10-Q

As filed with the Securities and Exchange Commission on August 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 June 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)
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           o

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           o

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

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

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

Yes           o                                No           x

As of August 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 8,821,878 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 June 30, 2011 and December 31, 2010	3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010	4
Condensed Consolidated Statements of Equity for the six months ended June 30, 2011 and 2010	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	6
Notes to Condensed Consolidated Financial Statements	7

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	June 30,			December 31,
	2011			2010
	(in thousands)
Assets:
Cash and cash equivalents	$	768,335		$	729,920
Investment securities:
Available-for-sale, at fair value		2,005,714			1,677,233
Trading, at fair value		88,151			86,096
Total investment securities		2,093,865			1,763,329
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value		3,243,965			2,907,264
USDA Guaranteed Securities:
Available-for-sale, at fair value		1,120,397			1,005,679
Trading, at fair value		249,074			311,765
Total USDA Guaranteed Securities		1,369,471			1,317,444
Loans:
Loans held for sale, at lower of cost or fair value		447,087			1,212,065
Loans held for investment, at amortized cost		1,168,995			90,674
Loans held for investment in consolidated trusts, at amortized cost		1,182,408			1,265,663
Allowance for loan losses		(11,053	)		(9,803	)
Total loans, net of allowance		2,787,437			2,558,599
Real estate owned, at lower of cost or fair value		4,067			1,992
Financial derivatives, at fair value		43,976			41,492
Interest receivable		88,852			90,295
Guarantee and commitment fees receivable		31,824			34,752
Deferred tax asset, net		3,591			14,530
Prepaid expenses and other assets		9,445			20,297
Total Assets	$	10,444,828		$	9,479,914
Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year	$	5,201,832		$	4,509,419
Due after one year		3,744,877			3,430,656
Total notes payable		8,946,709			7,940,075
Debt securities of consolidated trusts held by third parties		755,357			827,411
Financial derivatives, at fair value		109,151			113,687
Accrued interest payable		56,152			57,131
Guarantee and commitment obligation		27,628			30,308
Accounts payable and accrued expenses		21,781			22,113
Reserve for losses		7,443			10,312
Total Liabilities		9,924,221			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, 8,812,500 shares outstanding
as of June 30, 2011 and 8,752,711 shares outstanding as of December 31, 2010		8,813			8,753
Additional paid-in capital		101,097			100,050
Accumulated other comprehensive income		36,436			18,275
Retained earnings		73,299			50,837
Total Stockholders' Equity		278,754			237,024
Non-controlling interest - preferred stock		241,853			241,853
Total Equity		520,607			478,877
Total Liabilities and Equity	$	10,444,828		$	9,479,914

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011				June 30, 2010
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	7,033		$	6,390		$	14,220		$	12,873
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		29,358			18,795			57,133			39,626
Loans		30,461			32,142			59,571			65,560
Total interest income		66,852			57,327			130,924			118,059
Total interest expense		37,640			35,719			74,693			72,834
Net interest income		29,212			21,608			56,231			45,225
(Provision for)/release of loan losses		(160	)		1,870			(1,441	)		(980	)
Net interest income after (provision for)/release of loan losses		29,052			23,478			54,790			44,245
Non-interest (loss)/income:
Guarantee and commitment fees		6,320			5,710			12,707			11,629
Losses on financial derivatives		(17,806	)		(15,840	)		(13,801	)		(21,644	)
Gains on trading assets		1,968			5,058			3,279			8,425
Gains on sale of available-for-sale investment securities		38			-			195			240
Gains on sale of real estate owned		627			-			724			-
Lower of cost or fair value adjustment on loans held for sale		(156	)		90			(964	)		(2,184	)
Other income		1,124			211			5,022			1,040
Non-interest (loss)/income		(7,885	)		(4,771	)		7,162			(2,494	)
Non-interest expense:
Compensation and employee benefits		4,666			3,907			9,163			7,418
General and administrative		2,656			2,051			4,912			4,554
Regulatory fees		573			562			1,164			1,125
Real estate owned operating costs, net		231			298			599			308
(Release of)/provision for losses		(935	)		3,043			(2,869	)		1,575
Other expense		-			-			900			-
Non-interest expense		7,191			9,861			13,869			14,980
Income before income taxes		13,976			8,846			48,083			26,771
Income tax expense		2,539			756			12,056			5,092
Net income		11,437			8,090			36,027			21,679
Less: Net income attributable to non-controlling interest -
preferred stock dividends		(5,547	)		(5,546	)		(11,094	)		(9,614	)
Net income attributable to Farmer Mac		5,890			2,544			24,933			12,065
Preferred stock dividends		(720	)		(720	)		(1,440	)		(2,690	)
Loss on retirement of preferred stock		-			-			-			(5,784	)
Net income available to common stockholders	$	5,170		$	1,824		$	23,493		$	3,591
Earnings per common share and dividends:
Basic earnings per common share	$	0.50		$	0.18		$	2.28		$	0.35
Diluted earnings per common share	$	0.48		$	0.17		$	2.20		$	0.34
Common stock dividends per common share	$	0.05		$	0.05		$	0.10		$	0.10

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

	For the Six Months Ended
	June 30, 2011					June 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		58		58			121		121
Exercise of stock options and SARs		2		2			13		13
Balance, end of period		10,344	$	10,344			10,276	$	10,276
Additional paid-in capital:
Balance, beginning of period			$	100,050				$	97,090
Stock-based compensation expense				1,490					1,507
Issuance of Class C common stock				15					22
Exercise, vesting and cancellation of stock options,
SARs and restricted stock				(458	)				306
Balance, end of period			$	101,097				$	98,925
Retained earnings:
Balance, beginning of period			$	50,837				$	28,127
Net income attributable to Farmer Mac				24,933					12,065
Cash dividends:
Preferred stock, Series B ($8.33 per share)				-					(1,250	)
Preferred stock, Series C ($25.00 per share)				(1,440	)				(1,440	)
Common stock ($0.10 per share)				(1,031	)				(1,020	)
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			$	73,299				$	33,377
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				18,161					28,163
Change in unrealized gain on financial derivatives,
net of tax and reclassification adjustments				-					52
Balance, end of period			$	36,436				$	31,469
Total Stockholders' Equity			$	278,754				$	231,625
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			$	520,607				$	473,478
Comprehensive income:
Net income			$	36,027				$	21,679
Change in accumulated other comprehensive income, net of tax				18,161					28,215
Comprehensive income			$	54,188				$	49,894
Less: Comprehensive income attributable to non-controlling interest				11,094					9,614
Total comprehensive income			$	43,094				$	40,280

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Six Months Ended
	June 30, 2011			June 30, 2010
				(restated)
	(in thousands)
Cash flows from operating activities:
Net income	$	36,027		$	21,679
Adjustments to reconcile net income to net cash used in operating activities:
Net amortization of premiums and discounts on loans, investments, and
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		9,365			6,150
Amortization of debt premiums, discounts and issuance costs		5,765			3,033
Net change in fair value of trading securities, financial derivatives and loans held for sale		(10,299	)		(5,288	)
Amortization of deferred gains on certain Farmer Mac Guaranteed
Securities and USDA Guaranteed Securities		(4,036	)		-
Gains on the sale of available-for-sale investment securities		(195	)		(240	)
Gains on the sale of real estate owned		(724	)		-
Total (release of)/provision for losses		(1,428	)		2,555
Deferred income taxes		393			(3,347	)
Stock-based compensation expense		1,490			1,508
Proceeds from repayment and sale of trading investment securities		550			400
Purchases of loans held for sale		(119,410	)		(293,003	)
Proceeds from repayment of loans purchased as held for sale		51,012			15,242
Net change in:
Interest receivable		1,434			(5,438	)
Guarantee and commitment fees receivable		2,928			18,437
Other assets		12,650			(2,496	)
Accrued interest payable		(979	)		13,351
Other liabilities		(3,976	)		(19,294	)
Net cash used in operating activities		(19,433	)		(246,751	)
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(990,568	)		(306,239	)
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		(1,016,815	)		(216,302	)
Purchases of loans held for investment		(329,782	)		(19,924	)
Purchases of defaulted loans		(18,345	)		(3,403	)
Proceeds from repayment of available-for-sale investment securities		511,562			112,337
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		647,701			202,526
Proceeds from repayment of loans purchased as held for investment		181,792			173,921
Proceeds from sale of available-for-sale investment securities		153,609			69,175
Proceeds from sale of trading securities - fair value option		-			5,013
Proceeds from sale of Farmer Mac Guaranteed Securities		10,734			12,906
Proceeds from sale of real estate owned		1,279			-
Net cash (used in)/provided by investing activities		(848,833	)		30,010
Cash flows from financing activities:
Proceeds from issuance of discount notes		34,663,582			31,919,565
Proceeds from issuance of medium-term notes		991,849			1,006,272
Payments to redeem discount notes		(34,114,562	)		(32,095,725	)
Payments to redeem medium-term notes		(540,000	)		(908,590	)
Excess tax benefits related to stock-based awards		144			747
Payments to third parties on debt securities of consolidated trusts		(80,783	)		(113,749	)
Proceeds from common stock issuance		16			168
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		(11,094	)		(9,551	)
Dividends paid on common and preferred stock		(2,471	)		(3,710	)
Net cash provided by/(used in) financing activities		906,681			(112,720	)
Net increase/(decrease) in cash and cash equivalents		38,415			(329,461	)
Cash and cash equivalents at beginning of period		729,920			654,794
Cash and cash equivalents at end of period	$	768,335		$	325,333

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Accounting Policies

The interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented.  Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations.  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 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 Securities and Exchange Commission, and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the Farmer Mac II program – primarily the acquisition of 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.

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A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities.  When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished.  For Farmer Mac Guaranteed Securities in the Corporation’s portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC.  The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the condensed consolidated statements of operations.  These guarantee fees totaled $2.0 million and $4.1 million for the three and six months ended June 30, 2011, respectively, compared to $1.5 million and $3.2 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 six months ended June 30, 2011 and 2010.

	For the Six Months Ended
	June 30, 2011		June 30, 2010
	(in thousands)
Cash paid during the period for:
Interest	$	49,261	$	37,989
Income taxes		11,500		12,000
Non-cash activity:
Real estate owned acquired through loan liquidation		2,639		3,580
Loans acquired and securitized as loans held for investment in consolidated trusts		8,729		1,288
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to
loans held for investment in consolidated trusts		8,729		1,401,659
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to
debt securities of consolidated trusts held by third parties		8,729		1,401,659
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		-

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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, on Amendment No.1 of Form 10-K/A filed 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 to 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 are reduced by charge-offs for actual losses, net of recoveries.  Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.

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

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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 half 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.

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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 June 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.

           As of June 30, 2011 and 2010, Farmer Mac’s specific allowances for losses were $7.5 million and $3.0 million, respectively.

-11-

Allowance for Losses

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

	June 30, 2011									June 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	$	11,084		$	8,378		$	19,462		$	9,142		$	6,427	$	15,569
Provision for/(release of) losses		160			(935	)		(775	)		(1,870	)		3,043		1,173
Charge-offs		(191	)		-			(191	)		-			-		-
Recoveries		-			-			-			2,223			-		2,223
Ending Balance	$	11,053		$	7,443		$	18,496		$	9,495		$	9,470	$	18,965
For the Six Months Ended:
Beginning Balance	$	9,803		$	10,312		$	20,115		$	6,292		$	7,895	$	14,187
Provision for/(release of) losses		1,441			(2,869	)		(1,428	)		980			1,575		2,555
Charge-offs		(191	)		-			(191	)		-			-		-
Recoveries		-			-			-			2,223			-		2,223
Ending Balance	$	11,053		$	7,443		$	18,496		$	9,495		$	9,470	$	18,965

During second quarter 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.2 million and releases from its reserve for losses of $0.9 million.  The net release from the allowance for losses in second quarter 2011 was primarily due to a decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries.  Farmer Mac also charged off $0.2 million of losses upon acquisition of real estate owned (“REO”) during second quarter 2011.  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 six months ended June 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.

