farmer Mac Programs—Farmer Mac I—AgVantage Securities” 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.

Outstanding AgVantage on-balance sheet Farmer Mac I Guaranteed Securities totaled $2.7 billion and $0.9 billion as of September 30, 2011 and December 31, 2010, respectively.  Farmer Mac Guaranteed Securities – Rural Utilities structured as AgVantage transactions issued by CFC totaled $1.4 billion and $1.9 billion as of September 30, 2011 and December 31, 2010, respectively.  In addition, outstanding off-balance sheet AgVantage transactions totaled $1.0 billion and $3.0 billion as of September 30, 2011 and December 31, 2010, respectively.  See “—Business Volume” for information about off-balance sheet AgVantage securities that matured during third quarter 2011.  The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of September 30, 2011 and December 31, 2010.

   
September 30, 2011
   
December 31, 2010
 
         
Credit
   
Required
         
Credit
   
Required
 
Counterparty
 
Balance
   
Rating
   
Collateralization
   
Balance
   
Rating
   
Collateralization
 
   
(dollars in thousands)
 
                                     
MetLife (1)
  $ 2,750,000    
AA-
      103%     $ 2,750,000    
AA-
      103%  
CFC
    1,428,879     A       100%       1,902,492     A       100%  
M&I Bank (2)
    -                     475,000    
BBB- *+
      106%  
Rabo Agrifinance, Inc.
    900,000     N/A       106%       600,000     N/A       106%  
Rabobank N.A.
    50,000     N/A       106%       50,000     N/A       106%  
Other (3)
    11,000     N/A    
111% to 120%
      11,500     N/A    
111% to 120%
 
Total outstanding
  $ 5,139,879                   $ 5,788,992                

(1)
Includes securities issued by Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut.
(2)
M&I Bank was on credit watch positive (*+) as of December 31, 2010.
(3)
Consists of AgVantage securities issued by 4 different issuers as of September 30, 2011 and December 31, 2010.

Farmer Mac manages institutional credit risk related to sellers and servicers by requiring those institutions to meet Farmer Mac’s standards for creditworthiness.  Farmer Mac monitors the financial condition of those institutions by evaluating financial statements and bank credit rating agency reports.  For more information on Farmer Mac’s approval of sellers, see “Business—Farmer Mac Programs—Farmer Mac I—Sellers” 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.

 
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Credit Risk – Other Investments.  As of September 30, 2011, Farmer Mac had $825.0 million of cash and cash equivalents and $1.9 billion of investment securities.  The management of the credit risk inherent in these investments is governed by Farmer Mac’s own policies and regulations promulgated by FCA, including dollar amount, issuer concentration, and credit quality limitations.  Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the “Liquidity and Investment Regulations”).

In general, FCA’s Liquidity and Investment Regulations and Farmer Mac’s policies require each investment or issuer of an investment to be highly rated by a nationally-recognized statistical rating organization (“NRSRO”).  Investments in mortgage securities and asset-backed securities are required to have a rating in the highest NRSRO category.  The maximum maturity for corporate debt securities is three years and the minimum rating is required to be in one of the three highest categories.  There are investments for which a rating is not required, such as obligations of the United States or diversified investment funds regulated under the Investment Company Act of 1940.  Investments in diversified investment funds are further limited to those funds that are holding only instruments approved for direct investment by Farmer Mac.  FCA has recently sought public comment regarding its use of credit ratings in its Liquidity and Investment Regulations for purposes of a final rule to be published at a later date.  For more information on proposed changes to the Liquidity and Investment Regulations, see “—Regulatory Matters.”

FCA’s Liquidity and Investment Regulations and Farmer Mac’s policies also establish concentration limits, which are intended to limit exposure to any one counterparty.  FCA’s Liquidity and Investment Regulations limit Farmer Mac’s total credit exposure to any single issuer of securities and uncollateralized financial derivatives to 25 percent of the Corporation’s regulatory capital (as of September 30, 2011, 25 percent of Farmer Mac’s regulatory capital was $119.8 million).  This limitation is not applied to the obligations of the United States or to qualified investment funds.  The limitation applied to the obligations of any GSE is 100 percent of Farmer Mac’s regulatory capital.  Since June 2010, Farmer Mac’s policies applicable to new investments limited the Corporation’s total exposure to any single issuer of securities (other than GSEs and government agencies) and uncollateralized financial derivatives to 5 percent of the Corporation’s regulatory capital.

Interest Rate Risk.  Farmer Mac is subject to interest rate risk on all assets held for investment because of possible timing differences in the cash flows of the assets and related liabilities.  This risk is primarily related to loans held and on-balance sheet Farmer Mac Guaranteed Securities due to the ability of borrowers to prepay their mortgages before the scheduled maturities, thereby increasing the risk of asset and liability cash flow mismatches.  Cash flow mismatches in a changing interest rate environment can reduce the earnings of the Corporation if assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments when Farmer Mac’s funding costs cannot be correspondingly reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-cost debt.

