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		March 31, 2006						December 31, 2005
		As Previously			As			As Previously			As
Selected Balance Sheet Data:		Reported			Restated			Reported			Restated
		(in thousands)
Assets:
Deferred tax asset, net		$	1,647		$	2,906		$	2,397		$	3,223
Total Assets			4,473,336			4,474,595			4,340,619			4,341,445
Liabilities and Stockholder's Equity:
Notes payable: Due after one year			1,336,215			1,340,385			1,403,598			1,406,527
Total notes payable			4,107,321			4,111,491			3,991,302			3,994,231
Total Liabilities			4,219,173			4,223,343			4,092,487			4,095,416
Accumulated other comprehensive income			5,290			6,336			3,339			15,247
Retained earnings			118,810			114,853			115,644			101,633
Total Stockholders' Equity			254,163			251,252			248,132			246,029
Total Liabilities and Stockholders' Equity			4,473,336			4,474,595			4,340,619			4,341,445

		For the three months ended, March 31, 2006						For the three months ended, March 31, 2006
		As Previously			As			As Previously			As
Selected Statements of Operations Data:		Reported			Restated			Reported			Restated
		(in thousands, except per share amounts)
Interest income:
Farmer Mac Guaranteed Securities		$	18,095		$	18,037		$	17,081		$	18,327
Total interest income			56,176			56,118			41,789			43,035
Interest expense			47,276			45,451			33,983			29,154
Net interest income			8,900			10,667			7,806			13,881
Net interest income after recovery/ (provision) for loan losses			9,913			11,680			8,390			14,465
Gains on financial derivatives and trading assets			(2,001	)		11,700			(1,709	)		9,866
Total revenues			13,340			28,808			12,023			29,673
Income before income taxes			7,671			23,139			7,805			25,455
Income tax expense			2,074			7,488			2,333			8,510
Net income			5,597			15,651			5,472			16,945
Net income available to common stockholders			5,037			15,091			4,912			16,385
Earnings per common share:
Basic earnings per common share			0.45			1.36			0.42			1.40
Diluted earnings per common share			0.44			1.32			0.42			1.39

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		For the three months ended						For the three months ended
		March 31, 2006						March 31, 2005
		As Previously			As			As Previously			As
Selected Statements of Cash Flows Data:		Reported			Restated			Reported			Restated
		(in thousands)
Cash flows from operating activities:
Net income		$	5,597		$	15,651		$	5,472		$	16,945
Adjustments to reconcile net income to net cash provided by operating activities:
Net change in fair value of trading securities and financial derivatives			1,902			(12,501	)		2,107			(15,216	)
Amortization of  SFAS 133 transition adjustment on financial derivatives			89			131			438			169
Deferred income taxes			(302	)		5,112			(794	)		(5,385	)
Decrease in other assets			13,741			13,228			2,053			12,871
Net cash provided by operating activities			78,100			78,694			22,065			22,173
Cash flows from financing activities:
Settlement of financial derivatives			594			-			108			-
Net cash provided by/(used in) financing activities			89,550			88,956			(6,378	)		(6,486	)

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of financial condition and results of operations set forth in this Item 2 reflects revisions in financial reporting resulting from the Corporation’s restatement to correct for errors relating to its accounting for financial derivative transactions under SFAS 133 that were contained in the Corporation’s unaudited condensed consolidated financial statements and other financial information as of March 31, 2006 and December 31 2005 and for the three months ended March 31, 2006 and 2005 as discussed below and in Note 6 of the restated unaudited condensed consolidated financial statements. Financial information is consolidated to include the accounts of Farmer Mac and its wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation.

This discussion and analysis of financial condition and results of operations should be read together with: (1) the restated 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/A for the fiscal year ended December 31, 2005.

The discussion below is not necessarily indicative of future results.

 

Special Note Regarding 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 as to 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 provisions for losses;

·

trends in expenses;

·

changes in capital position; and

·

other business and financial matters.

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/A for the year ended December 31, 2005, as filed with the SEC concurrently with this report, and uncertainties regarding:

 

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·

increases in general and administrative expenses attributable to growth of the business and the regulatory environment, including the hiring of additional personnel with expertise in key functional areas;

·

the rate and direction of development of the secondary market for agricultural mortgage loans;

·

the general rate of growth in agricultural mortgage indebtedness;

·

lender interest in Farmer Mac credit products and the Farmer Mac secondary market;

·

borrower preferences for fixed-rate agricultural mortgage indebtedness;

·

the willingness of investors to invest in Farmer Mac Guaranteed Securities; and

·

possible reaction in the financial markets to events involving government-sponsored enterprises other than Farmer Mac.

