Unassociated Document
As filed with the Securities and Exchange Commission on
November 9, 2009

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, 2009
 
Commission File Number 001-14951
 
 
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
     
Federally chartered instrumentality
of the United States
 
52-1578738
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer identification number)
     
1133 Twenty-First Street, N.W., Suite 600
Washington, D.C.
 
20036
(Address of principal executive offices)
 
(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes     x                  No     ¨

Indicate by check mark whether the registrant 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 2, 2009 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,610,918 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, 2009 and December 31, 2008
 
3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008
 
4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
 
5
Notes to Condensed Consolidated Financial Statements
 
6
 
 
-2-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Assets:
           
Cash and cash equivalents
  $ 274,894     $ 278,412  
Investment securities:
               
Available-for-sale, at fair value
    924,041       1,072,096  
Trading, at fair value
    97,438       163,763  
Total investment securities
    1,021,479       1,235,859  
Farmer Mac Guaranteed Securities:
               
Available-for-sale, at fair value
    2,609,185       1,511,694  
Trading, at fair value
    890,976       939,550  
Total Farmer Mac Guaranteed Securities
    3,500,161       2,451,244  
Loans:
               
Loans held for sale, at lower of cost or fair value
    646,420       66,680  
Loans held for investment, at amortized cost
    85,706       718,845  
Allowance for loan losses
    (4,892 )     (10,929 )
Total loans, net of allowance
    727,234       774,596  
                 
Real estate owned, at lower of cost or fair value
    10,637       606  
Financial derivatives, at fair value
    21,099       27,069  
Interest receivable
    56,206       73,058  
Guarantee and commitment fees receivable
    54,472       61,109  
Deferred tax asset, net
    15,150       87,793  
Prepaid expenses and other assets
    52,399       117,561  
Total Assets
  $ 5,733,731     $ 5,107,307  
                 
Liabilities, Mezzanine Equity and Stockholders' Equity:
               
Liabilities:
               
Notes payable:
               
Due within one year
  $ 3,155,589     $ 3,757,099  
Due after one year
    1,962,591       887,999  
Total notes payable
    5,118,180       4,645,098  
                 
Financial derivatives, at fair value
    127,607       181,183  
Accrued interest payable
    37,388       40,470  
Guarantee and commitment obligation
    48,811       54,954  
Accounts payable and accrued expenses
    44,979       20,532  
Reserve for losses
    7,585       5,506  
Total Liabilities
    5,384,550       4,947,743  
                 
Mezzanine Equity:
               
Series B redeemable preferred stock, par value $1,000, 150,000 shares authorized, issued and outstanding
    144,216       144,216  
Stockholders' Equity:
               
Preferred stock:
               
Series C, stated at redemption/liquidation value, $1,000 per share, 100,000 shares authorized, 57,000 and 9,200 issued and outstanding as of September 30, 2009 and December 31, 2008, respectively
    57,000       9,200  
Common stock:
               
Class A Voting, $1 par value, no maximum authorization
    1,031       1,031  
Class B Voting, $1 par value, no maximum authorization
    500       500  
Class C Non-Voting, $1 par value, no maximum authorization
    8,609       8,601  
Additional paid-in capital
    96,547       95,572  
Accumulated other comprehensive income/(loss)
    18,139       (47,412 )
Retained earnings/(accumulated deficit)
    23,139       (52,144 )
Total Stockholders' Equity
    204,965       15,348  
Total Liabilities, Mezzanine Equity and Stockholders' Equity
  $ 5,733,731     $ 5,107,307  
See accompanying notes to condensed consolidated financial statements.