 
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Yield maintenance provisions and other prepayment penalties contained in many agricultural mortgage and rural utilities loans reduce, but do not eliminate, prepayment risk, particularly in the case of a defaulted loan where yield maintenance may not be collected.  Those provisions require borrowers to make an additional payment when they prepay their loans so that, when reinvested with the prepaid principal, yield maintenance payments generate substantially the same cash flows that would have been generated had the loan not prepaid.  Those provisions create a disincentive to prepayment and compensate the Corporation for some of its interest rate risks.  As of September 30, 2011, 9 percent of the total outstanding balance of loans in the Farmer Mac I program where Farmer Mac either owned the loan or the beneficial interest in the underlying loan had yield maintenance provisions and 5 percent had other forms of prepayment protection (together covering 24 percent of all loans with fixed interest rates).  Of the Farmer Mac I newly originated and current seasoned loans purchased in third quarter 2011, none had yield maintenance or other forms of prepayment protection.  As of September 30, 2011, none of the USDA-guaranteed portions held or underlying Farmer Mac II Guaranteed Securities had yield maintenance provisions; however, 9 percent contained prepayment penalties.  Of the USDA-guaranteed portions purchased in third quarter 2011, 6 percent contained various forms of prepayment penalties.  As of September 30, 2011, 69 percent of the rural utilities loans owned by Farmer Mac had yield maintenance provisions.  Of the rural utilities loans purchased in third quarter 2011, 53 percent had yield maintenance provisions.  As of September 30, 2011, all of the rural utilities loans held in trusts where Farmer Mac owned the beneficial interest in the underlying loan had yield maintenance provisions.

Farmer Mac uses prepayment models to project and value cash flows associated with its program assets, taking into consideration the prepayment provisions and the default probabilities associated with these assets.  Because borrowers’ behaviors in various interest rate environments may change over time, Farmer Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience and adjusts and refines the models as necessary to improve the precision of subsequent prepayment forecasts.

Farmer Mac’s $825.0 million of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities.  As of September 30, 2011, $1.2 billion of the $1.9 billion of investment securities (64 percent) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year.  Such securities are funded with floating rate medium-term notes or discount notes that closely match the rate adjustment dates of the associated investments.  As of September 30, 2011, Farmer Mac had outstanding discount notes of $4.8 billion, medium-term notes that mature within one year of $1.0 billion and medium-term notes that mature after one year of $4.1 billion.

The goal of interest rate risk management at Farmer Mac is to create and maintain a portfolio that generates stable earnings and value across a variety of interest rate environments.  Farmer Mac’s primary strategy for managing interest rate risk is to fund asset purchases with liabilities that have similar duration and cash flow characteristics so that they will perform similarly as interest rates change.  To achieve this match, Farmer Mac issues discount notes and both callable and non-callable medium-term notes across a spectrum of maturities.  Farmer Mac issues callable debt to offset the prepayment risk associated with some loans.  By using a blend of liabilities that includes callable debt, the interest rate sensitivities of the liabilities tend to increase or decrease as interest rates change in a manner similar to changes in the interest rate sensitivities of the assets.  Farmer Mac also uses financial derivatives to better match the durations of the Corporation’s assets and liabilities, thereby reducing overall interest rate sensitivity.

 
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An important “stress test” of Farmer Mac’s exposure to long-term interest rate risk is the measurement of the sensitivity of its market value of equity (“MVE”) to yield curve shocks.  MVE represents management’s estimate of the present value of all future cash flows from on- and off-balance sheet assets, liabilities and financial derivatives, discounted at current interest rates and appropriate spreads.

The following schedule summarizes the results of Farmer Mac’s MVE sensitivity analysis as of September 30, 2011 and December 31, 2010 to an immediate and instantaneous uniform or “parallel” shift in the yield curve.

     
Percentage Change in MVE from Base
 
Interest Rate
   
September 30,
   
December 31,
 
Scenario
   
2011
   
2010
 
               
  + 300 bp       -2.2%       -1.0%  
  + 200 bp       1.5%       1.9%  
  + 100 bp       1.9%       2.6%  
  - 100 bp       *       *  
  - 200 bp       *       *  
  - 300 bp       *       *  

 
*
As of the date indicated, a parallel shift of the U.S. Treasury yield curve by the number of basis points indicated produced negative interest rates for portions of this curve.

As of September 30, 2011, Farmer Mac’s effective duration gap, another standard measure of interest rate risk that measures the difference between the sensitivities of assets compared to that of liabilities, was minus 1.3 months, compared to minus 1.6 months as of December 31, 2010.  Duration matching of assets and the corresponding liabilities helps maintain the correlation of cash flows and stabilize portfolio earnings even when interest rates are not stable.  During 2011, Farmer Mac’s interest rate sensitivity has remained relatively stable and at relatively low levels, despite significant market volatility, a sharp decrease in interest rates and a much flatter yield curve.