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 law.

Restatement of Previously Issued Quarterly Financial Statements

The Corporation is restating its unaudited interim condensed consolidated financial statements as of March 31, 2006 and December 31, 2005 and for the three months ended March 31, 2006 and 2005. The Corporation is concurrently filing amendments to (1)  its Form 10-K for the year ended December 31, 2005 to restate the Corporation’s consolidated financial statements as of December 31, 2005 and 2004, and for the years ended December 31, 2005, 2004 and 2003, and other financial information as of and for the years ended December 31, 2002 and 2001 and the quarterly unaudited data for 2005 and 2004 and (2) its Form 10-Q for the quarter ended June 30, 2006 to restate the quarterly unaudited interim consolidated financial statements and other financial information contained in that report. These restatements and resulting revisions relate to the accounting treatment for derivative transactions under SFAS 133. In this regard, investors should rely on the restated financial results for the years and each of the quarters in the years 2005, 2004, 2003, 2002 and 2001 and the first and second quarters of 2006 and, as the Corporation previously reported on Form 8-K on October 6, 2006, should not rely on the Corporation’s previously issued consolidated financial statements and other financial information for these reporting periods.

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

As a result, the condensed consolidated financial statements included in Item 1 have been restated from the amounts previously reported to correct the accounting for financial derivatives. The corrections related to the Corporation’s accounting for fair value hedges and cash flow hedges as described in more detail below.

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The Corporation reduced its stockholders’ equity by $0.9 million as of January 1, 2003 as the cumulative effect of the correction of its accounting for financial derivatives for all periods preceding January 1, 2003, and restated its consolidated statements of operations and cash flows for the years ended December 31, 2005, 2004 and 2003 and its consolidated balance sheet as of December 31, 2005 and 2004. The restatement resulted in increases to previously reported net income available to common stockholders of $10.1 million ($0.88 per diluted common share) and $11.5 million ($0.97 per diluted common share) for the three months ended March 31, 2006 and 2005, respectively. In addition to the increases in net income available to common stockholders described above, the net impact related to the correction of these errors for fair value and cash flow hedges was to increase net interest income by $1.8 million and $6.1 million for the three months ended March 31, 2006 and 2005, respectively. Gains/(losses) on financial derivatives increased $13.7 million and $11.6 million for the three months ended March 31, 2006 and 2005, respectively. There was no effect on net cash flows, core earnings, or the amount of dividends declared for any years presented.

Fair Value Hedges:

The Corporation has determined that it did not meet the specific documentation requirements required by SFAS 133 to assume no ineffectiveness in its fair value hedge relationships or to apply hedge accounting to its fair value hedges. As a result, the Corporation’s designation of its financial derivatives as fair value hedges for the period from January 1, 2001 to March 31, 2006 did not meet the requirements of SFAS 133.

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

Cash Flow Hedges:

The Corporation determined also that it did not meet specific documentation and other requirements of SFAS 133 to apply hedge accounting to its cash flow hedges. In this regard, the Corporation has determined that its forecasted transactions were not documented with sufficient specificity at the inception of the hedge relationship to allow those transactions to be identified as the intended “hedged transactions” when they occurred; some of its forecasted transactions related to the acquisitions of assets, or incurrences of liabilities, involved subsequent remeasurements with changes in fair value attributable to the hedged risk reported currently in earnings; and the benchmark index identified for its basis swaps did not meet the definition of a “benchmark interest rate” as that term is defined in SFAS 133. As a result, the Corporation’s designation of its financial derivatives as cash flow hedges for the period from January 1, 2001 to March 31, 2006 did not meet the requirements of SFAS 133. 

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

Critical Accounting Policy and Estimates

The critical accounting policy that is both important to the portrayal of Farmer Mac’s financial condition and results of operations and requires complex, subjective judgments is the accounting policy for the allowance for losses. For a discussion of Farmer Mac’s critical accounting policy, changes implemented in its methodology for determining its allowance for losses during third quarter 2005, as well as Farmer Mac’s 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 Policy and Estimates” in the Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005, as filed with the SEC on November 9, 2006.

 

Results of Operations

 

Overview. Net income available to common stockholders for first quarter 2006 was $15.1 million or $1.32 per diluted common share, compared to $16.4 million or $1.39 per diluted common share for first quarter 2005. The decrease was due principally to the after-tax effects of increased compensation and employee benefits and professional fees.