 
-3-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2009
   
September 30,
2008
   
September 30,
2009
   
September 30,
2008
 
   
(in thousands, except per share amounts)
 
Interest income:
                       
Investments and cash equivalents
  $ 6,345     $ 20,395     $ 22,303     $ 97,305  
Farmer Mac Guaranteed Securities
    27,668       28,470       81,232       67,007  
Loans
    8,815       11,718       28,196       35,192  
Total interest income
    42,828       60,583       131,731       199,504  
Total interest expense
    23,031       39,260       68,593       135,885  
Net interest income
    19,797       21,323       63,138       63,619  
Provision for loan losses
    (3,098 )     (731 )     (939 )     (731 )
Net interest income after provision for loan losses
    16,699       20,592       62,199       62,888  
                                 
Non-interest income/(loss):
                               
Guarantee and commitment fees
    8,168       7,281       23,486       20,574  
(Losses)/gains on financial derivatives
    (7,733 )     (19,021 )     15,506       (29,691 )
Gains/(losses) on trading assets
    25,047       (14,507 )     56,707       (21,664 )
Other-than-temporary impairment losses
    (1,621 )     (97,108 )     (3,994 )     (102,452 )
Gains/(losses) on sale of available-for-sale investment securities
    63       (85 )     2,913       65  
Gains on sale of loans and Farmer Mac Guaranteed Securities
    -       1,531       1,581       1,531  
Gains on repurchase of debt
    -       840       -       840  
Other income
    874       192       1,209       1,315  
Non-interest income/(loss)
    24,798       (120,877 )     97,408       (129,482 )
                                 
Non-interest expense:
                               
Compensation and employee benefits
    2,896       3,748       10,493       11,327  
General and administrative
    2,432       4,061       8,332       8,331  
Regulatory fees
    512       513       1,537       1,538  
Real estate owned operating costs, net
    203       15       208       102  
Provision/(recoveries) for losses
    89       (91 )     2,079       (91 )
Non-interest expense
    6,132       8,246       22,649       21,207  
Income/(loss) before income taxes
    35,365       (108,531 )     136,958       (87,801 )
Income tax expense/(benefit)
    13,097       (2,973 )     47,721       3,463  
Net income/(loss)
    22,268       (105,558 )     89,237       (91,264 )
Preferred stock dividends
    (4,368 )     (578 )     (12,434 )     (1,698 )
Net income/(loss) available to common stockholders
  $ 17,900     $ (106,136 )   $ 76,803     $ (92,962 )
                                 
Earnings/(loss) per common share and dividends:
                               
Basic earnings/(loss) per common share
  $ 1.77     $ (10.55 )   $ 7.58     $ (9.33 )
Diluted earnings/(loss) per common share
  $ 1.74     $ (10.55 )   $ 7.54     $ (9.33 )
Common stock dividends per common share
  $ 0.05     $ 0.10     $ 0.15     $ 0.30  
See accompanying notes to condensed consolidated financial statements.

 
-4-

 

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
   
Nine Months Ended
 
   
September 30,
2009
   
September 30,
2008
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income/(loss)
  $ 89,237     $ (91,264 )
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization of premiums and discounts on loans, investments and Farmer Mac Guaranteed Securities
    3,123       3,752  
Amortization of debt premiums, discounts and issuance costs
    10,982       66,790  
Proceeds from repayment and sale of trading investment securities
    644       6,507  
Purchases of loans held for sale
    (122,421 )     (38,461 )
Proceeds from repayment of loans held for sale
    51,896       14,747  
Net change in fair value of trading securities and financial derivatives
    (104,312 )     30,954  
Amortization of transition adjustment on financial derivatives
    124       222  
Other-than-temporary impairment losses
    3,994       102,452  
Gains on sale of loans and Farmer Mac Guaranteed Securities
    (1,581 )     (1,531 )
Gains on sale of available-for-sale investment securities
    (2,913 )     (65 )
Gains on repurchase of debt
    -       (840 )
Total provision for losses
    3,018       640  
Deferred income taxes
    73,629       (11,316 )
Stock-based compensation expense
    2,159       3,389  
Decrease in interest receivable
    16,852       34,238  
Decrease/(increase) in guarantee and commitment fees receivable
    6,637       (2,581 )
Decrease/(increase) in other assets
    24,287       (41,561 )
Decrease in accrued interest payable
    (3,082 )     (17,484 )
Increase in other liabilities
    11,725       8,911  
Net cash provided by operating activities
    63,998       67,499  
Cash flows from investing activities:
               