During second quarter 2010, Farmer Mac recorded releases from its allowance for loan losses of $1.9 million and provisions to its reserve for losses of $3.0 million.  Farmer Mac also recorded recoveries of $2.2 million on a loan secured by an ethanol plant during second quarter 2010.  For the six months ended June 30, 2010, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $1.0 million and $1.6 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 the new consolidation guidance in first quarter 2010.

Farmer Mac’s reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of June 30, 2011 were $0.5 million and $6.9 million, respectively, compared to $0.6 million and $9.7 million, respectively as of December 31, 2010.

-12-

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

	As of June 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	$	1,771,634		$	813,080		$	1,138,248		$	259,825	$	218,938		$	19,322		$	4,221,047
Evaluated individually
for impairment		31,611			30,788			13,553			11,532		6,316			1,140			94,940
	$	1,803,245		$	843,868		$	1,151,801		$	271,357	$	225,254		$	20,462		$	4,315,987
Allowance for Losses:
Evaluated collectively
for impairment	$	1,637		$	1,204		$	1,118		$	782	$	6,250		$	8		$	10,999
Evaluated individually
for impairment		2,078			2,599			656			313		1,850			1			7,497
	$	3,715		$	3,803		$	1,774		$	1,095	$	8,100		$	9		$	18,496
For the Three Months Ended:
Beginning balance	$	3,922		$	3,802		$	1,850		$	1,053	$	8,823		$	12		$	19,462
Provision for/(release of) losses		(31	)		8			(68	)		42		(723	)		(3	)		(775	)
Charge-offs		(176	)		(7	)		(8	)		-		-			-			(191	)
Ending balance	$	3,715		$	3,803		$	1,774		$	1,095	$	8,100		$	9		$	18,496
For the Six Months Ended:
Beginning balance	$	3,572		$	3,537		$	2,749		$	445	$	9,797		$	15		$	20,115
Provision for/(release of) losses		319			273			(967	)		650		(1,697	)		(6	)		(1,428	)
Charge-offs		(176	)		(7	)		(8	)		-		-			-			(191	)
Ending balance	$	3,715		$	3,803		$	1,774		$	1,095	$	8,100		$	9		$	18,496

-13-

	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 $0.3 million and $1.1 million on impaired loans during the three months and six months ended June 30, 2011, respectively, compared to $0.4 million and $0.9 million, respectively, for the same periods in 2010.  During the three and six months ended June 30, 2011, Farmer Mac’s average investment in impaired loans was $89.1 million and $94.4 million, respectively, compared to $115.7 million and $124.3 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 June 30, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2011.

-14-

	As of June 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	$	12,586	$	10,134	$	7,135	$	3,056	$	-	$	964	$	33,875
Unpaid principal balance		12,797		9,574		7,570		3,063		-		902		33,906
With a specific allowance:
Recorded investment		20,017		20,743		6,133		8,575		6,316		240		62,024
Unpaid principal balance		18,814		21,214		5,983		8,469		6,316		238		61,034
Associated allowance		2,078		2,599		656		313		1,850		1		7,497
Total:
Recorded investment		32,603		30,877		13,268		11,631		6,316		1,204		95,899
Unpaid principal balance		31,611		30,788		13,553		11,532		6,316		1,140		94,940
Associated allowance		2,078		2,599		656		313		1,850		1		7,497
For the Three Months Ended June 30, 2011:
Average recorded investment
in impaired loans		30,040		29,531		12,990		9,391		6,458		723		89,133
Income recognized
on impaired loans		59		186		29		19		-		-		293
For the Six Months Ended June 30, 2011:
Average recorded investment
in impaired loans		32,016		30,188		14,597		10,235		6,578		817		94,431
Income recognized
on impaired loans		215		213		246		60		382		-		1,116
Recorded investment of loans on non accrual status:		9,865		25,060		3,422		5,244		-		-		43,591

	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

-15-

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 six months ended June 30, 2011, Farmer Mac purchased 5 defaulted loans having an unpaid principal balance of $1.4 million and 13 defaulted loans having an unpaid principal balance of $18.3 million, respectively, from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs.  During the three and six months ended June 30, 2010, Farmer Mac purchased 2 defaulted loans  having an unpaid principal balance of $0.9 million and 7 defaulted loans having an unpaid principal balance of $3.4 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 Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
	(in thousands)
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities	$	-	$	-	$	1,369	$	2,323
Defaulted loans purchased
underlying LTSPCs		1,420		913		16,976		1,080
Total defaulted loan purchases	$	1,420	$	913	$	18,345	$	3,403

-16-

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 June 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 June 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	$	1,705,342	$	758,248	$	997,538	$	239,603	$	116,498	$	17,797	$	3,835,026
Other assets especially mentioned ("OAEM") (2)		51,229		31,452		94,127		13,380		64,435		1,296		255,919
Substandard (2)		46,674		54,168		60,136		18,374		44,321		1,369		225,042
Total	$	1,803,245	$	843,868	$	1,151,801	$	271,357	$	225,254	$	20,462	$	4,315,987
Commodity analysis of past due loans (1)
Greater than 90 days	$	17,060	$	22,072	$	7,773	$	7,077	$	-	$	651	$	54,633
In bankruptcy and REO		5,099		4,683		1,618		1,221		-		-		12,621
Total non-performing	$	22,159	$	26,755	$	9,391	$	8,298	$	-	$	651	$	67,254

(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 $4.1 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.

-17-

	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 geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs as of June 30, 2011 and December 31, 2010:

	June 30,		December 31,
	2011		2010
	(in thousands)
By commodity/collateral type:
Crops	$	1,803,245	$	1,731,380
Permanent plantings		843,868		865,475
Livestock		1,151,801		1,146,458
Part-time farm		271,357		291,145
AgStorage and processing
(including ethanol facilities)		225,254		246,723
Other		20,462		22,939
Total	$	4,315,987	$	4,304,120
By geographic region (1):
Northwest	$	768,974	$	660,845
Southwest		1,578,702		1,626,398
Mid-North		928,976		934,879
Mid-South		502,724		521,294
Northeast		300,177		317,715
Southeast		236,434		242,989
Total	$	4,315,987	$	4,304,120
By original loan-to-value ratio:
0.00% to 40.00%	$	1,034,365	$	1,030,580
40.01% to 50.00%		772,677		770,744
50.01% to 60.00%		1,241,290		1,246,675
60.01% to 70.00%		1,067,894		1,056,132
70.01% to 80.00%		147,255		155,363
80.01% to 90.00%		52,506		44,626
Total	$	4,315,987	$	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, 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.

-20-

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

	June 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	$	1,721,842	$	2,317		$	(107,896	)		3.96	%		0.27	%				3.87
Receive fixed non-callable		3,305,910		41,976			(20	)		0.38	%		1.24	%				1.35
Receive fixed callable		100,000		76			-			0.19	%		0.48	%				0.82
Basis swaps		319,117		163			(1,763	)		0.92	%		0.40	%				1.62
Credit default swaps		30,000		-			(118	)		1.00	%		0.00	%				0.56
Agency forwards		17,248		266			-									113.41
Treasury futures		4,200		28			-									122.99
Credit valuation adjustment		-		(850	)		646
Total financial derivatives	$	5,498,317	$	43,976		$	(109,151	)

	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 June 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 $87.2 million.  As of June 30, 2011, Farmer Mac posted cash of $5.1 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.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2011, it could have been required to settle its obligations under the agreements or post additional collateral of $82.1 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 six months ended June 30, 2011 and 2010:

	Losses on Financial Derivatives
	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(in thousands)
Interest rate swaps	$	(16,451	)	$	(14,624	)	$	(11,721	)	$	(19,390	)
Agency forwards		(1,153	)		(1,339	)		(2,001	)		(1,938	)
Treasury futures		(211	)		(393	)		(26	)		(641	)
Credit default swaps		9			561			(53	)		405
		(17,806	)		(15,795	)		(13,801	)		(21,564	)
Amortization of derivatives transition adjustment		-			(45	)		-			(80	)
Total	$	(17,806	)	$	(15,840	)	$	(13,801	)	$	(21,644	)

As of June 30, 2011, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $74.1 million and a fair value of $(1.8) 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 $0.1 million and unrealized gains of $1.6 million on those outstanding basis swaps for the three and six months ended June 30, 2011, respectively, compared to unrealized losses of $0.1 million and $25,000, respectively, for the same periods in 2010.

-22-

(d)       Earnings Per Common Share

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

	For the Three Months Ended
	June 30, 2011							June 30, 2010
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available
to common stockholders	$	5,170		10,343	$	0.50		$	1,824		10,210	$	0.18
Effect of dilutive securities(1):
Stock options, SARs
and restricted stock				376		(0.02	)				400		(0.01	)
Diluted EPS	$	5,170		10,719	$	0.48		$	1,824		10,610	$	0.17

(1) For the three months ended June 30, 2011 and 2010, stock options and SARs of 652,234 and 1,650,050, 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 June 30, 2011 and 2010, contingent shares of non-vested restricted stock of 170,760 and 126,000, respectively, were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

	For the Six Months Ended
	June 30, 2011							June 30, 2010
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available
to common stockholders	$	23,493		10,314	$	2.28		$	3,591		10,177	$	0.35
Effect of dilutive securities(1):
Stock options, SARs
and restricted stock				378		(0.08	)				354		(0.01	)
Diluted EPS	$	23,493		10,692	$	2.20		$	3,591		10,531	$	0.34

(1) For the six months ended June 30, 2011 and 2010, stock options and SARs of 705,515 and 1,616,008, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the six months ended June 30, 2011 and 2010, contingent shares of non-vested restricted stock of 148,380 and 104,250, respectively, were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

(e)       Stock-Based Compensation

Farmer Mac’s 2008 Omnibus Incentive Compensation Plan authorizes the grants of restricted stock, stock options and SARs, among other alternative forms of equity-based compensation, to directors, officers and other employees.  SARs awarded to officers and employees vest annually in thirds.  If not exercised or terminated earlier due to the termination of employment, SARs granted to officers or employees expire after ten years.  For all SARs granted, the exercise price is equal to the closing price of Farmer Mac’s Class C Non-Voting Common Stock on the date of grant.  SARs granted to officers in second quarter 2011 have an exercise price of $18.77.  As of June 30, 2011, there were no outstanding SARs awarded to directors.  Restricted stock awarded to directors during second quarter 2011 vests fully on March 31, 2012, approximately one year after grant.  Restricted stock awarded to officers during second quarter 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.

-23-

For the three and six months ended June 30, 2011, Farmer Mac recognized $0.8 million and $1.5 million, respectively, of compensation expense related to stock options, SARs and restricted stock, compared to $0.8 million and $1.5 million, respectively, for the same periods in 2010.

-24-

The following tables summarize activity related to stock options, SARs and nonvested restricted stock awards for the three and six months ended June 30, 2011 and 2010:

	June 30, 2011					June 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		1,322,461		$	19.37		1,799,465		$	22.68
Granted		113,000			18.77		247,000			12.20
Exercised		-			-		(21,331	)		13.15
Canceled		(106,561	)		28.83		(102,084	)		20.88
Outstanding, end of period		1,328,900		$	18.57		1,923,050		$	21.53
For the Six 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		(5,667	)		7.48		(21,331	)		13.15
Canceled		(702,566	)		25.79		(102,084	)		20.88
Outstanding, end of period		1,328,900		$	18.57		1,923,050		$	21.53
Options and SARs
exercisable at end of period		886,237		$	21.68		1,433,792		$	25.04

	June 30, 2011					June 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		126,000		$	8.47		200,548		$	5.93
Granted		73,060			18.77		111,085			12.28
Canceled		-			-		(11,599	)		8.15
Vested and issued		-			-		(118,048	)		5.93
Outstanding, end of period		199,060		$	12.25		181,986		$	9.66
For the Six Months Ended:
Outstanding, beginning of period		182,609		$	9.63		200,548		$	5.93
Granted		73,060			18.77		111,085			12.28
Canceled		-			-		(11,599	)		8.15
Vested and issued		(56,609	)		12.22		(118,048	)		5.93
Outstanding, end of period		199,060		$	12.25		181,986		$	9.66

The cancellations of stock options, SARs and nonvested restricted stock during the first six months of 2011 were due to vested options terminating unexercised on their expiration dates.