Farmer Mac also calculates sensitivity of net interest income (“NII”) to changes in interest rates which represents a shorter-term measure of interest rate risk.  As of September 30, 2011, a parallel increase of 100 basis points would have decreased Farmer Mac’s NII by 6.1 percent, while a parallel decrease of 25 basis points would have decreased NII by 6.5 percent.  Farmer Mac also measures the sensitivity of both MVE and NII to a variety of non-parallel interest rate shocks, including flattening and steepening yield curve scenarios.  As of September 30, 2011, both MVE and NII showed similar or lesser sensitivity to non-parallel shocks than to the parallel shocks.

 
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The economic effects of financial derivatives are included in the Corporation’s MVE, NII and duration gap analyses.  Farmer Mac enters into the following financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of assets, future cash flows, credit exposure and debt issuance, not for trading or speculative purposes:
 
 
·
“pay-fixed” interest rate swaps, in which it pays fixed rates of interest to, and receives floating rates of interest from, counterparties;
 
·
“receive-fixed” interest rate swaps, in which it receives fixed rates of interest from, and pays floating rates of interest to, counterparties;
 
·
“basis swaps,” in which it pays variable rates of interest based on one index to, and receives variable rates of interest based on another index from, counterparties; and
 
·
“credit default swaps,” in which it pays a periodic fee to a counterparty in exchange for the counterparty’s agreement to make payments in the event of an instrument’s default or other credit event.
 
As of September 30, 2011, Farmer Mac had $6.5 billion combined notional amount of interest rate and credit default swaps, with terms ranging from one to fifteen years, of which $2.0 billion were pay-fixed interest rate swaps, $3.9 billion were receive-fixed interest rate swaps, $0.5 billion were basis swaps and $10.0 million were credit default swaps.
 
Liquidity and Capital Resources

Farmer Mac regularly accesses the capital markets for liquidity, and Farmer Mac maintained access to the capital markets at favorable rates throughout third quarter 2011.  The capital markets experienced increased volatility during third quarter 2011, which was widely attributed to global economic conditions, continued weak U.S. economic data, and concerns surrounding Standard & Poor’s downgrade of the credit rating of the United States.  To date, Farmer Mac’s access to the capital markets at favorable rates has not been negatively affected by this market volatility.  Assuming continued access to the capital markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future.  Farmer Mac also has a liquidity contingency plan to manage unanticipated disruptions in its access to the capital markets.  That plan involves borrowing through repurchase agreement arrangements and the sale of liquid assets.  In accordance with the calculation prescribed by FCA regulations, Farmer Mac maintains a minimum of 60 days of liquidity and a target of 90 days of liquidity.  In accordance with the methodology prescribed by those regulations, Farmer Mac maintained an average of 167 days of liquidity during third quarter 2011 and had 174 days of liquidity as of September 30, 2011.

Debt Issuance.  Farmer Mac funds its purchases of assets primarily by issuing debt obligations of various maturities in the public capital markets.  Debt obligations issued by Farmer Mac include discount notes and fixed and floating rate medium-term notes, including callable notes.  Farmer Mac also issues discount notes and medium-term notes to obtain funds to finance its investment activities, transaction costs, guarantee payments and LTSPC purchase obligations.  See “Business—Financing—Debt Issuance” 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 for more information about Farmer Mac’s debt issuance.

 
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Farmer Mac’s board of directors has authorized the issuance of up to $12.0 billion of discount notes and medium-term notes (of which $9.9 billion was outstanding as of September 30, 2011), subject to periodic review of the adequacy of that level relative to Farmer Mac’s borrowing requirements.  That authorization was increased from $10.0 billion to $12.0 billion in June 2011.  Farmer Mac invests the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities, and liquidity investment assets in accordance with policies established by its board of directors and subject to regulations established by FCA.

Liquidity.  The funding and liquidity needs of Farmer Mac’s business are driven by the purchase of loans, USDA-guaranteed portions and Farmer Mac Guaranteed Securities; the maturities of and interest payments on Farmer Mac’s discount notes and medium-term notes; and payment of principal and interest on Farmer Mac Guaranteed Securities.  Farmer Mac’s primary sources of funds to meet these needs are:
 
 
·
principal and interest payments and ongoing guarantee and commitment fees received on loans, Farmer Mac Guaranteed Securities, and LTSPCs;
 
·
principal and interest payments received from investment securities; and
 
·
the issuance of new discount notes and medium-term notes.