Purchases of available-for-sale investment securities
    (41,721 )     (1,160,501 )
Purchases of Farmer Mac Guaranteed Securities
    (1,952,704 )     (305,584 )
Purchases of loans held for investment
    (48,147 )     (86,024 )
Purchases of defaulted loans
    (19,631 )     (1,746 )
Proceeds from repayment of available-for-sale investment securities
    148,544       445,154  
Proceeds from repayment of Farmer Mac Guaranteed Securities
    690,741       219,341  
Proceeds from repayment of loans
    37,308       101,964  
Proceeds from sale of available-for-sale investment securities
    207,879       351,256  
Proceeds from sale of Farmer Mac Guaranteed Securities
    24,232       649,723  
Proceeds from sale of real estate owned
    31,056       -  
Proceeds from sale of loans held
    358,953       -  
Net cash (used in)/provided by investing activities
    (563,490 )     213,583  
Cash flows from financing activities:
               
Proceeds from issuance of discount notes
    40,680,191       105,086,822  
Proceeds from issuance of medium-term notes
    2,962,189       1,486,903  
Payments to redeem discount notes
    (41,077,281 )     (104,926,504 )
Payments to redeem medium-term notes
    (2,103,000 )     (1,979,660 )
Tax benefit from tax deductions in excess of compensation cost recognized
    -       381  
Proceeds from common stock issuance
    29       5,722  
Purchases of common stock
    -       (830 )
Proceeds from preferred stock issuance
    47,800       -  
Dividends paid
    (13,954 )     (4,700 )
Net cash provided by/ (used in) financing activities
    495,974       (331,866 )
Net decrease in cash and cash equivalents
    (3,518 )     (50,784 )
Cash and cash equivalents at beginning of period
    278,412       101,445  
Cash and cash equivalents at end of period
  $ 274,894     $ 50,661  
See accompanying notes to condensed consolidated financial statements.
 
 
-5-

 

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”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations and cash flows of Farmer Mac for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. The December 31, 2008 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2008 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2008 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Farmer Mac evaluated subsequent events through November 9, 2009. Below is a summary of Farmer Mac’s significant accounting policies.

 
-6-

 

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

Farmer Mac considers highly liquid investment securities with original maturities of three months or less at the time of purchase to be cash equivalents.  Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows.  During the three and nine months ended September 30, 2009, Farmer Mac refinanced $100 million and $500 million, respectively, of certain Farmer Mac Guaranteed Securities - Rural Utilities. For the nine months ended September 30, 2009, the cash flows related to these transactions are presented gross in the condensed consolidated statements of cash flows, whereas the six months ended June 30, 2009 reflected a net presentation. The following table sets forth information regarding certain cash and non-cash transactions for the nine months ended September 30, 2009 and 2008.

   
For the Nine Months Ended
 
   
September 30, 2009
   
September 30, 2008
 
   
(in thousands)
 
Cash paid for:
           
Interest
  $ 58,994     $ 88,012  
Income taxes
    10,500       25,069  
Non-cash activity:
               
Transfer of loans held for investment to real estate owned
    41,086       -  
Loans acquired and securitized as Farmer Mac Guaranteed Securities
    17,224       79,757  
Issuance of Series B redeemable preferred stock (net of deferred offering costs)
    -       61,039  
Reclassification of unsettled trades with the Reserve Primary Fund from Cash and cash equivalents to Prepaid expenses and other assets
    -       42,489  
Transfers of investment securities from available-for-sale to trading from the effect of adopting the fair value option
    -       600,468  
Transfers of Farmer Mac II Guaranteed Securities from held-to-maturity to trading from the effect of adopting the fair value option
    -       428,670  
Transfers of Farmer Mac II Guaranteed Securities from held-to-maturity to available for sale
    -       493,997  
Transfers of Farmer Mac I Guaranteed Securities from held-to-maturity to available for sale
    -       25,458  
Transfers of available-for-sale investment securities to available-for-sale Farmer Mac Guaranteed Securities - Rural Utilities
    -       902,420  
Transfers of trading investment securities to trading Farmer Mac Guaranteed Securities - Rural Utilities
    -       459,026  
Transfers of Farmer Mac I Guaranteed Securities to loans held for sale
    288,012       -  
Transfers of loans held for investment to loans held for sale
    617,072       -  
Exchange of GSE preferred stock - transfer from trading to available-for-sale
    90,657       -  
 
(b)  Allowance for Losses

As of September 30, 2009, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held and loans underlying LTSPCs, Farmer Mac I Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities in accordance with ASC 450-20, Loss Contingencies (formerly FASB Statement No. 5) and ASC 310-35, Receivables – Subsequent Measurement (formerly FASB Statement No. 114).