For the three and six months ended June 30, 2011 adjustments 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 $0.3 million for the three and six months ended June 30, 2010.  The reduction of income taxes to be paid as a result of the deduction for exercises of stock options and SARs was $0.4 million for the six months ended June 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 the three and six months ended June 30, 2010.

-25-

The following tables summarize information regarding stock options, SARs and nonvested restricted stock outstanding as of June 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		261,666	7.8 years		151,670	7.8 years		238,667	7.8 years
10.00 - 14.99		302,000	8.8 years		82,333	8.8 years		269,030	8.8 years
15.00 - 19.99		163,786	7.7 years		50,786	3.1 years		155,876	7.6 years
20.00 - 24.99		172,289	3.7 years		172,289	3.7 years		172,289	3.7 years
25.00 - 29.99		400,159	4.3 years		400,159	4.3 years		400,159	4.3 years
30.00 - 34.99		29,000	5.2 years		29,000	5.2 years		29,000	5.2 years
		1,328,900			886,237			1,265,021
	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	1.0 years		67,500	1.0 years
10.00 - 14.99		51,000	2.0 years		45,900	2.0 years
15.00 - 19.99		73,060	2.2 years		63,024	2.2 years
		199,060			176,424

The weighted-average grant date fair value of SARs granted during the first six months of 2011 and 2010 were $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%

(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).

-26-

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.

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 new 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 new 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.

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.

-27-

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 that 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 June 30, 2011, these Farmer Mac Guaranteed Securities trusts and investment securities trusts have carrying amounts on the condensed consolidated balance sheet totaling $1.8 billion and $867.6 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 $2.7 billion as of June 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 will be effective for third quarter 2011 reporting).  The troubled debt restructuring disclosures in ASU 2010-20 also will be effective in third quarter 2011.  Farmer Mac does not expect the adoption of these standards to 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 significant impact on Farmer Mac’s 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.

(i)       Reclassifications

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

-29-

Note 2. Investment Securities

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

	June 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	$	-	$	(9,418	)	$	64,682
Floating rate asset-backed securities		162,347		224		(37	)		162,534
Floating rate corporate debt securities		112,999		300		(9	)		113,290
Fixed rate corporate debt securities		34,322		60		-			34,382
Floating rate Government/GSE
guaranteed mortgage-backed securities		629,773		4,417		(218	)		633,972
Fixed rate GSE guaranteed mortgage-backed
securities		3,852		315		-			4,167
Floating rate GSE subordinated debt		70,000		-		(7,435	)		62,565
Fixed rate GSE preferred stock		79,838		2,539		-			82,377
Fixed rate senior agency debt		13,000		1		-			13,001
Fixed rate U.S. Treasuries		834,128		619		(3	)		834,744
Total available-for-sale		2,014,359		8,475		(17,120	)		2,005,714
Trading:
Floating rate asset-backed securities		5,411		-		(3,202	)		2,209
Fixed rate GSE preferred stock		83,406		2,536		-			85,942
Total trading		88,817		2,536		(3,202	)		88,151
Total investment securities	$	2,103,176	$	11,011	$	(20,322	)	$	2,093,865

	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

-30-

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

During the three and six months ended June 30, 2011, Farmer Mac received proceeds of $75.1 million and $153.6 million, respectively,  from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $38,000 and $0.2 million, respectively.  During the three months ended June 30, 2010, Farmer Mac did not receive any proceeds from the sale of securities from its available-for-sale investment portfolio.  During the six months ended June 30, 2010, Farmer Mac received proceeds of $69.2 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.4 million and gross realized losses of $0.2 million.

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

	June 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	$	-	$	-		$	49,992	$	(9	)
Floating rate asset-backed securities		9,970		(37	)		-		-
Floating rate auction-rate certificates backed
by Government guaranteed student loans		-		-			64,682		(9,418	)
Floating rate Government/GSE
guaranteed mortgage-backed securities		64,058		(216	)		518		(2	)
Floating rate GSE subordinated debt		-		-			62,565		(7,435	)
Fixed rate U.S. Treasuries		65,603		(3	)		-		-
Total	$	139,631	$	(256	)	$	177,757	$	(16,864	)
	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	)

-31-

The temporary unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to June 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 June 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 30 and 47 individual investment securities as of June 30, 2011 and December 31, 2010, respectively.

As of June 30, 2011, 12 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $16.9 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 June 30, 2011 that is, on average, approximately 91 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 June 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 June 30, 2011 and December 31, 2010.  As of June 30, 2011, Farmer Mac owned trading investments with an amortized cost of $88.8 million, a fair value of $88.2 million, and a weighted-average yield of 8.14 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 June 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 June 30, 2011
	Amortized				Weighted-
	Cost		Fair Value		Average Yield
	(dollars in thousands)
Due within one year	$	920,611	$	921,252	1.01%
Due after one year through five years		80,217		80,558	1.77%
Due after five years through ten years		418,586		420,553	1.13%
Due after ten years		594,945		583,351	2.52%
Total	$	2,014,359	$	2,005,714	1.51%

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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 June 30, 2011 and December 31, 2010.

	June 30, 2011
	Available-
	for-Sale			Trading			Total
	(in thousands)
Farmer Mac I	$	1,759,205		$	-		$	1,759,205
Farmer Mac II		36,530			-			36,530
Rural Utilities		1,448,230			-			1,448,230
Farmer Mac Guaranteed Securities		3,243,965			-			3,243,965
USDA Guaranteed Securities		1,120,397			249,074			1,369,471
Total	$	4,364,362		$	249,074		$	4,613,436
Amortized cost	$	4,306,533		$	252,697		$	4,559,230
Unrealized gains		60,697			322			61,019
Unrealized losses		(2,868	)		(3,945	)		(6,813	)
Fair value	$	4,364,362		$	249,074		$	4,613,436
	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 changes in interest rates from the date of acquisition to June 30, 2011 and December 31, 2010, as applicable.  As of June 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 June 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.

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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 six months ended June 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 June 30, 2011 and December 31, 2010.

	June 30,			December 31,
	2011			2010
	(dollars in thousands)
Fair value of beneficial interests retained in
Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities	$	4,613,436		$	4,224,708
Weighted-average remaining life (in years)		3.7			3.5
Weighted-average prepayment speed (annual rate)		3.0	%		3.5	%
Effect on fair value of a 10% adverse change	$	(205	)	$	(18	)
Effect on fair value of a 20% adverse change	$	(418	)	$	(17	)
Weighted-average discount rate		2.5	%		2.3	%
Effect on fair value of a 10% adverse change	$	(27,998	)	$	(20,257	)
Effect on fair value of a 20% adverse change	$	(55,912	)	$	(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.

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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.

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

Outstanding Balance of Loans, Loans Underlying Farmer Mac
Guaranteed Securities and LTSPCs, and USDA Guaranteed Securities
	June 30,		December 31,
	2011		2010
	(in thousands)
On-balance sheet:
Farmer Mac I:
Loans	$	1,171,522	$	972,206
Loans held in trusts:
Beneficial interests owned by Farmer Mac		829		3,697
Beneficial interests owned by third party investors		748,843		821,411
Farmer Mac Guaranteed Securities - AgVantage		1,741,500		941,500
Farmer Mac II:
USDA Guaranteed Securities		1,343,480		1,297,439
Farmer Mac Guaranteed Securities		37,283		39,856
Rural Utilities:
Loans		451,741		339,963
Loans held in trusts:
Beneficial interests owned by Farmer Mac		393,572		400,228
Farmer Mac Guaranteed Securities - AgVantage		1,410,800		1,887,200
Total on-balance sheet	$	7,299,570	$	6,703,500
Off-balance sheet:
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
LTSPCs		1,694,470		1,754,597
Farmer Mac Guaranteed Securities		696,257		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,120		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		18,080		15,292
Total off-balance sheet	$	4,898,927	$	5,513,209
Total	$	12,198,497	$	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.

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

	For the Three Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
	(in thousands)
Unpaid principal balance at acquisition date	$	1,420	$	913	$	18,345	$	3,403
Contractually required payments
receivable		1,420		913		18,392		3,470
Impairment recognized subsequent
to acquisition		-		359		3,770		1,740
Recovery/release of allowance for defaulted
loans		4		2,924		14		2,924
	June 30,		December 31,
	2011		2010
	(in thousands)
Outstanding balance	$	37,442	$	34,473
Carrying amount		29,865		30,365

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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 June 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 June 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 June 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 June 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 June 30, 2011 and 2010, Farmer Mac had not experienced any credit losses on any of those loans or securities.

	90-Day						Net Credit
	Delinquencies (1)						Losses/(Recoveries)
	As of		As of		As of		For the Six Months Ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2011		2010		2010		2011		2010
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	32,862	$	37,665	$	38,709	$	191	$	(1,926	)
Total on-balance sheet	$	32,862	$	37,665	$	38,709	$	191	$	(1,926	)
Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	21,771	$	32,583	$	17,302	$	-	$	-
Total off-balance sheet	$	21,771	$	32,583	$	17,302	$	-	$	-
Total	$	54,633	$	70,248	$	56,011	$	191	$	(1,926	)

(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.

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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 six months ended June 30, 2011 and 2010:

	For the Three Months Ended					For the Six Months Ended
	June 30,			June 30,		June 30,			June 30,
	2011			2010		2011			2010
	(in thousands)
Net income	$	11,437		$	8,090	$	36,027		$	21,679
Available-for-sale securities, net of tax:
Net unrealized holding gains		27,466			23,853		20,911			28,353
Reclassification adjustment for realized gains (1)		(645	)		-		(2,750	)		(190	)
Net change from available-for-sale securities (2)		26,821			23,853		18,161			28,163
Financial derivatives, net of tax:
Reclassification for amortization of financial derivatives
transition adjustment (3)		-			29		-			52
Other comprehensive income, net of tax		26,821			23,882		18,161			28,215
Comprehensive income		38,258			31,972		54,188			49,894
Less: Comprehensive income attributable to non-
controlling interest		5,547			5,546		11,094			9,614
Total comprehensive income	$	32,711		$	26,426	$	43,094		$	40,280

(1) Includes the reclassification of deferred gains recognized on certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities of $0.6 million and $2.6 million, after tax, for the three and six months ended June 30, 2011, respectively.

(2) Unrealized gains on available for sale securities are shown net of income tax expense of $14.4 million and $12.8 million for the three months ended June 30, 2011 and 2010, respectively, and $9.8 million and $15.3 million for the six months ended June 30, 2011 and 2010, respectively.

(3) Amortization of the financial derivatives transition adjustment is shown net of income tax expense of $16,000 and $28,000 for the three and six months ended June 30, 2010, respectively.

During the three and six months ended June 30, 2011, Farmer Mac reclassified $0.6 million and $2.6 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.

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The following table presents Farmer Mac’s accumulated other comprehensive income as of June 30, 2011 and December 31, 2010 and changes in the components of accumulated other comprehensive income for the six months ended June 30, 2011 and the year ended December 31, 2010.

	June 30,		December 31,
	2011		2010
	(in thousands)
Available-for-sale securities:
Beginning balance	$	18,275	$	3,300
Net unrealized gains, net of tax		18,161		14,975
Ending balance	$	36,436	$	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	$	36,436	$	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.

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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 six months ended June 30, 2011 and 2010 were $10.7 million and $12.9 million, respectively.  The following table summarizes cash flows received from and paid to trusts used for Farmer Mac securitizations:

	For the Six Months Ended
	June 30, 2011			June 30, 2010
	(in thousands)
Proceeds from new securitizations	$	10,734		$	12,906
Guarantee fees received		4,286			2,620
Purchases of assets from the trusts		(1,369	)		(2,323	)
Servicing advances		(20	)		(343	)
Repayments of servicing advances		14			174

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 June 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
	June 30,		December 31,
	2011		2010
	(in thousands)
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
Farmer Mac Guaranteed Securities		696,257		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,120		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		18,080		15,292
Total off-balance sheet Farmer Mac Guaranteed Securities	$	3,204,457	$	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 $14.5 million as of June 30, 2011 and $17.7 million as of December 31, 2010.  Upon adoption of the new 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 June 30, 2011, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 13.6 years.  As of June 30, 2011, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 2.4 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).