As part of Farmer Mac’s continuing evaluation of the overall credit quality of its portfolio, the state of the U.S. agricultural economy, the recent upward trends in agricultural land values, and the level of Farmer Mac’s outstanding guarantees and commitments, Farmer Mac determined that the appropriate allowance for losses as of March 31, 2006 was $6.8 million. This resulted in the release of approximately $1.7 million from the allowance for losses in first quarter 2006. As of March 31, 2006, the allowance for losses was $6.8 million and 16 basis points relative to the outstanding post-1996 Act Farmer Mac I portfolio, compared to $8.7 million and 20 basis points as of December 31, 2005 and $16.3 million and 37 basis points as of March 31, 2005.

As of March 31, 2006, Farmer Mac’s 90-day delinquencies (Farmer Mac I loans purchased or placed under Farmer Mac I Guaranteed Securities or LTSPCs after changes to Farmer Mac’s statutory charter in 1996 that were 90 days or more past due, in foreclosure, restructured after delinquency, or in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan) were $28.8 million, representing 0.68 percent of the principal balance of all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, down from $45.8 million (1.04 percent) as of March 31, 2005.

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During first quarter 2006, Farmer Mac:

 

·

added $73.2 million of Farmer Mac I loans under LTSPCs;

·

guaranteed $500.0 million of AgVantage securities;

·

purchased $30.3 million of newly originated and current seasoned Farmer Mac I loans; and

·

purchased $45.1 million of Farmer Mac II USDA-guaranteed portions of loans.

 

As of March 31, 2006, Farmer Mac’s outstanding program volume was $5.6 billion, which represented approximately 12 percent of management’s estimate of a $48.0 billion market of eligible agricultural mortgage loans. In addition, Farmer Mac entered into a $486.7 million LTSPC on April 3, 2006, bringing Farmer Mac’s outstanding program volume to more than $6.0 billion at that time. Farmer Mac’s ongoing guarantee and commitment fee income is earned on the cumulative outstanding principal balance of Farmer Mac Guaranteed Securities and loans underlying LTSPCs. Accordingly, guarantee and commitment fees increase or decrease through changes in periodic business volume in proportion to the change in that cumulative outstanding principal balance, not in proportion to the change in periodic volume.

Set forth below is a more detailed discussion of Farmer Mac’s results of operations.

Net Interest Income. Net interest income was $10.7 million for first quarter 2006, compared to $13.9 million for first quarter 2005. The net interest yield was 100 basis points for the three months ended March 31, 2006, compared to 152 basis points for the three months ended March 31, 2005. Net interest income includes guarantee fees for loans purchased after April 1, 2001 (the effective date of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”)), but not for loans purchased prior to that date. The effect of SFAS 140 was the classification of approximately $0.9 million (8 basis points) of guarantee fee income as interest income for first quarter 2006, compared to $0.9 million (10 basis points) for first quarter 2005.

As discussed in Note 6 to the condensed consolidated financial statements, Farmer Mac accounts for its financial derivatives as undesignated financial derivatives. Accordingly, the Corporation classifies the net interest income and expense realized on financial derivatives as gains and losses on financial derivatives and trading assets. For the three months ended March 31, 2006 and 2005, this classification resulted in the decrease of the net interest yield of 19 basis points and 63 basis points, respectively.

The net interest yields for the three months ended March 31, 2006 and 2005 included the benefits of yield maintenance payments of 9 basis points and 17 basis points, 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. For the three months ended March 31, 2006 and 2005, the after-tax effects of yield maintenance payments on net income and diluted earnings per share were $0.7 million or $0.06 per diluted share and $1.1 million or $0.08 per diluted share, respectively.

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The following table provides information regarding interest-earning assets and funding for the three months ended March 31, 2006 and 2005. The balance of non-accruing loans is included in the average balance of interest-earning loans presented, though no related income is included in the income figures presented. Therefore, as the balance of non-accruing loans increases or decreases, the net interest yield will decrease or increase accordingly. Net interest income and the yield will also fluctuate due to the uncertainty of the timing and size of yield maintenance payments. The average rate earned on cash and cash equivalents reflects the increase in short-term market rates during the latter part of 2005 and first quarter 2006. The increase in the average rate for investments reflects the general increase in short-term rates and the short-term or floating rate nature of most investments acquired or reset during 2005 and first quarter 2006 and outstanding during 2006. The higher average rate on loans and Farmer Mac Guaranteed Securities during first quarter 2006 reflects the increase in market rates during the latter part of 2005 and first part of 2006, which affected the rates on loans acquired or reset during that period and outstanding during first quarter 2006. The higher 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 upward 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 higher market rates during the latter part of 2005 and first quarter 2006 and outstanding during first quarter 2006.