The allowance for losses is increased through periodic provisions for loan losses that are charged against net interest income and provisions for losses that are charged to non-interest expense and is reduced by charge-offs for actual losses, net of recoveries.  Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.
 
-7-

 
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 Farmer Mac’s portfolio of loans 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.

Farmer Mac separately evaluates the cooperative lender obligations of loans and loans underlying its Farmer Mac Guaranteed Securities in its Rural Utilities program to determine if there are probable losses inherent in the securities or the underlying rural utilities loans.

Farmer Mac also analyzes assets in its portfolio for impairment. Farmer Mac’s impaired assets include:
 
 
·
non-performing assets (loans 90 days or more past due, in foreclosure, restructured, in bankruptcy – including loans performing under either their original loan terms or a court-approved bankruptcy plan);
 
·
loans for which Farmer Mac had 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. In the event that the collateral value does not support the total recorded investment, Farmer Mac provides a specific allowance for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. For the remaining impaired assets without updated valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics.
 
-8-

 
Management believes that its use of this methodology produces a reliable estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities.

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, 2009 and 2008:

   
September 30, 2009
   
September 30, 2008
 
   
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
  $ 1,810     $ 7,496     $ 9,306     $ 1,592     $ 2,197     $ 3,789  
Provision/(recovery) for losses
    3,098       89       3,187       731       (91 )     640  
Charge-offs
    (16 )     -       (16 )     -       -       -  
Recoveries
    -       -       -       6       -       6  
Ending balance
  $ 4,892     $ 7,585     $ 12,477     $ 2,329     $ 2,106     $ 4,435  
                                                 
For the Nine Months Ended:
                                               
Beginning balance
  $ 10,929     $ 5,506     $ 16,435     $ 1,690     $ 2,197     $ 3,887  
Provision/(recovery) for losses
    939       2,079       3,018       731       (91 )     640  
Charge-offs
    (7,741 )     -       (7,741 )     (108 )     -       (108 )
Recoveries
    765       -       765       16       -       16  
Ending balance
  $ 4,892     $ 7,585     $ 12,477     $ 2,329     $ 2,106     $ 4,435  
 
No allowance for losses has been provided for loans underlying AgVantage securities or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”).  Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security.  As of September 30, 2009, 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, 2009, Farmer Mac had not experienced any credit losses on any AgVantage securities.  The guaranteed portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the United States Department of Agriculture (“USDA”).  Each USDA guarantee is an obligation backed by the full faith and credit of the United States.  As of September 30, 2009, Farmer Mac had not experienced any credit losses on any Farmer Mac II Guaranteed Securities.
 
-9-

 
The table below summarizes the components of Farmer Mac’s allowance for losses as of September 30, 2009 and December 31, 2008:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Allowance for loan losses
  $ 4,892     $ 10,929  
Reserve for losses:
               
On-balance sheet Farmer Mac I Guaranteed Securities
    -       869  
Off-balance sheet Farmer Mac I Guaranteed Securities
    1,511       535  
LTSPCs
    6,074       4,102  
Farmer Mac Guaranteed Securities - Rural Utilities
    -       -  
Total
  $ 12,477     $ 16,435  
 
As of September 30, 2009, Farmer Mac individually analyzed $44.5 million of its $216.4 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values.  Farmer Mac evaluated the remaining $171.9 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics.  Farmer Mac’s specific allowance for under-collateralized assets was $1.5 million as of September 30, 2009 and $8.6 million as of December 31, 2008.  Farmer Mac’s non-specific or general allowances were $11.0 million as of September 30, 2009 and $7.8 million as of December 31, 2008.

Farmer Mac recognized interest income of approximately $0.4 million and $2.0 million on impaired loans during the three and nine months ended September 30, 2009, respectively, compared to $1.0 million and $3.1 million, respectively, during the same periods in 2008.  During the three and nine months ended September 30, 2009, Farmer Mac’s average investment in impaired loans was $184.6 million and $168.0 million, respectively, compared to $46.9 million and $42.2 million, respectively, for the same periods in 2008.
 