Farmer Mac’s borrowing costs have remained at favorable levels despite continued market volatility.  Farmer Mac uses a combination of pay-fixed interest rate swaps and receive-fixed interest rate swaps to mitigate its exposure to interest rate risk and monitors the effects of actual and potential fair value changes on its regulatory capital surplus.  From time to time, Farmer Mac uses pay-fixed interest rate swaps, combined with a planned series of discount note issuances, as an alternative source of effectively fixed rate funding.  While the swap market may provide favorable effectively fixed rates, interest rate swap transactions expose Farmer Mac to the risk of future widening of its own issuance spreads versus corresponding LIBOR rates.  If the spreads on the Farmer Mac discount notes were to increase relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets.  Conversely, if the rates on the Farmer Mac discount notes were to decrease relative to LIBOR, Farmer Mac would benefit from a commensurate increase on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets.  Further, the use of pay-fixed interest rate swaps subject the Corporation’s regulatory capital surplus to the potential adverse effects of a reduction in the fair values of those interest rate swaps.  Farmer Mac routinely enters into receive-fixed interest rate swaps to partially offset the fair value movements of the pay-fixed interest rate swaps.  These transactions reduce the susceptibility of Farmer Mac’s regulatory capital surplus to changes in the fair values of its financial derivatives and often times result in lower effective borrowing costs.

 
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Farmer Mac maintains cash and cash equivalents (including U.S. Treasury bills and other short-term money market instruments) and other investment securities that can be drawn upon for liquidity needs.  The following table presents these assets as of September 30, 2011 and December 31, 2010.

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Cash and cash equivalents
  $ 825,014     $ 729,920  
Investment securities:
               
Guaranteed by U.S. Government and its agencies
    906,325       929,793  
Guaranteed by GSEs
    610,394       405,631  
Preferred stock issued by GSEs
    164,268       169,524  
Corporate debt securities
    85,918       163,188  
Asset-backed securities principally backed by Government-guaranteed student loans
    145,972       95,193  
Total
  $ 2,737,891     $ 2,493,249  

Farmer Mac’s asset-backed investment securities include callable, AAA-rated ARCs, the interest rates on which are reset through an auction process, most commonly at intervals of 28 days, or at formula-based floating rates as set forth in the related transaction documents in the event of a failed auction.  These formula-based floating rates, which may at times reset to zero, are intended to preserve the underlying principal balance of the securities and avoid overall cash shortfalls.  Accordingly, payments of accrued interest may also be delayed and are ultimately subject to cash availability.  Beginning in mid-February 2008, there were widespread failures of the auction mechanism designed to provide regular liquidity to these types of securities.  Consequently, Farmer Mac has not sold any of its ARCs into the auctions since that time.  All ARCs held by Farmer Mac are collateralized entirely by pools of Federal Family Education Loan Program guaranteed student loans that are backed by the full faith and credit of the United States.  Farmer Mac continues to believe that the credit quality of these securities is high, based on the underlying collateralization and the securities’ continued AAA ratings.  To date, Farmer Mac has received all interest due on ARCs it holds and expects to continue to do so.  Farmer Mac does not believe that the auction failures will affect the Corporation’s liquidity or its ability to fund its operations or make dividend payments.  All ARCs held by Farmer Mac are callable by the issuers at par at any time.

Farmer Mac held $62.2 million of ARCs as of September 30, 2011, compared to $64.3 million as of December 31, 2010.  As of September 30, 2011, Farmer Mac’s carrying value of its ARCs was 84 percent of par.  The discounted carrying value reflects uncertainty regarding the ability to obtain par in the absence of any active market trading.

Capital.  See “—Balance Sheet Review—Regulatory Capital Compliance” for more information about Farmer Mac’s capital position and “—Regulatory Matters” for more information about changes to the risk-based capital stress test applicable to Farmer Mac.

 
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Other Matters

Common Stock Dividends.  For the first three quarters of 2011 and for each quarter in 2010, Farmer Mac paid a quarterly dividend of $0.05 per share on the Corporation’s Class A, Class B and Class C common stock.  Farmer Mac’s ability to pay dividends on its common stock is subject to the payment of dividends on its outstanding preferred stock.  Farmer Mac’s ability to declare and pay dividends could be restricted if it were to fail to comply with the applicable regulatory capital requirements.  See “Business—Government Regulation of Farmer Mac—Regulation—Capital Standards—Enforcement levels” in Farmer Mac’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 16, 2011.

Preferred Stock Dividends.  For the first three quarters of 2011 and for each quarter in 2010, Farmer Mac paid a quarterly dividend of $12.50 per share on the Corporation’s Series C Preferred Stock.

On January 25, 2010, all of the outstanding shares of the Corporation’s Series B preferred stock was repurchased and retired.  The price paid to repurchase the Series B Preferred Stock included accrued dividends of $8.33 per share through the purchase date.

Non-controlling Interest.  For the first three quarters of 2011, Farmer Mac II LLC paid a quarterly dividend of $22.1875 per share on the company’s preferred stock.  For first, second and third quarters 2010, Farmer Mac II LLC paid a quarterly dividend of $16.02 per share, $22.1875 per share, and $22.1875 per share, respectively, on the company’s preferred stock.  Farmer Mac’s net income attributable to non-controlling interest totaled $5.5 million and $16.6 million for the three and nine months ended September 30, 2011, respectively, compared to $5.5 million and $15.2 million, respectively, for the same periods in 2010.  These amounts represent the dividends paid on the Farmer Mac II LLC preferred stock held by third parties.  Farmer Mac’s income tax expense is determined based on income before income taxes less the amount of these dividends.
 