		Three Months Ended
		March 31, 2006									March 31, 2005
		Average Balance			Income/ Expense			Average Rate			Average Balance			Income/ Expense			Average Rate
		(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents		$	593,615		$	6,664			4.49	%	$	485,245		$	2,994			2.47	%
Investments			1,616,628			20,034			4.96	%		1,021,698			9,593			3.76	%
Loans and Farmer Mac
Loans and Farmer Mac Guaranteed Securities			2,060,797			29,420			5.71	%		2,154,734			30,448			5.65	%
Total interest-earning assets			4,271,040			56,118			5.26	%		3,661,677			43,035			4.70	%
Funding:
Notes payable due within one year			2,372,349			25,742			4.34	%		1,819,416			11,259			2.48	%
Notes payable due after one year			1,654,704			19,709			4.76	%		1,647,521			17,895			4.34	%
Total interest-bearing liabilities			4,027,053			45,451			4.51	%		3,466,937			29,154			3.36	%
Net non-interest-bearing funding			243,987									194,740
Total funding		$	4,271,040			45,451			4.26	%	$	3,661,677			29,154			3.18	%
Net interest income/yield					$	10,667			1.00	%				$	13,881			1.52	%

 

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 increases in income due to changes in rate reflect the short-term or adjustable-rate nature of the assets or liabilities and the general increases in short-term market rates.

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		Three Months Ended March 31, 2006
		Compared to Three Months Ended
		March 31, 2005
		Increase/(Decrease) Due to
		Rate			Volume			Total
		(in thousands)
Income from interest-earning assets:
Cash and cash equivalents		$	2,884		$	786		$	3,670
Investments			3,702			6,739			10,441
Loans and Farmer Mac Guaranteed Securities			1,831			(2,859	)		(1,028	)
Total			8,417			4,666			13,083
Expense from interest-bearing liabilities			11,069			5,228			16,297
Change in net interest income		$	(2,652	)	$	(562	)	$	(3,214	)

 

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 $5.0 million for first quarter 2006, the same as for first quarter 2005. The effect of SFAS 140 was the classification as interest income of guarantee fees of $0.9 million for first quarter 2006, the same as for first quarter 2005, although management considers the amounts to have been earned in consideration for the assumption of credit risk. That portion of the difference or “spread” between the cost of Farmer Mac’s debt funding for loans and the yield on post-1996 Act Farmer Mac I Guaranteed Securities held on its books compensates for credit risk. When a post-1996 Act Farmer Mac I Guaranteed Security is sold to a third party, Farmer Mac continues to receive the guarantee fee component of that spread, which continues to compensate Farmer Mac for its assumption of credit risk. The portion of the spread that compensates for interest rate risk would not typically continue to be received by Farmer Mac if the asset were sold, except to the extent attributable to any retained interest-only strip.

Expenses. General and administrative expenses were $2.8 million for first quarter 2006 compared to $2.0 million for first quarter 2005. The increase was largely attributable to increased legal fees related to a $500 million securitization transaction and compliance matters. Compensation and employee benefits were $2.9 million for first quarter 2006, compared to $1.8 million for first quarter 2005. Of this increase, $0.4 million was due to the recognition of compensation expense related to stock option grants outstanding and unvested as of December 31, 2005. For more information on stock option expense and the adoption of SFAS 123(R) on January 1, 2006, see Note 1(e). The remainder of the increase was due to a general increase in staffing during 2005. Regulatory fees assessed by FCA for each of first quarter 2006 and 2005 were $0.6 million. FCA has advised the Corporation that its estimated fees for the federal fiscal year ended September 30, 2006 will be $2.4 million. 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. Farmer Mac expects all of the above-mentioned expenses and regulatory fees to continue at approximately the same levels through 2006.

During first quarter 2006, Farmer Mac released $1.7 million from the allowance for losses, compared to a release of $0.7 million for first quarter 2005. See “—Quantitative and Qualitative Disclosures About Market Risk Management—Credit Risk” for additional information regarding Farmer Mac’s provision for losses, provision for loan losses and Farmer Mac’s methodology for determining its allowance for losses. As of March 31, 2006, Farmer Mac’s total allowance for losses was $6.8 million, or 0.16 percent of outstanding loans held or loans underlying post-1996 Act Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs, compared to $8.7 million and 0.20 percent as of December 31, 2005.