(c)  Financial Derivatives

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows or debt issuance, not for trading or speculative purposes.  Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term loans and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market.  Farmer Mac also recognizes certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative in ASC Topic 815, Derivatives and Hedging (“ASC 815”).
 
-10-

 
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.

The following tables summarize information related to Farmer Mac’s financial derivatives as of September 30, 2009 and December 31, 2008:
 
   
September 30, 2009
 
                                       
Weighted-
 
                     
Weighted-
   
Weighted-
   
Weighted-
   
Average
 
                     
Average
   
Average
   
Average
   
Remaining
 
   
Notional
   
Fair Value
   
Pay
   
Receive
   
Forward
   
Life
 
   
Amount
   
Asset
   
(Liability)
   
Rate
   
Rate
   
Price
   
(in years)
 
   
(dollars in thousands)
 
Interest rate swaps:
                                         
Pay fixed callable
  $ 100,337     $ -     $ (2,664 )     5.74 %     0.45 %           7.65  
Pay fixed non-callable
    1,190,521       -       (121,394 )     5.15 %     0.42 %           4.94  
Receive fixed callable
    325,000       347       (51 )     0.04 %     0.56 %           0.92  
Receive fixed non-callable
    2,601,263       20,702       (778 )     0.53 %     1.77 %           2.04  
Basis swaps
    262,177       533       (3,961 )     1.74 %     1.09 %           2.59  
Agency forwards
    34,551       -       (298 )                     99.04          
Treasury futures
    800       -       (1 )                     118.18          
Credit valuation adjustment
    -       (483 )     1,540                                  
Total financial derivatives
  $ 4,514,649     $ 21,099     $ (127,607 )     1.91 %     1.25 %                

   
December 31, 2008
 
                                   
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
  $ 208,958     $ -     $ (6,646 )     5.51 %     3.23 %       7.66  
Pay fixed non-callable
    1,311,218       -       (169,040 )     5.21 %     3.05 %       5.33  
Receive fixed callable
    606,500       1,727       (65 )     2.91 %     3.20 %       1.28  
Receive fixed non-callable
    1,347,069       25,269       (94 )     2.23 %     2.28 %       1.43  
Basis swaps
    206,863       45       (3,734 )     3.84 %     3.28 %       4.31  
Agency forwards
    74,998       -       (1,604 )                
       105.85
       
Treasury futures
    2,500       28       -                  
       126.88
       
Total financial derivatives
  $ 3,758,106     $ 27,069     $ (181,183 )     3.68 %     2.82 %          
 
-11-

 
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, 2009, 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 $116.6 million.  As of September 30, 2009, Farmer Mac posted assets with a fair value of $37.5 million as collateral for its derivatives in net liability positions.  If Farmer Mac had breached certain provisions of the derivative contracts as of September 30, 2009, it could have been required to settle its obligations under the agreements or post additional collateral of $79.1 million.

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, 2009 and 2008:
 
   
(Losses)/Gains on Financial Derivatives
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2009
   
September 30, 2008
   
September 30, 2009
   
September 30, 2008
 
   
(in thousands)
 
                         
Interest rate swaps
  $ (6,409 )   $ (18,652 )   $ 17,971     $ (29,218 )
Agency forwards
    (1,223 )     (470 )     (2,301 )     (255 )
Treasury futures
    (47 )     148       28       63  
Pay-fixed swaptions
    -       61       -       61  
      (7,679 )     (18,913 )     15,698       (29,349 )
                                 
Amortization of derivatives transition adjustment
    (54 )     (108 )     (192 )     (342 )
Total
  $ (7,733 )   $ (19,021 )   $ 15,506     $ (29,691 )
 
As of September 30, 2009 and December 31, 2008, respectively, Farmer Mac had approximately $0.1 million and $0.2 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive income/(loss) related to the financial derivatives transition adjustment.  These amounts will be reclassified into earnings in the same period or periods during which the hedged forecasted transactions (either the payment of interest or the issuance of discount notes) affect earnings or immediately when it becomes probable that the original hedged forecasted transaction will not occur within two months of the originally specified date.  Over the next 12 months, Farmer Mac estimates that $0.1 million of the amount currently reported in accumulated other comprehensive income/(loss) will be reclassified into earnings.
 