Regulatory Matters

In the April 27, 2011 issue of the Federal Register, FCA published a final rule (the “Final RBC 4.0 Rule”) that revises certain FCA regulations governing the risk-based capital stress test applicable to Farmer Mac.  In its announcement of the Final RBC 4.0 Rule, FCA stated that the purpose of the changes was to update the risk-based capital model to address the addition of rural utilities loans to Farmer Mac’s program authorities, to revise the existing treatment of risk mitigations of general obligations in the AgVantage structure, and to revise the treatment of counterparty risk on Farmer Mac’s non-program investments.  The Final RBC 4.0 Rule became effective during second quarter 2011.

Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement and the amount required by the risk-based capital stress test.  As of September 30, 2011, Farmer Mac’s minimum capital requirement was $336.6 million, and Farmer Mac’s core capital level was $461.3 million, $124.7 million above the minimum capital requirement.  Based on the new risk-based capital stress test that became effective in second quarter 2011, Farmer Mac’s risk-based capital requirement as of September 30, 2011 was $110.9 million, and Farmer Mac’s regulatory capital of $479.0 million exceeded that requirement by approximately $368.1 million.

 
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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contains a variety of provisions designed to regulate financial markets, including credit and derivatives transactions.  Certain provisions of the Dodd-Frank Act, such as the requirement to retain a five percent credit risk in any securitized loan, do not apply to Farmer Mac or, with respect to any loan sold to Farmer Mac, the seller of such loan.  In addition, Farmer Mac’s equity and debt securities are excluded from the Dodd-Frank Act’s prohibitions on proprietary trading by banking entities.  However, certain provisions of the Dodd-Frank Act, such as those regarding derivatives regulation, corporate governance and executive compensation, do not contain specific exemptions for Farmer Mac.  Until various studies are completed and all applicable final regulations are promulgated pursuant to the Dodd-Frank Act, the full effect of the legislation on the Corporation’s business activities and operations cannot be completely assessed, particularly how it will affect the Corporation’s hedging operations and costs.  Farmer Mac does not expect that any of the final rules that have been passed under the Dodd-Frank Act to date will have a material impact on the Corporation’s business activities and operations or financial condition.  Farmer Mac will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expects to be able to adapt successfully to any new applicable legislative and regulatory requirements.

On May 11, 2011, the FCA, together with other prudential regulators, published in the Federal Register a proposed rule under the Dodd-Frank Act titled “Margin and Capital Requirements for Covered Swap Entities.”  The proposed rule provides for margin and capital requirements for non-cleared derivatives transactions among various categories of counterparties, including Farmer Mac.  Farmer Mac submitted comments during the comment period for the proposed rule, which closed on July 11, 2011.  The final rule has not yet been published.

On June 16, 2011, the FCA published in the Federal Register an advance notice of proposed rulemaking (the “ANPRM”), seeking public comment on revising Farmer Mac’s risk-based capital stress test (1) to eliminate reliance on credit ratings from NRSROs as a measure of the creditworthiness of Farmer Mac’s assets, as mandated under the Dodd-Frank Act and (2) to include a capital charge for counterparty risk related to derivatives transactions.  In addition, the ANPRM solicits comment on ways to revise Farmer Mac’s operational and strategic business planning requirements to place greater emphasis on diversity and inclusion in both Farmer Mac’s personnel as well as the borrowers and lenders who benefit from Farmer Mac’s secondary market activities.  Farmer Mac submitted a comment letter on the ANPRM on August 15, 2011.

On October 13, 2011, the FCA board approved a proposed rule to revise the Liquidity and Investment Regulations in response to the requirement under the Dodd-Frank Act for all federal agencies to review their respective regulations that refer to or require the use of credit ratings, to remove those references and requirements, and to substitute other appropriate standards of creditworthiness.  The proposed rule is pending a 30-day congressional review and has not yet been published in the Federal Register, but FCA has published a “Fact Sheet” that summarizes the proposed changes and identifies the questions on which FCA seeks comment.  Based on the Fact Sheet, included among FCA’s proposed changes to the Liquidity and Investment Regulations are requirements for due diligence and stress testing of non-program assets, increased liquidity levels and enhancements to interest rate risk management.  The proposed rule would also establish new parameters for investment eligibility, including pre-approved investments that complement Farmer Mac’s mission to serve rural America.  In addition, the proposed rule outlines for comment three possible approaches for substituting the use of credit ratings in the Liquidity and Investment Regulations, including the use of benchmark indices, the use of internal assessment by Farmer Mac, or the use of third-party assessments of creditworthiness.  Farmer Mac intends to submit a comment letter on the proposed rule before the comment period closes, which will be sixty days after publication of the proposed rule in the Federal Register.