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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 $1.7 billion as of June 30, 2011 and $1.8 billion as of December 31, 2010.

As of June 30, 2011, the weighted-average remaining maturity of all loans underlying LTSPCs was 13.8 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 $13.1 million as of June 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.

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From first quarter 2009 through second 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 June 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 June 30, 2011 and December 31, 2010, were all held by the 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.

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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 June 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 June 30, 2011, Farmer Mac’s minimum and critical capital requirements were $321.9 million and $161.0 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 $484.2 million, $162.3 million above the minimum capital requirement and $323.2 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 June 30, 2011 was $122.9 million and Farmer Mac’s regulatory capital (core capital plus the allowance for losses) of $502.7 million exceeded that requirement by approximately $379.8 million.  Based on the risk-based capital stress test in effect prior to second quarter 2011, Farmer Mac’s risk-based capital requirement as of June 30, 2011 would have been $32.7 million and Farmer Mac’s regulatory capital (core capital plus the allowance for losses) of $502.7 million would have exceeded that requirement by approximately $470.0 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).

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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.

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.

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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.  Prior to 2010, Farmer Mac used a discounted cash flow model to determine the estimated fair value of these investments as of each quarter end.  The assumptions used in preparing the model included estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment.  In making these assumptions, Farmer Mac considered relevant factors including: the formula for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the underlying student loans are backed by the full faith and credit of the United States; and, publicly available pricing data for student loan asset-backed securities that are not subject to auctions.  Farmer Mac classified these fair value measurements as level 3.

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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 in the first half of 2011.  Transfers within the fair value hierarchy for the fair value measurements of investment securities in first quarter 2010 are described below.

During the first half 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 June 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 in the first six months of 2011.  Transfers out of level 3 during first quarter 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 are 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 new 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 June 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 $(0.2) 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 June 30, 2011, Farmer Mac recorded an adjustment of $9.9 million 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.

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Real Estate Owned

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.

Fair Value Classification and Transfers

As of June 30, 2011, Farmer Mac’s assets and liabilities recorded at fair value include financial instruments valued at $5.1 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 70 percent of financial instruments measured at fair value as of June 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.

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The following tables present information about Farmer Mac’s asset and liabilities measured at fair value on a recurring and nonrecurring basis as of June 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 June 30, 2011
	Level 1		Level 2		Level 3		Total
Recurring:	(in thousands)
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	-	$	-	$	64,682	$	64,682
Floating rate asset-backed securities		-		162,534		-		162,534
Floating rate corporate debt securities		-		113,290		-		113,290
Floating rate Government/GSE
guaranteed mortgage-backed securities		-		633,972		-		633,972
Fixed rate GSE guaranteed mortgage-backed
securities		-		4,167		-		4,167
Floating rate GSE subordinated debt		-		62,565		-		62,565
Fixed rate GSE preferred stock		-		82,377		-		82,377
Fixed rate corporate debt		-		34,382		-		34,382
U.S. Treasuries		834,744		-		-		834,744
Senior agency debt		-		13,001		-		13,001
Total available-for-sale		834,744		1,106,288		64,682		2,005,714
Trading:
Floating rate asset-backed securities		-		-		2,209		2,209
Fixed rate GSE preferred stock		-		85,942		-		85,942
Total trading		-		85,942		2,209		88,151
Total Investment Securities		834,744		1,192,230		66,891		2,093,865
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		-		-		1,759,205		1,759,205
Farmer Mac II		-		-		36,530		36,530
Rural Utilities		-		-		1,448,230		1,448,230
Total Farmer Mac Guaranteed Securities		-		-		3,243,965		3,243,965
USDA Guaranteed Securities:
Available-for-sale		-		-		1,120,397		1,120,397
Trading		-		-		249,074		249,074
Total USDA Guaranteed Securities		-		-		1,369,471		1,369,471
Financial derivatives		28		43,948		-		43,976
Total Assets at fair value	$	834,772	$	1,236,178	$	4,680,327	$	6,751,277
Liabilities:
Financial derivatives	$	-	$	107,396	$	1,755	$	109,151
Total Liabilities at fair value	$	-	$	107,396	$	1,755	$	109,151
Nonrecurring:
Assets:
Loans held for sale	$	-	$	-	$	441,890	$	441,890
Loans held for investment		-		-		12,246		12,246
REO		-		-		705		705
Total Nonrecurring Assets at fair value	$	-	$	-	$	454,841	$	454,841

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Assets and Liabilities Measured at Fair Value as of December 31, 2010
	Level 1		Level 2		Level 3		Total
Recurring:	(in thousands)
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
U.S. Treasuries		692,994		-		-		692,994
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

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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 June 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
Recurring:	(in thousands)
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	64,539		$	-	$	-		$	-		$	-		$	143		$	-	$	-		$	64,682
Trading:
Floating rate asset-backed securities(1)		1,690			-		-			(168	)		687			-			-		-			2,209
Total Investment Securities		66,229			-		-			(168	)		687			143			-		-			66,891
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		1,429,318			300,000		-			(6	)		-			29,893			-		-			1,759,205
Farmer Mac II		37,803			981		(1,041	)		(1,134	)		-			(79	)		-		-			36,530
Rural Utilities		1,442,793			-		-			-			-			5,437			-		-			1,448,230
Total Farmer Mac Guaranteed Securities		2,909,914			300,981		(1,041	)		(1,140	)		-			35,251			-		-			3,243,965
USDA Guaranteed Securities:
Available-for-sale		1,063,540			98,464		-			(48,951	)		-			7,344			-		-			1,120,397
Trading(2)		274,561			-		-			(26,985	)		1,498			-			-		-			249,074
Total USDA Guaranteed Securities		1,338,101			98,464		-			(75,936	)		1,498			7,344			-		-			1,369,471
Total Assets at fair value	$	4,314,244		$	399,445	$	(1,041	)	$	(77,244	)	$	2,185		$	42,738		$	-	$	-		$	4,680,327
Liabilities:
Financial derivatives(3)	$	(1,671	)	$	-	$	-		$	-		$	(84	)	$	-		$	-	$	-		$	(1,755	)
Total Liabilities at fair value	$	(1,671	)	$	-	$	-		$	-		$	(84	)	$	-		$	-	$	-		$	(1,755	)
Nonrecurring:
Assets:
Loans held for sale	$	406,168		$	-	$	-		$	-		$	(156	)	$	-		$	35,878	$	-		$	441,890
Loans held for investment		12,399			-		-			-			-			-			-		(153	)		12,246
REO		1,573			-		-			(974	)		(101	)		-			207		-			705
Total Nonrecurring Assets at fair value	$	420,140		$	-	$	-		$	(974	)	$	(257	)	$	-		$	36,085	$	(153	)	$	454,841

(1) Unrealized gains are attributable to assets still held as of June 30, 2011 and are recorded in gains on trading assets.

(2) Includes unrealized gains of $0.3 million attributable to assets still held as of June 30, 2011 that are recorded in gains on trading assets.

(3) Unrealized losses are attributable to liabilities still held as of June 30, 2011 and are recorded in losses on financial derivatives.

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Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 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
Recurring:	(in thousands)
Assets:
Investment securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	62,256		$	-		$	-		$	1,088	$	-		$	63,344
Floating rate GSE subordinated debt		-			-			-			-		-			-
Fixed rate GSE preferred stock		-			-			-			-		-			-
Total available-for-sale investment securities		62,256			-			-			1,088		-			63,344
Trading:
Floating rate asset-backed securities(1)		1,452			(166	)		126			-		-			1,412
Fixed rate GSE preferred stock		-			-			-			-		-			-
Total trading investment securities		1,452			(166	)		126			-		-			1,412
Total investment securities		63,708			(166	)		126			1,088		-			64,756
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		48,080			(1,508	)		-			1,249		-			47,821
Farmer Mac II		39,692			502			-			242		-			40,436
Rural Utilities		1,706,155			(87,799	)		-			11,527		-			1,629,883
Total available-for-sale		1,793,927			(88,805	)		-			13,018		-			1,718,140
Trading:
Farmer Mac II		-			-			-			-		-			-
Rural Utilities		-			-			-			-		-			-
Total trading		-			-			-			-		-			-
Total Farmer Mac Guaranteed Securities		1,793,927			(88,805	)		-			13,018		-			1,718,140
USDA Guaranteed Securities:
Available-for-sale		781,823			84,682			-			13,919		-			880,424
Trading(2)		407,844			(26,931	)		5,583			-		-			386,496
Total USDA Guaranteed Securities		1,189,667			57,751			5,583			13,919		-			1,266,920
Total Assets at fair value	$	3,047,302		$	(31,220	)	$	5,709		$	28,025	$	-		$	3,049,816
Liabilities:
Financial derivatives(3)	$	(3,591	)	$	-		$	(87	)	$	-	$	-		$	(3,678	)
Total Liabilities at fair value	$	(3,591	)	$	-		$	(87	)	$	-	$	-		$	(3,678	)
Nonrecurring:
Assets:
Loans held for sale, at lower of cost or fair value	$	85,248		$	-		$	90		$	-	$	77,727		$	163,065
Loans held for investment, at fair value		10,522			-			(584	)		-		(5,682	)		4,256
Total Assets at fair value	$	95,770		$	-		$	(494	)	$	-	$	72,045		$	167,321

(1) Unrealized gains are attributable to assets still held as of June 30, 2010 and are recorded in gains on trading assets.

(2) Includes unrealized gains of $4.0 million attributable to assets still held as of June 30, 2010 that are recorded in gains on trading assets.

(3) Unrealized losses are attributable to liabilities still held as of June 30, 2010 and are recorded in losses on financial derivatives.

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Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 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
Recurring:	(in thousands)
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	64,335		$	-	$	-		$	-		$	-		$	347		$	-	$	-		$	64,682
Trading:
Floating rate asset-backed securities(1)		1,400			-		-			(550	)		1,359			-			-		-			2,209
Total Investment Securities		65,735			-		-			(550	)		1,359			347			-		-			66,891
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		942,809			800,000		-			(14	)		-			16,410			-		-			1,759,205
Farmer Mac II		37,637			2,004		(2,005	)		(2,494	)		-			1,388			-		-			36,530
Rural Utilities		1,926,818			-		-			(476,401	)		-			(2,187	)		-		-			1,448,230
Total Farmer Mac Guaranteed Securities		2,907,264			802,004		(2,005	)		(478,909	)		-			15,611			-		-			3,243,965
USDA Guaranteed Securities:
Available-for-sale		1,005,679			214,811		-			(109,786	)		-			9,693			-		-			1,120,397
Trading(2)		311,765			-		-			(62,958	)		267			-			-		-			249,074
Total USDA Guaranteed Securities		1,317,444			214,811		-			(172,744	)		267			9,693			-		-			1,369,471
Total Assets at fair value	$	4,290,443		$	1,016,815	$	(2,005	)	$	(652,203	)	$	1,626		$	25,651		$	-	$	-		$	4,680,327
Liabilities:
Financial derivatives(3)	$	(3,390	)	$	-	$	-		$	-		$	1,635		$	-		$	-	$	-		$	(1,755	)
Total Liabilities at fair value	$	(3,390	)	$	-	$	-		$	-		$	1,635		$	-		$	-	$	-		$	(1,755	)
Nonrecurring:
Assets:
Loans held for sale	$	331,076		$	-	$	-		$	(4,617	)	$	(964	)	$	-		$	116,395	$	-		$	441,890
Loans held for investment		11,971			-		-			-			(195	)		-			623		(153	)		12,246
REO		1,925			-		-			(1,006	)		(421	)		-			207		-			705
Total Nonrecurring Assets at fair value	$	344,972		$	-	$	-		$	(5,623	)	$	(1,580	)	$	-		$	117,225	$	(153	)	$	454,841

(1) Unrealized gains are attributable to assets still held as of June 30, 2011 and are recorded in gains on trading assets.

(2) Includes unrealized losses of $2.4 million attributable to assets still held as of June 30, 2011 that are recorded in gains on trading assets.

(3) Unrealized gains are attributable to liabilities still held as of June 30, 2011 and are recorded in losses on financial derivatives.