-12-

 
As of September 30, 2009, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with total notional amount of $105.2 million and a fair value of $(3.9) million, compared to $131.9 million and $(3.7) million, respectively, as of December 31, 2008.  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 $0.6 million and $0.2 million on those outstanding basis swaps for the three and nine months ended September 30, 2009, respectively, compared to unrealized gains of $0.2 million and unrealized losses of $0.1 million, respectively, for the same periods in 2008.

(d)  Earnings/(Loss) Per Common Share

Basic earnings/(loss) per common share are based on the weighted-average number of shares of common stock outstanding.  Diluted earnings/(loss) per common share are based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights (“SARs”) and nonvested restricted stock awards.  The following schedule reconciles basic and diluted earnings/(loss) per common share (“EPS”) for the three and nine months ended September 30, 2009 and 2008:
 
   
For the Three Months Ended
 
   
September 30, 2009
   
September 30, 2008
 
   
Net
         
$ per
   
Net
         
$ per
 
   
Income
   
Shares
   
Share
   
Loss
   
Shares
   
Share
 
   
(in thousands, except per share amounts)
 
Basic EPS
                                   
Net income/(loss) available to common stockholders
  $ 17,900       10,140     $ 1.77     $ (106,136 )     10,065     $ (10.55 )
Effect of dilutive securities:
                                               
Stock options, SARs and restricted stock (1)
            146       (0.03 )             -       -  
Diluted EPS
  $ 17,900       10,286     $ 1.74     $ (106,136 )     10,065     $ (10.55 )

(1) 
For the three months ended September 30, 2009 and 2008, stock options, SARs and nonvested restricted stock of 1,590,965 and 2,381,503, respectively, were outstanding but not included in the computation of diluted earnings/(loss) per share of common stock because they were anti-dilutive.

   
For the Nine Months Ended
 
   
September 30, 2009
   
September 30, 2008
 
   
Net
         
$ per
   
Net
         
$ per
 
   
Income
   
Shares
   
Share
   
Loss
   
Shares
   
Share
 
   
(in thousands, except per share amounts)
 
Basic EPS
                                   
Net income/(loss) available to common stockholders
  $ 76,803       10,138     $ 7.58     $ (92,962 )     9,966     $ (9.33 )
Effect of dilutive securities:
                                               
Stock options, SARs and restricted stock (1)
            49       (0.04 )             -       -  
Diluted EPS
  $ 76,803       10,187     $ 7.54     $ (92,962 )     9,966     $ (9.33 )

(1) 
For the nine months ended September 30, 2009 and 2008, stock options, SARs and nonvested restricted stock of 1,784,912 and 2,385,890, respectively, were outstanding but not included in the computation of diluted earnings/(loss) per share of common stock because they were anti-dilutive.
 
-13-

 
(e)  Stock-Based Compensation

In 1997, Farmer Mac adopted a stock option plan for directors, officers and other employees to acquire shares of Class C Non-Voting Common Stock.  Upon stock option exercise, new shares are issued by the Corporation.  Under the plan, stock options awarded vest annually in thirds, with the first third vesting one year after the date of grant.  If not exercised, any options granted under the 1997 plan expire ten years from the date of grant, except that options issued to directors since June 1, 1998, if not exercised, expire five years from the date of grant.  For all stock options granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on or immediately preceding the date of grant.  As of June 30, 2008, the plan had terminated pursuant to its terms and no further grants will be made under it.

During 2008, Farmer Mac’s stockholders approved the 2008 Omnibus Incentive Compensation Plan that 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 and SARs awarded to directors vest fully after approximately one year.  If not exercised or terminated earlier due to the termination of employment or service on the Board, SARs granted to officers or employees expire after ten years and those granted to directors expire after seven years.  For all SARs granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on the date of grant.  SARs granted to officers during June 2009 have an exercise price of $5.93 per share.  There were no SARs granted to directors during 2009. Restricted stock was awarded to directors in June 2009 and vests fully after approximately one year.  Restricted stock awarded to officers in June 2009 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, 2009, Farmer Mac recognized $0.6 million and $2.2 million, respectively, of compensation expense related to stock options, SARs, and restricted stock awards compared to $1.1 million and $3.4 million for the same periods in 2008.
 