 
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Supplemental Information

The following tables present quarterly and annual information regarding loan purchases, guarantees and LTSPCs and outstanding loans, guarantees and LTSPCs.

Farmer Mac Purchases, Guarantees and LTSPCs
 
    
Farmer Mac I
   
Farmer Mac II
   
Rural Utilities
       
    
Loans and
         
and USDA
   
Loans and
       
    
Guaranteed
         
Guaranteed
   
Guaranteed
       
    
Securities
   
LTSPCs (1)
   
Securities
   
Securities
   
Total
 
    
(in thousands)
 
For the quarter ended:
                             
September 30, 2011
  $ 1,069,701     $ 266,906     $ 87,051     $ 32,387     $ 1,456,045  
June 30, 2011
    416,930       53,248       99,275       38,674       608,127  
March 31, 2011
    711,899       54,152       117,253       80,517       963,821  
December 31, 2010
    474,216       128,752       102,858       543,966       1,249,792  
September 30, 2010
    632,270       25,416       139,667       285,242       1,082,595  
June 30, 2010
    98,235       32,430       123,062       77,726       331,453  
March 31, 2010
    77,948       77,143       92,288       59,018       306,397  
December 31, 2009
    86,872       108,646       94,936       16,009       306,463  
September 30, 2009
    40,732       37,083       76,119       553,644       707,578  
                                         
For the year ended:
                                       
December 31, 2010
    1,282,669       263,741       457,875       965,952       2,970,237  
December 31, 2009
    195,318       234,166       346,432       1,739,653       2,515,569  

(1)
As of September 30, 2011, approximately $31.7 million of the loans underlying $555.5 million of AgStorage and processing LTSPCs (including ethanol facilities) were not yet disbursed by the lender.

 
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Outstanding Balance of Farmer Mac Loans,
 
Guarantees and LTSPCs and USDA Guarantees
 
    
Farmer Mac I
   
Farmer Mac II
   
Rural Utilities
       
    
Loans and
         
and USDA
   
Loans and
       
    
Guaranteed
         
Guaranteed
   
Guaranteed
       
    
Securities
   
LTSPCs
   
Securities
   
Securities
   
Total
 
    
(in thousands)
 
As of:
                             
September 30, 2011
  $ 6,277,085     $ 1,811,280     $ 1,463,129     $ 2,289,899     $ 11,841,393  
June 30, 2011
    6,803,951       1,694,470       1,425,883       2,274,193       12,198,497  
March 31, 2011
    6,485,156       1,712,791       1,402,831       2,235,522       11,836,300  
December 31, 2010
    6,434,031       1,754,597       1,385,398       2,642,683       12,216,709  
September 30, 2010
    6,059,184       1,697,578       1,365,993       2,353,453       11,476,208  
June 30, 2010 (1)
    5,544,091       1,739,979       1,300,945       2,173,660       10,758,675  
March 31, 2010 (2)
    5,444,448       1,846,244       1,237,539       2,183,576       10,711,807  
December 31, 2009
    5,224,768       2,165,706       1,199,798       2,130,832       10,721,104  
September 30, 2009
    5,227,939       2,135,445       1,141,570       2,266,592       10,771,546  

(1)
The Loans and Guaranteed Securities and LTSPCs amounts reflect the conversion of $86.0 million of existing LTSPCs to Farmer Mac I Guaranteed Securities during second quarter 2010 at the request of a program participant.
(2)
The Loans and Guaranteed Securities and LTSPCs amounts reflect the conversion of $265.8 million of existing LTSPCs to Farmer Mac I Guaranteed Securities during first quarter 2010 at the request of a program participant.

Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
         
5-to-10-Year
         
Total
 
         
ARMs &
   
1-Month-to-
   
Held in
 
   
Fixed Rate
   
Resets
   
3-Year ARMs
   
Portfolio
 
   
(in thousands)
 
As of:
                       
September 30, 2011
  $ 5,233,417     $ 1,192,497     $ 1,909,470     $ 8,335,384  
June 30, 2011
    4,193,132       1,198,740       1,907,698       7,299,570  
March 31, 2011
    3,835,010       1,164,567       1,893,487       6,893,064  
December 31, 2010
    3,662,363       1,133,871       1,907,266       6,703,500  
September 30, 2010
    3,006,105       1,087,714       1,883,049       5,976,868  
June 30, 2010
    2,269,059       1,036,781       1,885,693       5,191,533  
March 31, 2010
    2,365,557       1,332,369       1,820,896       5,518,822  
December 31, 2009
    1,923,697       723,017       1,422,403       4,069,117  
September 30, 2009
    2,071,801       677,593       1,382,817       4,132,211  
 
 
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Farmer Mac is exposed to market risk attributable to changes in interest rates.  Farmer Mac manages this market risk by entering into various financial transactions, including financial derivatives, and by monitoring its exposure to changes in interest rates.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk” for more information about Farmer Mac’s exposure to interest rate risk and strategies to manage such risk.  For information regarding Farmer Mac’s use of and accounting policies for financial derivatives, see Note 1(c) to the condensed consolidated financial statements contained in this report.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further information regarding Farmer Mac’s debt issuance and liquidity risks.
 