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Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 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
Recurring:	(in thousands)
Assets:
Investment securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	72,884		$	-		$	-		$	(9,540	)	$	-		$	63,344
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			-			-			(9,540	)		(136,773	)		63,344
Trading:
Floating rate asset-backed securities(1)		1,824			(402	)		(10	)		-			-			1,412
Fixed rate GSE preferred stock		88,148			-						-			(88,148	)		-
Total trading investment securities		89,972			(402	)		(10	)		-			(88,148	)		1,412
Total investment securities		299,629			(402	)		(10	)		(9,540	)		(224,921	)		64,756
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		56,864			(5,265	)		-			1,607			(5,385	)		47,821
Farmer Mac II		764,792			197			-			(1,369	)		(723,184	)		40,436
Rural Utilities		1,703,211			(87,799	)		-			14,471			-			1,629,883
Total available-for-sale		2,524,867			(92,867	)		-			14,709			(728,569	)		1,718,140
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			(92,867	)		-			14,709			(1,602,698	)		1,718,140
USDA Guaranteed Securities:
Available-for-sale		-			137,579			-			19,661			723,184			880,424
Trading(2)		-			(46,789	)		10,604			-			422,681			386,496
Total USDA Guaranteed Securities		-			90,790			10,604			19,661			1,145,865			1,266,920
Total Assets at fair value	$	3,698,625		$	(2,479	)	$	10,594		$	24,830		$	(681,754	)	$	3,049,816
Liabilities:
Financial derivatives(3)	$	(3,653	)	$	-		$	(25	)	$	-		$	-		$	(3,678	)
Total Liabilities at fair value	$	(3,653	)	$	-		$	(25	)	$	-		$	-		$	(3,678	)
Nonrecurring:
Assets:
Loans held for sale, at lower of cost or fair value	$	28,505		$	-		$	(2,184	)	$	-		$	136,744		$	163,065
Loans held for investment, at fair value		-			-			(668	)		-			4,924			4,256
Total Assets at fair value	$	28,505		$	-		$	(2,852	)	$	-		$	141,668		$	167,321

(1) Unrealized losses are attributable to assets still held as of June 30, 2010 and are recorded in gains on trading assets.

(2) Includes unrealized gains of $8.0 million attributable to assets still held as of June 30, 2010 that are recorded in gains on trading assets.

(3) Unrealized losses are attributable to liabilities still held as of June 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.

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Farmer Mac made no fair value option elections for the three and six months ended June 30, 2011 and 2010.  For the three and six months ended June 30, 2011, Farmer Mac recorded net gains on trading assets of $1.3 million and $1.9 million, respectively, for changes in fair values of assets previously selected for the fair value option, compared to net gains of $4.9 million and $8.4 million, respectively, for the same periods ended June 30, 2010.  These changes in fair value are presented as “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 June 30, 2011 and December 31, 2010 in accordance with accounting guidance on disclosures about fair value of financial instruments.

	June 30, 2011				December 31, 2010
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	768,335	$	768,335	$	729,920	$	729,920
Investment securities		2,093,865		2,093,865		1,763,329		1,763,329
Farmer Mac Guaranteed Securities		3,243,965		3,243,965		2,907,264		2,907,264
USDA Guaranteed Securities		1,369,471		1,369,471		1,317,444		1,317,444
Loans		2,890,033		2,787,437		2,642,399		2,558,599
Financial derivatives		43,976		43,976		41,492		41,492
Interest receivable		88,852		88,852		90,295		90,295
Guarantee and commitment fees receivable:
LTSPCs		23,905		13,988		14,191		13,666
Farmer Mac Guaranteed Securities		20,608		17,836		19,058		21,086
Financial liabilities:
Notes payable:
Due within one year		5,205,836		5,201,832		4,510,758		4,509,419
Due after one year		3,868,825		3,744,877		3,530,656		3,430,656
Debt securities of consolidated trusts held by
third parties		818,189		755,357		883,669		827,411
Financial derivatives		109,151		109,151		113,687		113,687
Accrued interest payable		56,152		56,152		57,131		57,131
Guarantee and commitment obligations:
LTSPCs		23,018		13,100		13,152		12,627
Farmer Mac Guaranteed Securities		17,298		14,528		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.

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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 more accurately reflects 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 similar to 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 June 30, 2011, Farmer Mac II LLC held assets with a fair value of $1.4 billion, had debt outstanding of $141.0 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.

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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.

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

Core Earnings by Business Segment
For the Three Months Ended June 30, 2011
													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	34,555		$	14,045		$	13,131		$	7,033		$	(1,912	)			$	66,852
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(839	)		-			-			-			839					-
Interest expense (2)		(22,398	)		(11,321	)		(10,044	)		(3,174	)		9,297					(37,640	)
Net effective spread		11,318			2,724			3,087			3,859			8,224					29,212
Guarantee and commitment fees		5,824			50			1,285			-			(839	)				6,320
Other income/(expense) (3)		1,261			59			-			(646	)		(14,879	)				(14,205	)
Non-interest income/(loss)		7,085			109			1,285			(646	)		(15,718	)				(7,885	)
Provision for loan losses		(160	)		-			-			-			-					(160	)
Release of losses		935			-			-			-			-					935
Other non-interest expense		(3,992	)		(712	)		(1,247	)		(2,175	)		-					(8,126	)
Non-interest expense (4)		(3,057	)		(712	)		(1,247	)		(2,175	)		-					(7,191	)
Core earnings before income taxes		15,186			2,121			3,125			1,038			(7,494	)	(5	)		13,976
Income tax (expense)/benefit		(5,315	)		(742	)		(1,094	)		1,989			2,623					(2,539	)
Core earnings before preferred stock
dividends and attribution of income to
non-controlling interest		9,871			1,379			2,031			3,027			(4,871	)	(5	)		11,437
Preferred stock dividends		-			-			-			(720	)		-					(720	)
Non-controlling interest		-			-			-			(5,547	)		-					(5,547	)
Segment core earnings	$	9,871		$	1,379		$	2,031		$	(3,240	)	$	(4,871	)	(5	)	$	5,170
Total assets at carrying value	$	3,743,934		$	1,422,554		$	2,353,748		$	2,924,592		$	-				$	10,444,828
Total principal balance of on- and
off-balance sheet program assets		8,498,421			1,425,883			2,274,193			-			-					12,198,497

(1) Includes reconciling adjustments for yield maintenance income and 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and financial derivatives and trading assets.  Also includes a reconciling adjustment related to the recognition of deferred gains upon prepayment 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.

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Core Earnings by Business Segment
For the Three Months Ended June 30, 2010
													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	27,081		$	13,825		$	13,987		$	6,390		$	(3,956	)			$	57,327
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(1,282	)		-			-			-			1,282					-
Interest expense (2)		(18,210	)		(11,262	)		(11,342	)		(3,638	)		8,733					(35,719	)
Net effective spread		7,589			2,563			2,645			2,752			6,059					21,608
Guarantee and commitment fees		5,450			50			1,492			-			(1,282	)				5,710
Other income/(expense) (3)		411			-			-			(784	)		(10,108	)				(10,481	)
Non-interest income/(loss)		5,861			50			1,492			(784	)		(11,390	)				(4,771	)
Release of loan losses		1,870			-			-			-			-					1,870
Provision for losses		(3,043	)		-			-			-			-					(3,043	)
Other non-interest expense		(3,350	)		(721	)		(1,038	)		(1,709	)		-					(6,818	)
Non-interest expense (4)		(6,393	)		(721	)		(1,038	)		(1,709	)		-					(9,861	)
Core earnings before income taxes		8,927			1,892			3,099			259			(5,331	)	(5	)		8,846
Income tax (expense)/benefit		(3,124	)		(662	)		(1,085	)		2,249			1,866					(756	)
Core earnings before preferred stock
dividends, attribution of income to
non-controlling interest, and loss on
retirement of preferred stock		5,803			1,230			2,014			2,508			(3,465	)	(5	)		8,090
Preferred stock dividends		-			-			-			(720	)		-					(720	)
Non-controlling interest		-			-			-			(5,546	)		-					(5,546	)
Segment core earnings	$	5,803		$	1,230		$	2,014		$	(3,758	)	$	(3,465	)	(5	)	$	1,824
Total assets at carrying value	$	1,836,374		$	1,324,674		$	2,262,314		$	1,676,128		$	-				$	7,099,490
Total principal balance of on- and
off-balance sheet program assets		7,288,389			1,300,944			2,173,660			-			-					10,762,993

(1) Includes reconciling adjustments for yield maintenance income and 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and 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.

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Core Earnings by Business Segment
For the Six Months Ended June 30, 2011
													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	66,634		$	27,710		$	26,793		$	14,220		$	(4,433	)			$	130,924
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(1,713	)		-			-			-			1,713					-
Interest expense (2)		(42,676	)		(22,319	)		(20,704	)		(7,314	)		18,320					(74,693	)
Net effective spread		22,245			5,391			6,089			6,906			15,600					56,231
Guarantee and commitment fees		11,589			103			2,728			-			(1,713	)				12,707
Other income/(expense) (3)		2,223			105			-			(740	)		(7,133	)				(5,545	)
Non-interest income/(loss)		13,812			208			2,728			(740	)		(8,846	)				7,162
Provision for loan losses		(1,441	)		-			-			-			-					(1,441	)
Release of losses		2,869			-			-			-			-					2,869
Other non-interest expense		(8,760	)		(1,375	)		(2,379	)		(4,224	)		-					(16,738	)
Non-interest expense (4)		(5,891	)		(1,375	)		(2,379	)		(4,224	)		-					(13,869	)
Core earnings before income taxes		28,725			4,224			6,438			1,942			6,754		(5	)		48,083
Income tax (expense)/benefit		(10,054	)		(1,478	)		(2,254	)		4,094			(2,364	)				(12,056	)
Core earnings before preferred stock
dividends and attribution of income to
non-controlling interest		18,671			2,746			4,184			6,036			4,390		(5	)		36,027
Preferred stock dividends		-			-			-			(1,440	)		-					(1,440	)
Non-controlling interest		-			-			-			(11,094	)		-					(11,094	)
Segment core earnings	$	18,671		$	2,746		$	4,184		$	(6,498	)	$	4,390		(5	)	$	23,493
Total assets at carrying value	$	3,743,934		$	1,422,554		$	2,353,748		$	2,924,592		$	-				$	10,444,828
Total principal balance of on- and
off-balance sheet program assets		8,498,421			1,425,883			2,274,193			-			-					12,198,497

(1) Includes reconciling adjustments for yield maintenance income and 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and financial derivatives and trading assets.  Also includes a reconciling adjustment related to the recognition of deferred gains upon prepayment 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.

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Core Earnings by Business Segment
For the Six Months Ended June 30, 2010
													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	55,763		$	26,431		$	27,940		$	12,873		$	(4,948	)			$	118,059
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(2,749	)		-			-			-			2,749					-
Interest expense (2)		(38,250	)		(21,721	)		(22,636	)		(7,295	)		17,068					(72,834	)
Net effective spread		14,764			4,710			5,304			5,578			14,869					45,225
Guarantee and commitment fees		11,000			351			3,027			-			(2,749	)				11,629
Other income/(expense) (3)		1,297			-			-			(1,233	)		(14,187	)				(14,123	)
Non-interest income/(loss)		12,297			351			3,027			(1,233	)		(16,936	)				(2,494	)
Release of loan losses		(980	)		-			-			-			-					(980	)
Provision for losses		(1,575	)		-			-			-			-					(1,575	)
Other non-interest expense		(6,386	)		(1,548	)		(2,067	)		(3,404	)		-					(13,405	)
Non-interest expense (4)		(7,961	)		(1,548	)		(2,067	)		(3,404	)		-					(14,980	)
Core earnings before income taxes		18,120			3,513			6,264			941			(2,067	)	(5	)		26,771
Income tax (expense)/benefit		(6,342	)		(1,230	)		(2,192	)		3,949			723					(5,092	)
Core earnings before preferred stock
dividends, attribution of income to
non-controlling interest, and loss on
retirement of preferred stock		11,778			2,283			4,072			4,890			(1,344	)	(5	)		21,679
Preferred stock dividends		-			-			-			(2,690	)		(5,784	)				(8,474	)
Non-controlling interest		-			-			-			(9,614	)		-					(9,614	)
Segment core earnings	$	11,778		$	2,283		$	4,072		$	(7,414	)	$	(7,128	)	(5	)	$	3,591
Total assets at carrying value	$	1,836,374		$	1,324,674		$	2,262,314		$	1,676,128		$	-				$	7,099,490
Total principal balance of on- and
off-balance sheet program assets		7,288,389			1,300,944			2,173,660			-			-					10,762,993

(1) Includes reconciling adjustments for yield maintenance income and 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and 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.