-14-

 
The following tables summarize activity related to stock options, SARs and nonvested restricted share awards for the three and nine months ended September 30, 2009 and 2008:

   
September 30, 2009
   
September 30, 2008
 
   
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
    1,755,965     $ 23.06       2,381,503     $ 26.24  
Granted
    -       -       -       -  
Exercised
    -       -       (106,331 )     21.99  
Canceled
    (1,500 )     22.94       (12,667 )     28.50  
Outstanding, end of period
    1,754,465     $ 23.06       2,262,505     $ 26.43  
                                 
For the Nine Months Ended:
                               
Outstanding, beginning of period
    2,237,711     $ 25.54       2,218,199     $ 25.48  
Granted
    165,000       5.93       339,770       28.92  
Exercised
    -       -       (264,297 )     21.43  
Canceled
    (648,246 )     27.27       (31,167 )     28.67  
Outstanding, end of period
    1,754,465     $ 23.06       2,262,505     $ 26.43  
                                 
Stock Options and SARs exercisable at the end of the period
    1,398,262     $ 25.17       1,520,944     $ 25.32  

   
September 30, 2009
   
September 30, 2008
 
         
Weighted-
         
Weighted-
 
   
Nonvested
   
Average
   
Nonvested
   
Average
 
   
Restricted
   
Grant-date
   
Restricted
   
Grant-date
 
   
Stock
   
Fair Value
   
Stock
   
Fair Value
 
For the Three Months Ended:
                       
Outstanding, beginning of period
    200,548     $ 5.93       -     $ -  
Granted
    -       -       -       -  
Canceled
    -       -       -       -  
Outstanding, end of period
    200,548     $ 5.93       -     $ -  
                                 
For the Nine Months Ended:
                               
Outstanding, beginning of period
    -     $ -       -     $ -  
Granted
    200,548       5.93       -       -  
Canceled
    -       -       -       -  
Outstanding, end of period
    200,548     $ 5.93       -     $ -  

The cancellations of stock options during the first nine months of 2009 and 2008 were due to unvested options or SARs terminating and the cancellation of a portion of vested options upon employee and officers’ departures from Farmer Mac.  There were no stock options or SARs exercised during the first nine months of 2009 and 264,297 shares were exercised during the first nine months of 2008.
 
-15-

 
The following tables summarize information regarding stock options, SARs and nonvested restricted stock outstanding as of September 30, 2009:

   
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
    255,000    
9.4 years
      30,000    
9.0 years
      220,500    
9.5 years
 
 10.00 - 14.99
    -    
-
      -    
-
      -    
-
 
 15.00 - 19.99
    81,722    
4.5 years
      81,722    
4.5 years
      81,722    
4.5 years
 
 20.00 - 24.99
    550,588    
4.6 years
      550,588    
4.6 years
      550,588    
4.6 years
 
 25.00 - 29.99
    653,487    
5.1 years
      530,288    
4.5 years
      642,634    
5.0 years
 
 30.00 - 34.99
    213,668    
2.4 years
      205,664    
2.2 years
      211,267    
2.3 years
 
                                                 
      1,754,465               1,398,262               1,706,711          
 
   
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
 
                   
$
5.93
 
       200,548
 
1.4 years
 
       180,493
 
1.4 years
 
 
The weighted-average grant date fair value of options and SARs granted during the nine months ended 2009 and 2008 was $4.12 and $11.33 per share, respectively.  The weighted-average grant date fair value of shares of restricted stock granted during the nine months ended 2009 was $5.93 per share.  No shares of restricted stock were granted in 2008.  The fair values for SARs and stock options were estimated using the Black-Scholes option pricing model based on the following assumptions:
 
   
SARs and Stock Options
 
   
2009
   
2008
 
Risk-free interest rate
    1.5 %     2.5 %
Expected years until exercise
 
7 years
   
6 years
 
Expected stock volatility
    104.3 %     43.2 %

(f)  Reclassifications

Certain reclassifications of prior period information were made to conform to the current period presentation.
 