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Gains and Losses on Financial Derivatives and Trading Assets. SFAS 133 requires the change in the fair values of financial derivatives to be reflected in a company’s net income or accumulated other comprehensive income. As discussed in Note 6 to the condensed consolidated financial statements, the Corporation accounts for its financial derivatives as undesignated financial derivatives. The net effect of gains and losses on financial derivatives and trading assets recorded in Farmer Mac’s consolidated statements of operations was a net gain of $11.7 million for first quarter 2006 compared to a net gain of $9.9 million for first quarter 2005.

Effects of SFAS 133. Farmer Mac records financial derivatives at fair value on its balance sheet with the related changes in fair value recognized in the consolidated statement of operations. Although the Corporation’s use of financial derivatives achieves its economic and risk management objectives, its classification of financial derivatives as undesignated hedges under SFAS 133 allows factors unrelated to the economic performance of the Corporation’s business, such as changes in interest rates, to increase the volatility - even the direction - of the Corporation's earnings under accounting principles generally accepted in the United States of America (“GAAP”).

Farmer Mac enters into financial derivative transactions to protect against risk from the effects of market price or interest rate movements on the value of assets, future cash flows and debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term mortgage and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and also to derive an overall lower effective fixed-rate cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market. Specifically, interest rate swaps convert economically the variable cash flows related to the forecasted issuance of short-term debt to effectively fixed-rate medium-term and long-term notes that match the anticipated duration, repricing and interest rate characteristics of the corresponding assets. Since this strategy provides Farmer Mac with approximately the same cash flows as those that are inherent in the issuance of medium-term notes, Farmer Mac uses either the bond market or the swap market based upon their relative pricing efficiencies.

Farmer Mac uses callable interest rate swaps (in conjunction with the issuance of short-term debt) as an alternative to callable medium-term notes with equivalently structured maturities and call options. The call options on the swaps are designed to match the implicit prepayment options on those mortgage assets without prepayment protection. The blended durations of the swaps are also designed to match the duration of the related mortgages over their estimated lives. If the mortgages prepay, the swaps can be called and the short-term debt repaid; if the mortgages do not prepay, the swaps remain outstanding and the short-term debt is rolled over, effectively providing fixed-rate callable funding over the lives of the related mortgages. Thus, the economics of the assets are closely matched to the economics of the interest rate swap and funding combination.

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Non-GAAP Performance Measures. Farmer Mac reports its financial results in accordance with GAAP. In addition to GAAP measures, Farmer Mac presents certain non-GAAP performance measures. Farmer Mac uses these non-GAAP performance measures to develop financial plans, to measure corporate economic performance, and to set incentive compensation because, in management’s view, the non-GAAP measures more accurately represent Farmer Mac’s economic performance, transaction economics and business trends. Investors and the investment analyst community have previously relied upon similar measures to evaluate Farmer Mac’s historical and future performance. Farmer Mac’s disclosure of non-GAAP measures is not intended to replace GAAP information but, rather, to supplement it.

Farmer Mac developed non-GAAP core earnings to present net income less the after-tax effects of SFAS 133. Core earnings for first quarter 2006 were $6.2 million compared to $6.3 million for first quarter 2005. The reconciliation of GAAP net income available to common stockholders to core earnings is presented in the following table:

Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
		Three Months Ended
		March 31, 2006			March 31, 2005
		(in thousands)
GAAP net income available to common stockholders		$	15,091		$	16,385
Less the effects of SFAS 133:
Unrealized gains/(losses) on financial derivavtives and trading assets, net of tax			8,126			9,890
Net effects of settlements on agency forward contracts, net of tax			794			230
Core earnings		$	6,171		$	6,265

 

Business Volume. New business volume for first quarter 2006 was $648.5 million, up from $95.5 million during the same period last year. Included in that new business volume was a January 2006 transaction in which Farmer Mac guaranteed $500.0 million principal amount of AgVantage securities supported by a five-year mortgage-backed obligation of Metropolitan Life Insurance Company backed by agricultural real estate mortgage loans. In addition, on April 3, 2006, Farmer Mac announced it issued an LTSPC to a Farm Credit System (“FCS”) institution on $486.7 million of agricultural real estate mortgage loans. Both of these transactions were products of Farmer Mac’s ongoing efforts to diversify its marketing focus to include large program transactions that emphasize high asset quality, with greater protection against adverse credit performance and commensurately lower compensation for the assumption of credit risk and administrative costs.