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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 operates 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.

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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;

·   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 reactions to Standard & Poor’s recent downgrade of the credit ratings of the United States, certain GSEs, and other federal agencies linked to long-term U.S. debt; and

·   the future level 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

Following a successful 2010, Farmer Mac entered 2011 well positioned to continue to fulfill its congressional mission to provide capital and liquidity to rural America.  Second quarter results included the addition of $608.1 million of new program business volume bringing total year-to-date new program volume as of June 30, 2011 to $1.6 billion.  GAAP and core earnings also increased in second quarter 2011 compared to the prior year.  Farmer Mac’s GAAP net income available to common stockholders for second quarter 2011 was $5.2 million ($0.48 per diluted common share), compared to $1.8 million ($0.17 per diluted common share) in second quarter 2010.  Farmer Mac’s core earnings for second quarter 2011 were $10.0 million, up from $5.3 million in second quarter 2010.  Second quarter 2011 results benefited from increased outstanding business volume compared to a year earlier, increased net interest income of $29.2 million, compared to $21.6 million in second quarter 2010 and net releases from the allowance for losses of $0.8 million as opposed to provisions of $1.2 million in the prior year.  As of June 30, 2011, Farmer Mac’s excess core capital above its statutory minimum capital requirement was $162.3 million.

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Although approximately $976.4 million of AgVantage Securities in both the Farmer Mac I and Rural Utilities business segments matured during the first six months of 2011, Farmer Mac’s new business volume during that period totaled $1.6 billion, compared to $637.9 million during the first half of 2010.  Notably, the 2011 new business included the second quarter issuance by Rabo Agrifinance, Inc. of $300.0 million of AgVantage bonds and the first quarter issuance by Metropolitan Life Insurance Company (“MetLife”) of $500.0 million of AgVantage bonds, both of which are held on-balance sheet by Farmer Mac.  The MetLife issuance coincided with the first quarter 2011 maturity of a prior $500.0 million AgVantage bond issued by MetLife that had been held by third party investors and accounted for as an off-balance sheet guarantee by Farmer Mac.  Although the new MetLife transaction did not increase the overall level of outstanding program volume, it effectively extended the duration of the MetLife AgVantage security that had matured and provides increased future profitability due to the net interest margin earned by Farmer Mac on the new bond being greater than the guarantee fee earned on the prior off-balance sheet guarantee.  Taking into account all the new business volume for the first half of 2011 along with the maturities of AgVantage securities and the regularly scheduled principal paydown of loans, Farmer Mac’s total outstanding loans, guarantees and commitments was $12.2 billion as of June 30, 2011, effectively even with the $12.2 billion as of December 31, 2010 and an increase over the $10.8 billion outstanding as of June 30, 2010.

As of the end of second 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 second quarter 2011, 90-day delinquencies were $54.6 million (1.27 percent), down from $57.3 million (1.33 percent) as of March 31, 2011, $70.2 million (1.63 percent) as of December 31, 2010 and $56.0 million (1.30 percent) as of June 30, 2010.  Notably, as of June 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 June 30, 2011 is 0.45 percent.

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.

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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 income available to common stockholders for second quarter 2011 was $5.2 million or $0.48 per diluted common share, compared to net income of $1.8 million or $0.17 per diluted common share for second quarter 2010.  For the six months ended June 30, 2011, Farmer Mac’s net income available to common stockholders was $23.5 million or $2.20 per diluted common share, compared to $3.6 million or $0.34 per diluted common share for the six months ended June 30, 2010.  Farmer Mac’s core earnings were $10.0 million or $0.94 per diluted common share for second quarter 2011, compared to $5.3 million or $0.50 per diluted common share for second quarter 2010.  Core earnings for the six months ended June 30, 2011 were $19.1 million or $1.79 per diluted common share, compared to $10.7 million or $1.02 per diluted common share for the six months ended June 30, 2010.

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management’s view, core earnings more accurately reflects 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.  Farmer Mac’s disclosure of this non-GAAP measure is not intended to replace GAAP information but, rather, to supplement it.  A reconciliation of Farmer Mac’s GAAP net income available to common stockholders to core earnings is presented in the following table, and the reconciling items are described in more detail below the table.

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Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
	For the Three Months Ended
	June 30, 2011						June 30, 2010
				Per Diluted						Per Diluted
				Share						Share
	(in thousands, except per share amounts)
GAAP net income available to common stockholders	$	5,170		$	0.48		$	1,824		$	0.17
Less the net of tax effects of:
Unrealized losses on financial derivatives		(4,439	)		(0.42	)		(4,016	)		(0.39	)
Unrealized gains on trading assets		1,280			0.12			3,288			0.31
Amortization of premiums on assets consolidated at fair value		(1,583	)		(0.15	)		(2,701	)		(0.25	)
Recognition of deferred gains related to certain Farmer Mac II
Guaranteed Securities and USDA Guaranteed Securities		620			0.06			-			-
Net effects of settlements on agency forward contracts		(647	)		(0.06	)		(94	)		(0.01	)
Lower of cost or fair value adjustment on loans held for sale		(102	)		(0.01	)		58			0.01
Sub-total		(4,871	)		(0.46	)		(3,465	)		(0.33	)
Core earnings	$	10,041		$	0.94		$	5,289		$	0.50

	For the Six Months Ended
	June 30, 2011						June 30, 2010
				Per Diluted						Per Diluted
				Share						Share
	(in thousands, except per share amounts)
GAAP net income available to common stockholders	$	23,493		$	2.20		$	3,591		$	0.34
Less the net of tax effects of:
Unrealized gains/(losses) on financial derivatives		4,541			0.42			(2,129	)		(0.20	)
Unrealized gains on trading assets		2,132			0.20			5,476			0.52
Amortization of premiums on assets consolidated at fair value		(3,286	)		(0.31	)		(3,383	)		(0.32	)
Recognition of deferred gains related to certain Farmer Mac II
Guaranteed Securities and USDA Guaranteed Securities		2,623			0.25			-			-
Net effects of settlements on agency forward contracts		(993	)		(0.09	)		112			0.01
Lower of cost or fair value adjustment on loans held for sale		(627	)		(0.06	)		(1,420	)		(0.13	)
Issuance costs on the retirement of preferred stock		-			-			(5,784	)		(0.56	)
Sub-total		4,390			0.41			(7,128	)		(0.68	)
Core earnings	$	19,103		$	1.79		$	10,719		$	1.02

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 six months ended June 30, 2011, Farmer Mac recorded unrealized losses of $6.8 million ($4.4 million after-tax) and unrealized gains of $7.0 million ($4.5 million after-tax), respectively, for fair value changes on its financial derivatives, compared to unrealized losses of $6.2 million ($4.0 million after-tax) and $3.3 million ($2.1 million after-tax) for the same periods in 2010, respectively.  Fair value gains on trading assets totaled $2.0 million ($1.3 million after-tax) and $3.3 million ($2.1 million after-tax) for the three and six months ended June 30, 2011, respectively, compared to gains of $5.1 million ($3.3 million after-tax) and $8.4 million ($5.5 million after-tax) for the three and six months ended June 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 June 30, 2011, the cumulative fair value of after-tax losses recorded on financial derivatives was $42.4 million.  Over time, Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap contracts, which may 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.  This positive effective net spread will 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.

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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.  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 six months ended June 30, 2011, Farmer Mac reclassified $1.0 million ($0.6 million after-tax) and $4.0 million ($2.6 million after-tax) of these gains into earnings based on the estimated remaining lives of the underlying 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.

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 lives of the associated debt issuances.  The after-tax net effect of these items is shown as a reconciling item in the table above.

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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 losses of $0.2 million ($0.1 million after-tax) and $1.0 million ($0.6 million after-tax) during the three and six months ended June 30, 2011, respectively.  During the three and six months ended June 30, 2010, Farmer Mac recorded a gain of $90,000 ($58,000 after-tax) and a loss of $2.2 million ($1.4 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 six months ended June 30, 2011 was $29.2 million and $56.2 million, respectively, compared to $21.6 million and $45.2 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 six months ended June 30, 2011, these guarantee fees resulted in an increase in net interest income of $0.8 million and $1.7 million, respectively, and a decrease in the net interest yield of 7 basis points in both periods.  For the three and six months ended June 30, 2010, these guarantee fees resulted in an increase in net interest income of $1.3 million and $2.7 million, respectively, and a decrease in the net interest yield of 18 basis points and 19 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 127 basis points for the six months ended June 30, 2011, compared to 148 basis points for the six months ended June 30, 2010.

The following table provides information regarding interest-earning assets and funding for the six months ended June 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 half of 2011 compared to the first half of 2010.  The lower average rate on loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities during the six months ended June 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.

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	For the Six Months Ended
	June 30, 2011					June 30, 2010
	Average		Income/		Average	Average		Income/		Average
	Balance		Expense		Rate	Balance		Expense		Rate
	(dollars in thousands)
Interest-earning assets:
Cash and investments	$	2,357,413	$	14,220	1.21%	$	1,535,482	$	12,873	1.68%
Loans, Farmer Mac Guaranteed Securities
and USDA Guaranteed Securities (1)		6,224,259		97,226	3.12%		4,194,011		70,980	3.38%
Total interest-earning assets	$	8,581,672	$	111,446	2.60%	$	5,729,493	$	83,853	2.93%
Funding:
Notes payable due within one year	$	3,833,401	$	4,700	0.25%	$	3,049,991	$	5,137	0.34%
Notes payable due after one year (2)		4,337,390		52,228	2.41%		2,276,958		36,240	3.18%
Total interest-bearing liabilities (3)		8,170,791		56,928	1.39%		5,326,949		41,377	1.55%
Net non-interest-bearing funding		410,881		-			402,544		-
Total funding		8,581,672		56,928	1.33%		5,729,493		41,377	1.44%
Net interest income/yield prior to
consolidation of certain trusts		8,581,672		54,518	1.27%		5,729,493		42,476	1.48%
Net effect of consolidated trusts (4)		778,047		1,713	0.44%		1,308,514		2,749	0.42%
Adjusted net interest income/yield	$	9,359,719	$	56,231	1.20%	$	7,038,007	$	45,225	1.29%

(1) Excludes interest income of $19.5 million and $34.2 million in 2011 and 2010, respectively, related to consolidated trusts with beneficialinterests owned by third parties.

(2) Includes current portion of long-term notes.

(3) Excludes interest expense of $17.8 million and $31.5 million in 2011 and 2010, respectively, related to consolidated trusts with beneficialinterests 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 Six Months Ended June 30, 2011
	Compared to the Six Months Ended
	June 30, 2010
	Increase/(Decrease) Due to
	Rate			Volume		Total
	(in thousands)
Income from interest-earning assets:
Cash and investments	$	(18,492	)	$	19,839	$	1,347
Loans, Farmer Mac Guaranteed Securities
and USDA Guaranteed Securities		(34,131	)		60,377		26,246
Total		(52,623	)		80,216		27,593
Expense from interest-bearing liabilities		(26,073	)		41,624		15,551
Change in net interest income prior to
consolidation of certain trusts (1)	$	(26,550	)	$	38,592	$	12,042

(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 June 30, 2011, this increased the net interest yield by $9.3 million (42 basis points), compared to $8.7 million (60 basis points) for the three months ended June 30, 2010.  For the six months ended June 30, 2011, this increased the net interest yield by $18.3 million (43 basis points), compared to $17.1 million (60 basis points) for the six months ended June 30, 2010.