-16-

 
(g)  Fair Value

Effective January 1, 2008, Farmer Mac adopted the guidelines in ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures (formerly FASB Statement No. 157).  ASC 820 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).  Effective January 1, 2009, Farmer Mac adopted the guidance in ASC 820 related to non-recurring fair value measurements of non-financial assets and liabilities.

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 long-dated volatilities) inputs.

Effective January 1, 2008, Farmer Mac adopted the guidelines in ASC Topic 825 (“ASC 825”), Financial Instruments (formerly FASB Statement No. 159).  ASC 825 provides companies an irrevocable option to report financial instruments at fair value with changes in fair value recorded in earnings as they occur.  On January 1, 2008, Farmer Mac recorded a cumulative effect of adoption adjustment of $12.1 million, net of tax, as an increase to the beginning balance of retained earnings.  The fair value option election was made for certain available-for-sale investment securities and certain Farmer Mac II Guaranteed Securities that were classified as held-to-maturity on January 1, 2008.

See Note 7 for more information regarding fair value measurement.

(h)  New Accounting Standards

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets (“FAS 166”) and FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”).  These statements address amendments to ASC Topic 860 (“ASC 860”), Transfers and Servicing (formerly FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), and to ASC Topic 810 (“ASC 810”), Consolidations (formerly FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities).  The two FASB statements are effective for fiscal years beginning after November 15, 2009.  The statements, amending ASC 860 and ASC 810, remove the concept of a qualifying special-purpose entity (“QSPE”) from ASC 860 and remove the exception from applying ASC 810 to QSPEs.  Although Farmer Mac is currently evaluating the impact of these new accounting standards, Farmer Mac believes the adoption of FAS 166 and FAS 167 will result in the consolidation of assets and liabilities onto Farmer Mac’s balance sheet in connection with trusts that currently qualify for the QSPE exception.  Additionally, interest income and interest expense related to the consolidated assets and liabilities of the trusts will be reflected in the statement of operations. Farmer Mac expects the adoption of FAS 166 and FAS 167 to require the consolidation of additional assets and liabilities on its balance sheet, resulting in an increase in its statutory minimum capital requirement; however, Farmer Mac believes its current capital is adequate to remain in compliance with regulatory capital requirements, absorb the additional capital required upon adoption, and provide sufficient excess capital above the statutory minimum capital requirement for its business needs.
 
 
-17-

 
In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.  This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy).  This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of this guidance did not have a material impact on Farmer Mac’s financial condition, results of operations or cash flows.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”), within ASC 820.  ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques that maximize the use of relevant observable inputs.  The ASU is effective for the first interim or annual reporting period beginning after issuance, which will be fourth quarter 2009.  Farmer Mac does not expect the adoption of this guidance to have a material impact on its financial condition, results of operations or cash flows.
 
 
-18-

 

Note 2.
Investments

The following tables present the amortized cost and estimated fair values of Farmer Mac’s investments as of September 30, 2009 and December 31, 2008.

   
September 30, 2009
 
   
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     $ -     $ (1,365 )   $ 72,735  
Floating rate asset-backed securities
    67,352       140       (41 )     67,451  
Floating rate corporate debt securities
    292,807       9       (2,708 )     290,108  
Floating rate Government/GSE guaranteed mortgage-backed securities
    328,395       798       (1,067 )     328,126  
Fixed rate GSE guaranteed mortgage-backed securities
    6,451       328       -       6,779  
Floating rate GSE subordinated debt
    70,000       -       (9,684 )     60,316  
Fixed rate GSE preferred stock
    90,622       7,904       -       98,526  
Total available-for-sale
    929,727       9,179       (14,865 )     924,041  
                                 
Trading:
                               
Floating rate asset-backed securities
    6,850       -       (5,002 )     1,848  
Fixed rate GSE preferred stock
    89,816       5,774       -       95,590  
Total trading
    96,666       5,774       (5,002 )     97,438  
Total investme