Notwithstanding the increased volume in first quarter and the large second quarter transaction noted in the preceding paragraph, Farmer Mac’s new business with agricultural mortgage lenders continues to be constrained by:

 

·

high levels of available capital and liquidity of agricultural lenders;

·

alternative sources of funding and credit enhancement for agricultural lenders;

·

increased competition in the secondary market for agricultural mortgage loans; and

·

reduced growth rates in the agricultural mortgage market, due largely to the strong liquidity of many farmers and ranchers.

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Management believes that legislative or regulatory developments or interpretations of Farmer Mac’s statutory charter could continue to adversely affect Farmer Mac, its ability to offer new products, the ability or motivation of certain lenders to participate in its programs or the terms of any such participation, or increase the cost of regulation and related corporate activities. See “Risk Factors” in Part I, Item 1A of Farmer Mac’s Annual Report on Form 10-K/A for the year ended December 31, 2005, as filed with the SEC on November 9, 2006.

For a more detailed discussion of the above factors and the related effects on Farmer Mac’s business volume, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook for 2006” in the Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2005, as filed with the SEC on November 9, 2006.

Looking ahead, Farmer Mac is developing innovative ways to serve the financing needs of rural America, and remains confident of opportunities for increased business volume and income growth as a result of the Corporation’s product development and customer service efforts. Farmer Mac’s marketing initiatives are generating business opportunities for 2006 and, it believes, beyond. Current initiatives include:

 

·

an alliance with the American Bankers Association (“ABA”), entered into in October 2005, under which Farmer Mac agreed to facilitate access and improve pricing to ABA member institutions and the ABA agreed to promote member participation in the Farmer Mac I program;

·

new and expanded business relationships that will serve a cross-section of agricultural lenders in many areas of the nation;

·

expanded use of AgVantage transactions, targeting highly-rated financial institutions with large agricultural mortgage portfolios;

·

product enhancements, such as open prepayment loan structures;

·

agribusiness and rural development loans associated with agriculture, in fulfillment of Farmer Mac’s Congressional mission;

·

federal and state agricultural finance programs;

·

new loan securitization structures; and

·

increased efforts to adjust the pricing of products to reflect with greater precision the risks assumed by Farmer Mac and the creditworthiness of the obligors on obligations guaranteed by Farmer Mac.

 

Some of the agribusiness and rural development initiatives will require Farmer Mac to consider credit risks that expand upon or differ from those the Corporation has accepted previously. Farmer Mac will use underwriting standards appropriate to those credit risks, and likely will draw upon outside expertise to analyze and evaluate the credit and funding aspects of loans submitted pursuant to those initiatives. While Farmer Mac is seeking to expand its mix of loan types within the scope of its Congressional charter, it is too early to assess the probability of success of these efforts. Farmer Mac believes that prospects for large portfolio transactions similar to those that have accounted for a significant portion of growth in prior years continue to exist, including the previously mentioned January 2006 AgVantage transaction and the April 2006 LTSPC transaction. No assurance can be given at this time as to the certainty or timing of similar transactions in the future.

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The following tables set forth the amount of all Farmer Mac I and Farmer Mac II loan purchase and guarantee activities for newly originated and current seasoned loans during the periods indicated:

					Three Months Ended
					March 31, 2006			March 31, 2005
					(in thousands)
Loan purchase and guarantee and commitment activity:
Farmer Mac I:
Loans					$	30,260		$	18,540
LTSPCs						73,155			33,282
AgVantage securities						500,000			-
Farmer Mac II Guaranteed Securities						45,127			43,634
Total purchases, guarantees and commitments					$	648,542		$	95,456
Farmer Mac I Guaranteed Securities issuances:
Retained					$	-		$	-
Sold						1,485			1,914
Total					$	1,485		$	1,914

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To fulfill its guarantee and commitment obligations, Farmer Mac purchases defaulted loans underlying Farmer Mac Guaranteed Securities and LTSPCs, all of which are at least 90 days delinquent at the time of purchase. 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:

		Three Months Ended
		March 31, 2006			March 31, 2005
		(in thousands)
Farmer Mac I newly originated and current seasoned loan purchases		$	30,260		$	18,540
Defaulted loans purchased underlying off-balance sheet Farmer Mac I Guaranteed Securities			506			1,595
Defaulted loans underlying on-balance sheet Farmer Mac I Guaranteed Securities transferred to loans			599			1,174
Defaulted loans purchased underlying LTSPCs			2,949			630
Total loan purchases		$	34,314		$	21,939