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Farmer Mac’s net interest income and net interest yields for the three months ended June 30, 2011 and 2010 included the benefits of yield maintenance payments of $0.5 million (2 basis points) and $0.2 million (1 basis point), respectively.  The net interest income and net interest yields for the six months ended June 30, 2011 and 2010 included the benefits of yield maintenance payments of $0.6 million (1 basis point) and $0.3 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.

Farmer Mac’s net interest income and net interest yield for the three months ended June 30, 2011 and 2010 included expenses of $2.4 million (11 basis points) and $4.2 million (29 basis points), respectively, related to the amortization of the premiums described above.  The net interest income and net interest yields for the six months ended June 30, 2011 and 2010 included expenses of $5.1 million (12 basis points) and $5.2 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 income or expense related to financial derivatives and subtracting yield maintenance payments and the amortization of premiums on assets consolidated at fair value.  New on-balance sheet program volume added throughout 2010 and the first half of 2011 increased Farmer Mac’s net effective spread for the three and six months ended June 30, 2011 to $21.0 million and $40.6 million, respectively, up from $15.5 million and $30.4 million, respectively, for the same periods in 2010.  However, the net yields were reduced to 0.96 percent and 0.95 percent for the three and six months ended June 30, 2011, respectively, from 1.08 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 lower yielding assets in Farmer Mac’s liquidity investment portfolio, primarily U.S. Treasuries, which have a negative net yield but offer a source of contingent liquidity.  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 Six Months Ended
	June 30, 2011						June 30, 2010						June 30, 2011						June 30, 2010
	Dollars			Yield			Dollars			Yield			Dollars			Yield			Dollars			Yield
	(dollars in thousands)												(dollars in thousands)
Net interest income/yield
prior to consolidation of certain trusts	$	28,373			1.29	%	$	20,326			1.40	%	$	54,518			1.27	%	$	42,476			1.48	%
Expense related to financial derivatives		(9,296	)		-0.42	%		(8,733	)		-0.60	%		(18,320	)		-0.43	%		(17,068	)		-0.60	%
Yield maintenance payments		(523	)		-0.02	%		(200	)		-0.01	%		(622	)		-0.01	%		(256	)		-0.01	%
Amortization of premiums on assets
consolidated at fair value		2,435			0.11	%		4,156			0.29	%		5,055			0.12	%		5,204			0.18	%
Net effective spread	$	20,989			0.96	%	$	15,549			1.08	%	$	40,631			0.95	%	$	30,356			1.05	%

Provision for Loan Losses.  During the three and six months ended June 30, 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.2 million and $1.4 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 loan losses for the first half 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 and six months ended June 30, 2010, Farmer Mac recorded releases from its allowance for loan losses of $1.9 million and provisions of $1.0 million, respectively.  Farmer Mac also recorded recoveries of $2.2 million on a loan secured by an ethanol plant during second quarter 2010.  The provisions recorded in the first half of 2010 include the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses upon adoption of the new consolidation guidance in first quarter 2010.

As of June 30, 2011, Farmer Mac’s total allowance for loan losses was $11.1 million, compared to $9.8 million as of December 31, 2010 and $9.5 million as of June 30, 2010.  See “—Risk Management—Credit Risk – Loans.”

Provision for Losses.  During the three and six months ended June 30, 2011, Farmer Mac recorded releases from its reserve for losses of $0.9 million and $2.9 million, respectively, compared to provisions of $3.0 million and $1.6 million for the three and six months ended June 30, 2010, respectively.  The releases recorded during the first half 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 half 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 June 30, 2011, Farmer Mac’s reserve for losses was $7.4 million, compared to $10.3 million as of December 31, 2010 and $9.5 million as of June 30, 2010.  See “—Risk Management—Credit Risk – Loans.”

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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 $6.3 million for second quarter 2011 and $12.7 million for the six months ended June 30, 2011, compared to $5.7 million for second quarter 2010 and $11.6 million for the six months ended June 30, 2010.  Guarantee and commitment fees for the three and six months ended June 30, 2011 reflect the reclassification of $0.8 million and $1.7 million, respectively, 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.  Guarantee and commitment fees for the three and six months ended June 30, 2010 reflect the reclassification of $1.3 million and $2.7 million, respectively, 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.

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 six months ended June 30, 2011 was a net loss of $17.8 million and $13.8 million, respectively, compared to a net loss of $15.8 million and $21.6 million, respectively, for the three and six months ended June 30, 2010.  The components of losses on financial derivatives for the three and six months ended June 30, 2011 and 2010 are summarized in the following table:

	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(in thousands)
Realized:
Expense related to financial derivatives	$	(9,297	)	$	(8,733	)	$	(18,320	)	$	(17,068	)
Losses due to terminations or net settlements		(1,705	)		(885	)		(2,493	)		(1,257	)
Unrealized (losses)/gains due to fair value changes		(6,804	)		(6,177	)		7,012			(3,239	)
Amortization of financial derivatives transition adjustment		-			(45	)		-			(80	)
Losses on financial derivatives	$	(17,806	)	$	(15,840	)	$	(13,801	)	$	(21,644	)

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)/gains due to fair value changes and are primarily the result of fluctuations in market interest rates.  The amortization of the financial derivatives transition adjustment reflects the reclassification into earnings of the unrealized gains/(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 six months ended June 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 $1.0 million for the three and six months ended June 30, 2011, respectively, related to these interest rate swap contracts, compared to realized expenses of $0.8 million and $1.6 million, respectively, for the same periods in 2010.  Farmer Mac recognized unrealized losses of $0.1 million and unrealized gains of $1.6 million, for the three and six months ended June 30, 2011, respectively, compared to unrealized losses of $0.1 million and $25,000, respectively, for the same periods in 2010, due to changes in the fair value of these interest rate swap contracts.

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Gains on Trading Assets.  During the three and six months ended June 30, 2011, Farmer Mac recognized gains on trading assets of $2.0 million and $3.3 million, respectively, compared to gains of $5.1 million and $8.4 million, respectively, for the same periods in 2010.  During first quarter 2010, Farmer Mac changed its primary source of valuation for its investment in the preferred stock of AgFirst Farm Credit Bank.  Taking into consideration its own recently executed trades during first quarter 2010, along with an increase in observable trading activity for this and similar securities, Farmer Mac determined that the best estimates of fair value for this security as of March 31, 2010, and continuing through June 30, 2011, were the fair values provided by an independent third party pricing service.  For the three and six months ended June 30, 2011, Farmer Mac recorded trading losses of $0.2 million and trading gains of $1.7 million, respectively, related to the change in the fair value of its investment in AgFirst Farm Credit Bank preferred stock.  For the three and six months ended June 30, 2010, Farmer Mac recorded $0.7 million and $2.2 million, respectively, of trading losses related to the change in the fair value of its investment in AgFirst Farm Credit Bank preferred stock.

During the three and six months ended June 30, 2011, Farmer Mac also recorded trading gains of $1.5 million and $0.3 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 six months ended June 30, 2010, Farmer Mac recorded trading gains of $5.6 million and $10.6 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 $2.0 million and $3.3 million of unrealized gains recognized on trading assets during the three and six months ended June 30, 2011, respectively, $1.3 million and $1.9 million, respectively, related to assets selected for the fair value option.  Of the total $5.1 million and $8.4 million of unrealized gains recognized on trading assets during the three and six months ended June 30, 2010, respectively, $4.9 million and $8.4 million, respectively, related to assets selected for the fair value option.

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

Gains on Sale of Available-for-Sale Investment Securities.  During the three and six months ended June 30, 2011, Farmer Mac realized net gains of $38,000 and $0.2 million, respectively, on sales of investment securities from its available-for-sale portfolio.  During the three months ended June 30, 2010, Farmer Mac did not sell any securities from its available-for-sale portfolio, and for the six months ended June 30, 2010, Farmer Mac realized net gains of $0.2 million from the sale 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 six months ended June 30, 2011, Farmer Mac recorded unrealized losses of $0.2 million and $1.0 million, respectively, to adjust the carrying value of loans held for sale to their estimated fair value, compared to an unrealized gain of $0.1 million and an unrealized loss of $2.2 million, respectively, for the same periods in 2010.  The unrealized losses recorded during the first half of  2010 and continuing through the first half of 2011 were primarily the result of a larger portfolio of rural utilities loans held for sale.

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Other Income.  For the three and six months ended June 30, 2011, other income totaled $1.1 million and $5.0 million, respectively, compared to $0.2 million and $1.0 million, respectively, for the same periods in 2010.  The increase in the first half of  2011 was due to the recognition of $4.0 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 $4.7 million and $9.2 million for the three and six months ended June 30, 2011, respectively, compared to $3.9 million and $7.4 million, respectively, for the same periods in 2010.  The increase in 2011 compared to 2010 was due to increased employee headcount, increased costs for employee insurance and higher accruals for employee incentive compensation.

General and Administrative Expenses.  General and administrative expenses, including legal, independent audit, and consulting fees, were $2.7 million and $4.9 million for the three and six months ended June 30, 2011, respectively, compared to $2.1 million and $4.6 million for the same periods in 2010.  The increase in general and administrative expenses in 2011 compared to 2010 was primarily attributable to higher accruals for rent expense during the construction period of Farmer Mac’s new office space and increased costs associated with information and technology.

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 second 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.

Regulatory Fees. Regulatory fees for the three and six months ended June 30, 2011 were $0.6 million and $1.2 million, respectively, compared to $0.6 million and $1.1 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, 2011 will be $2.3 million, unchanged from the federal fiscal year ended September 30, 2010.  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.

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Income Tax Expense.  Income tax expense totaled $2.5 million and $12.1 million for the three and six months ended 2011, respectively, compared to $0.8 million and $5.1 million for the same periods in 2010, respectively.  Income tax expense increased primarily due to the increase in pre-tax book income.  Farmer Mac’s effective tax rates for the three and six months ended June 30, 2011 were 18.2 percent and 25.1 percent, respectively, compared to 8.5 percent and 19.0 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.

Business Volume.  During second quarter 2011, Farmer Mac added $608.1 million of new program volume in the form of:

·   purchases of $116.9 million of Farmer Mac I loans;

·   purchases of $300.0 million of Farmer Mac I AgVantage securities;

·   the placement of $53.2 million of Farmer Mac I loans under LTSPCs;

·   purchases of $99.3 million of USDA-guaranteed portions of loans;

·   purchases of $35.9 million of rural utilities loans; and

·   the guarantee of $2.8 million of AgVantage securities secured by rural utilities loans.

Farmer Mac’s outstanding program volume was $12.2 billion as of June 30, 2011, unchanged from December 31, 2010.  During the first six months of 2011, $1.6 billion of new program volume replaced principal paydowns on outstanding loans, USDA Guaranteed Securities, loans and USDA-guaranteed portions underlying Farmer Mac Guaranteed Securities, and loans underlying LTSPCs.

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 Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
	(in thousands)
Farmer Mac I:
Loans	$	116,930	$	98,235	$	328,829	$	176,183
LTSPCs		53,248		32,430		107,400		109,573
Farmer Mac Guaranteed Securities - AgVantage		300,000		-		800,000		-
Farmer Mac II:
USDA Guaranteed Securities		98,294		115,109		214,524		201,672
Farmer Mac Guaranteed Securities		981		7,953		2,004		13,678
Rural Utilities:
Loans		35,878		77,726		116,395		136,744
Farmer Mac Guaranteed Securities - AgVantage		2,796		-		2,796		-
Total purchases, guarantees and commitments	$	608,127	$	331,453	$	1,571,948	$	637,850

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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 $12.2 billion as of June 30, 2011 and 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
	June 30,		December 31,
	2011		2010
	(in thousands)
On-balance sheet:
Farmer Mac I:
Loans	$	1,171,522	$	972,206
Loans held in trusts:
Beneficial interests owned by Farmer Mac		829		3,697
Beneficial interests owned by third party investors		748,843		821,411
Farmer Mac Guaranteed Securities - AgVantage		1,741,500		941,500
Farmer Mac II:
USDA Guaranteed Securities		1,343,480		1,297,439
Farmer Mac Guaranteed Securities		37,283		39,856
Rural Utilities:
Loans		451,741		339,963
Loans held in trusts:
Beneficial interests owned by Farmer Mac		393,572		400,228
Farmer Mac Guaranteed Securities - AgVantage		1,410,800		1,887,200
Total on-balance sheet	$	7,299,570	$	6,703,500
Off-balance sheet:
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
LTSPCs		1,694,470		1,754,597
Farmer Mac Guaranteed Securities		696,257		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,120		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		18,080		15,292
Total off-balance sheet	$	4,898,927	$	5,513,209
Total	$	12,198,497	$	12,216,709

Of the $12.2 billion outstanding principal balance of volume included in Farmer Mac’s three programs as of June 30, 2011, $5.6 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 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 June 30, 2011.