Item 4.
Controls and Procedures

(a)  Management’s Evaluation of Disclosure Controls and Procedures.  Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Corporation’s periodic filings under the Securities Exchange Act of 1934 (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis.  These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Corporation’s management on a timely basis to allow decisions regarding required disclosure.  Management, including Farmer Mac’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), has evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2011.

The Corporation carried out the evaluation of the effectiveness of Farmer Mac’s disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of management, including the CEO and CFO.  Based upon this evaluation, the CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2011.

(b) Changes in Internal Control Over Financial Reporting.  There were no changes in Farmer Mac’s internal control over financial reporting during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, Farmer Mac’s internal control over financial reporting.

 
-106-

 

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

There were no material changes from the risk factors previously disclosed in Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
(a)
Farmer Mac is a federally chartered instrumentality of the United States and its debt and equity securities are exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933.
 
During third quarter 2011, one type of transaction occurred related to Farmer Mac common stock that was not registered under the Securities Act of 1933 and not otherwise reported on a Current Report on Form 8-K.  On July 11, 2011, pursuant to Farmer Mac’s policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 177 shares of its Class C common stock to the four directors who elected to receive such stock in lieu of their cash retainers.  The number of shares issued to the directors was calculated based on a price of $22.12 per share, which was the closing price of the Class C common stock on June 30, 2011 as reported by the New York Stock Exchange.

 
(b)
Not applicable.

 
(c)
None.
 
Item 3.
Defaults Upon Senior Securities

 
(a)
None.

 
(b)
None.

 
-107-

 

Item 4.
(Removed and Reserved)

Item 5.
Other Information

 
(a)
None.

 
(b)
None.

Item 6.
Exhibits

*
3.1
-
Title VIII of the Farm Credit Act of 1971, as most recently amended by the Food, Conservation and Energy Act of 2008 (Form 10-Q filed August 12, 2008).
       
*
3.2
-
Amended and Restated By-Laws of the Registrant (Form 10-K filed March 16, 2011).
       
*
4.1
-
Specimen Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q filed May 15, 2003).
       
*
4.2
-
Specimen Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q filed May 15, 2003).
       
*
4.3
-
Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q filed May 15, 2003).
       
*
4.4
-
Amended and Restated Certificate of Designation of Terms and Conditions of Non-Voting Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.7 to Form 10-Q filed November 9, 2009).
       
†*
10.1
-
Amended and Restated 1997 Incentive Plan (Form 10-Q filed November 14, 2003).
       
†*
10.1.1
-
Form of stock option award agreement under 1997 Incentive Plan (Form 10-K filed March 16, 2005).
       
†*
10.1.2
-
2008 Omnibus Incentive Plan (Form 10-Q filed August 12, 2008).
 

*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.
#
Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
 
 
-108-

 

†*
10.1.3
-
Form of SAR Agreement under the 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10 to Form 8-K filed June 11, 2008).
       
†*
10.1.4
-
Form of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.1 to Form 8-K filed June 10, 2009).
       
†*
10.1.5
-
Form of Restricted Stock Agreement (Directors) under the 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.2 to Form 8-K filed June 10, 2009).
       
†*
10.2
-
Amended and Restated Employment Agreement dated as of April 1, 2011 between Michael A. Gerber and the Registrant (Form 10-Q filed May 10, 2011).
       
†*
10.3
-
Compiled Amended and Restated Employment Contract dated as of June 5, 2008 between Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.4 to Form 10-Q filed August 12, 2008).
       
†*
10.4
-
Compiled Amended and Restated Employment Contract dated June 5, 2008 between Timothy L. Buzby and the Registrant (Previously filed as Exhibit 10.5 to Form 10-Q filed August 12, 2008).
       
†*
10.4.1
-
Amendment No. 6 to Employment Contract between Timothy L. Buzby and the Registrant, dated as of April 2, 2009 (Form 10-Q filed August 10, 2009).
       
 
10.5
-
Exhibit number reserved for future use.
       
†*
10.6
-
Description of compensation agreement between the Registrant and its directors (Form 10-K filed March 16, 2011).
       
*
10.7
-
Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
       
*
10.8
-
Medium-Term Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
       
*
10.9
-
Discount Note Dealer Agreement dated as of September 18, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
 

*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.
#
Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
 
 
-109-

 

*#
10.10
-
ISDA Master Agreement and Credit Support Annex dated as of June 26, 1997 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
       
*#
10.11
-
Amended and Restated Master Central Servicing Agreement dated as of May 1, 2004 between Zions First National Bank and the Registrant (Previously filed as Exhibit 10.11.2 to Form 10-Q filed August 9, 2004).
       
*#
10.11.1
-
Amendment No. 1 to Amended and Restated Master Central Servicing Agreement between Zions First National Bank and the Registrant, dated as of June 1, 2009 (Form 10-Q filed August 10, 2009).
       
*#
10.11.2
-
Amendment No. 2. to Amended and Restated Master Central Servicing Agreement between Zions First National Bank and the Registrant, dated as of August 25, 2010 (Form 10-Q filed November 9, 2010).
       
*#
10.12
-
Loan Closing File Review Agreement dated as of August 2, 2005 between Zions First National Bank and the Registrant (Form 10-Q filed November 9, 2005).
       
*#
10.13
-
Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
       
*#
10.13.1
-
Amendment No. 1 dated as of January 1, 2000 to Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
       
*
10.13.2
-
Amendment No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
       
*
10.14
-
Lease Agreement, dated June 28, 2001 between EOP – Two Lafayette, L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27, 2002).
       
*#
10.15
-
Long Term Standby Commitment to Purchase dated as of August 1, 2007 between Farm Credit Bank of Texas and the Registrant (Previously filed as Exhibit 10.20 to Form 10-Q filed November 8, 2007).
 

*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.
#
Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
 
 
-110-

 

*#
10.16
-
Long Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and the Registrant (Form 10-Q filed November 9, 2004).
       
*#
10.16.1
-
Amendment No. 1 dated as of December 8, 2006 to Long Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and the Registrant (Form 10-K filed March 15, 2007).
       
*#
10.17
-
Central Servicer Delinquent Loan Servicing Transfer Agreement dated as of July 1, 2004 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 9, 2004).
       
†*
10.18
-
Form of Indemnification Agreement for Directors (Previously filed as Exhibit 10.1 to Form 8-K filed April 9, 2008).
       
*
10.19
 
Master Trust, Sale and Servicing Agreement dated as of October 20, 2006 between CFC Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, U.S. Bank National Association, and the Registrant (Form 10-Q filed August 9, 2010).
       
*
10.20
 
Registration Rights Agreement Series 2007-1 dated as of February 15, 2007 between CFC Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, and the Registrant (Form 10-Q filed August 9, 2010).
       
*
10.21
 
Registration Rights Agreement Series 2007-2 dated as of August 10, 2007 between CFC Advantage, LLC, National Rural Utilities Cooperative Finance Corporation and the Registrant (Form 10-Q filed August 9, 2010).
       
*
10.22
 
Amended and Restated Note Purchase Agreement dated as of March 24, 2011 between Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant (Form 10-Q filed May 10, 2011).
       
*
10.23
 
Amended, Restated and Consolidated Pledge Agreement dated as of March 24, 2011 between Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, U.S. Bank National Association, and the Registrant (Form 10-Q filed May 10, 2011).
       
*
10.24
 
Setoff Rights Letter Agreement dated as of March 24, 2011 between National Rural Utilities Cooperative Finance Corporation, Farmer Mac Mortgage Securities Corporation, and the Registrant (Form 10-Q filed May 10, 2011).
 

*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.
#
Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
 
 
-111-

 

*
10.25
 
First Supplemental Note Purchase Agreement dated as of March 24, 2011 between Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant (Form 10-Q filed May 10, 2011).
       
**
10.26
 
Amended and Restated Master Sale and Servicing Agreement dated as of August 12, 2011 between National Rural Utilities Cooperative Finance Corporation and the Registrant.
       
*#
10.27
 
Credit Support Agreement dated as of September 1, 2009 between National Rural Utilities Cooperative Finance Corporation and the Registrant (Previously filed as Exhibit 10.38 to Form 10-Q filed August 9, 2010).
       
*
10.28
 
Indenture dated as of September 1, 2009 between National Rural Utilities Cooperative Finance Corporation, U.S. Bank National Association and the Registrant (Previously filed as Exhibit 10.39 to Form 10-Q filed August 9, 2010).
       
*
10.29
 
Sublease Agreement dated as of December 6, 2010 between Mayer Brown LLP and the Registrant (Previously filed as Exhibit 10.43 to Form 10-K/A filed June 1, 2011).
       
*
21
-
List of the Registrant’s subsidiaries (Form 10-K filed March 16, 2010).
       
**
31.1
-
Certification of Chief Executive Officer relating to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
**
31.2
-
Certification of Chief Financial Officer relating to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
**
32
-
Certification of Chief Executive Officer and Chief Financial Officer relating to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan.
#
Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
 
 
-112-

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  FEDERAL AGRICULTURAL MORTGAGE CORPORATION
       
November 9, 2011
     
       
   
By:
/s/ Michael A. Gerber
     
Michael A. Gerber
President and Chief Executive Officer
(Principal Executive Officer)
       
     
/s/ Timothy L. Buzby
     
Timothy L. Buzby
Senior Vice President – Chief Financial Officer and Treasurer
(Principal Financial Officer)
 
 
-113-