AgVantage Balances by Year of Maturity
	As of
	June 30, 2011
	(in thousands)
2011	$	1,477,000
2012		497,000
2013		307,250
2014		860,900
2015		552,250
Thereafter		1,920,980
Total	$	5,615,380

Of the AgVantage securities maturing during the second half of 2011, $1.0 billion issued by MetLife matured in July 2011 and $475.0 million issued by M&I Bank will mature in August 2011, both of which are off-balance sheet Farmer Mac guarantees.  To replace the $1.0 billion of financing that matured in July 2011, Farmer Mac purchased in July and August 2011 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, and (3) a $150.0 million ten-year AgVantage security.  Farmer Mac and MetLife have also recently entered into a transaction whereby Farmer Mac will purchase a $200.0 million three-year AgVantage security issued by MetLife, which Farmer Mac anticipates will be completed by mid-August 2011.  All of these securities, totaling $1.0 billion, will be 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 provide increased future profitability due to the net interest margin earned by Farmer Mac on the new AgVantage securities being greater than the guarantee fee earned on the prior off-balance sheet guarantee.  With respect to the August 2011 maturity of the AgVantage security issued by M&I Bank, Farmer Mac does not expect the BMO Financial Group of Canada (which purchased M&I Bank during 2011) or its affiliates to issue a new AgVantage security.  That maturity will result 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 second quarter 2011 and 2010 was less than one month.  Of the Farmer Mac I newly originated and current seasoned loans purchased during second quarter 2011 and 2010, 73 percent and 75 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 16.3 years and 15.0 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 second quarter 2011 and second quarter 2010 was 6.2 years and 5.6 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 Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
	(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases	$	116,930	$	98,235	$	328,829	$	176,183
Defaulted loans purchased underlying
Farmer Mac I Guaranteed Securities
owned by third party investors		-		-		1,369		2,323
Defaulted loans purchased
underlying LTSPCs		1,420		913		16,976		1,080
Total loan purchases	$	118,350	$	99,148	$	347,174	$	179,586

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.

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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 June 30, 2011, Farmer Mac II LLC held assets with a fair value of $1.4 billion, had debt outstanding of $141.0 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.

Outlook.  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 demands of the industries and the stability of the financial markets.  With lenders in both the agricultural and rural utilities sectors continuing to face capital markets and economic challenges, Farmer Mac represents a potential source of liquidity, capital, and risk management to help lenders meet the borrowing needs of their customers.

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 half of 2011.  The price increase of feed grains is positive for producers of these commodities but also puts 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 half 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 remains in place and mandates targeted use of fuel from renewable sources, most especially ethanol.  The Environmental Protection Agency approved the use of E15 (a blend of gasoline and ethanol) in vehicle model years 2001 and newer, but it is likely that the cost of implementing new fuel tanks and pumps will make adoption slow.  It is 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 half of 2011 continued to be more robust than the national economy in general.  However, agriculture is not completely insulated from the effects of the economic downturn and 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 national energy policy reconsideration of ethanol tax credits 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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With respect to the agricultural operating and lending markets, recent farmland sales have reflected the continued strong profits earned by the growers of feed grains (corn, soybeans and wheat), who are most typically located in the Midwest, with land values in that geographic area rapidly increasing.  Land values outside the Midwest have also generally increased, though land that has traditionally had a value component tied to long term development uses other than agriculture has shown decline.  While this is true of agricultural land values generally, the development value impact in Farmer Mac’s agricultural loan portfolio is not significant.  Farmer Mac generally expects changes in regional farmland values to remain related to the landowner’s profitability from the commodities produced.  Volatility in demand for commodities (partially a consequence of global economic cycles) can result in volatility in land values, as the value of land used to produce a particular commodity may increase or decrease in response to perceived increases or decreases in profitability in the industry for the commodity.  A cycle of reduced demand for a particular commodity can negatively affect a producer’s profitability and ability to repay debt and also have a corresponding negative effect on land values.

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 55 percent as of June 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.

Additionally, 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 clean energy projects and demand-side management and avoids new coal-fired generating projects in response to low natural gas fuel costs and to deal with future public policy initiatives, such as carbon tax, cap and trade legislation, and clean energy incentives.  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.

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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 appropriately 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.

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.

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Assets.  Total assets were $10.4 billion as of June 30, 2011, compared to $9.5 billion as of December 31, 2010.  The increase was attributable primarily to increases in loans, investment securities and Farmer Mac Guaranteed Securities.  As of June 30, 2011, Farmer Mac had $2.8 billion of loans, compared to $2.6 billion as of December 31, 2010.  As of June 30, 2011, Farmer Mac had $2.1 billion of investment securities, compared to $1.8 billion as of December 31, 2010.  As of June 30, 2011, Farmer Mac had $3.2 billion of Farmer Mac Guaranteed Securities, compared to $2.9 billion as of December 31, 2010.

Liabilities and Total Equity.  During the six months ended June 30, 2011, total liabilities increased $0.9 billion as a result of debt issued to support the growth in assets.  Total equity increased $41.7 million during the same period primarily due to increased retained earnings.

Regulatory Capital Compliance.  Farmer Mac was in compliance with its statutory minimum capital requirement and its risk-based capital standard as of June 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 June 30, 2011, Farmer Mac’s core capital totaled $484.2 million and exceeded its statutory minimum capital requirement of $321.9 million by $162.3 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 June 30, 2011, Farmer Mac’s new risk-based capital stress test generated a risk-based capital requirement of $122.9 million.  Farmer Mac’s regulatory capital of $502.7 million exceeded that amount by approximately $379.8 million.  Farmer Mac’s risk-based capital stress test in effect prior to second quarter 2011 would have generated a risk-based capital requirement of $32.7 million as of June 30, 2011.  Farmer Mac’s regulatory capital of $502.7 million would have exceeded that amount by approximately $470.0 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.

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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.

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 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 June 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 ability 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.

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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 June 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.

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 June 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 June 30, 2011 was $845.3 million, of which $816.4 million were loans to electric distribution cooperatives and $28.9 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.

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

	June 30,		December 31,
	2011		2010
	(in thousands)
Allowance for loan losses	$	11,053	$	9,803
Reserve for losses:
Off-balance sheet Farmer Mac I Guaranteed Securities		519		635
LTSPCs		6,924		9,677
Total allowance for losses	$	18,496	$	20,115

The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three and six months ended June 30, 2011 and 2010:

	June 30, 2011									June 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	$	11,084		$	8,378		$	19,462		$	9,142		$	6,427	$	15,569
Provision for/(release of) losses		160			(935	)		(775	)		(1,870	)		3,043		1,173
Charge-offs		(191	)		-			(191	)		-			-		-
Recoveries		-			-			-			2,223			-		2,223
Ending Balance	$	11,053		$	7,443		$	18,496		$	9,495		$	9,470	$	18,965
For the Six Months Ended:
Beginning Balance	$	9,803		$	10,312		$	20,115		$	6,292		$	7,895	$	14,187
Provision for/(release of) losses		1,441			(2,869	)		(1,428	)		980			1,575		2,555
Charge-offs		(191	)		-			(191	)		-			-		-
Recoveries		-			-			-			2,223			-		2,223
Ending Balance	$	11,053		$	7,443		$	18,496		$	9,495		$	9,470	$	18,965

During the three and six months ended June 30, 2011, Farmer Mac recorded releases from its allowance for losses of $0.8 million and $1.4 million, respectively, compared to provisions of $1.2 million and $2.6 million, respectively, for the same periods in 2010.  Farmer Mac recorded charge-offs of $0.2 million for the three and six months ended June 30, 2011, compared to no charge-offs during the same periods in 2010.  Farmer Mac had no recoveries during the first half of 2011, compared to $2.2 million of recoveries during the three and six months ended June 30, 2010.  There was no previously accrued or advanced interest on loans or Farmer Mac I Guaranteed Securities charged off in second quarter 2011 or 2010.  As of June 30, 2011, Farmer Mac’s allowance for losses totaled $18.5 million, or 43 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.

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As of June 30, 2011, Farmer Mac’s 90-day delinquencies were $54.6 million (1.27 percent), compared to $56.0 million (1.30 percent) as of June 30, 2010.  As of June 30, 2011 there were no ethanol loans in the 90-day delinquencies, compared to $10.9 million as of June 30, 2010.  As of June 30, 2011, Farmer Mac’s non-performing assets totaled $67.3 million (1.56 percent), compared to $71.3 million (1.66 percent) as of June 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.

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 0.45 percent as of June 30, 2011.

As of June 30, 2011, Farmer Mac’s ethanol exposure, which includes loans held and loans subject to LTSPCs, was $212.3 million on 27 different plants, with an additional $19.8 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:
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	%
June 30, 2009		4,471,567		97,123		2.17	%		54,816		42,307		0.95	%

(1) Excludes loans underlying AgVantage securities.

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As of June 30, 2011, Farmer Mac individually analyzed $61.0 million of its $94.9 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values.  Farmer Mac evaluated the remaining $33.9 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics.  As of June 30, 2011, Farmer Mac had recorded specific allowances of $7.5 million for under-collateralized assets.  As of June 30, 2011, Farmer Mac’s non-specific or general allowances were $11.0 million.

As of June 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 54.6 percent, and the weighted-average original LTV for all non-performing assets was 55.6 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 June 30, 2011 by year of origination, geographic region and commodity/collateral type.

Farmer Mac I Non-performing Assets as of June 30, 2011
	Distribution of		Outstanding
	Outstanding		Loans,
	Loans,		Guarantees,		Non-		Non-
	Guarantees,		LTSPCs		performing		performing
	LTSPCs and REO		and REO (1)		Assets (2)		Asset Rate
	(dollars in thousands)
By year of origination:
Before 1997		5%	$	212,117	$	6,137		2.89%
1997		2%		92,632		1,609		1.74%
1998		3%		141,863		3,602		2.54%
1999		5%		195,821		3,716		1.90%
2000		2%		101,299		803		0.79%
2001		4%		186,869		7,029		3.76%
2002		6%		246,814		4,672		1.89%
2003		7%		298,537		3,273		1.10%
2004		7%		293,097		2,390		0.82%
2005		9%		373,830		2,649		0.71%
2006		10%		422,632		8,495		2.01%
2007		9%		385,728		15,622		4.05%
2008		9%		399,306		5,445		1.36%
2009		6%		261,925		1,812		0.69%
2010		10%		456,822		-		0.00%
2011		6%		246,695		-		0.00%
Total		100%	$	4,315,987	$	67,254		1.56%
By geographic region (1):
Northwest		18%	$	768,974	$	13,070		1.70%
Southwest		36%		1,578,702		13,612		0.86%
Mid-North		22%		928,976		9,222		0.99%
Mid-South		12%		502,724		10,791		2.15%
Northeast		7%		300,177		3,027		1.01%
Southeast		5%		236,434		17,532		7.42%
Total		100%	$	4,315,987	$	67,254		1.56%
By commodity/collateral type:
Crops		42%	$	1,803,245	$	22,159		1.23%
Permanent plantings		20%		843,868		26,755		3.17%
Livestock		27%		1,151,801		9,391		0.82%
Part-time farm		6%		271,357		8,298		3.06%
AgStorage and processing
(including ethanol facilities)		5%		225,254		-		0.00%
Other		0%		20,462		651		3.18%
Total		100%	$	4,315,987	$	67,254		1.56%

(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 June 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 June 30, 2011
	Cumulative
	Original Loans,		Cumulative			Cumulative
	Guarantees and		Net Credit			Loss
	LTSPCs		Losses			Rate
	(dollars in thousands)
By year of origination:
Before 1997	$	3,452,888	$	1,593			0.05%
1997		774,294		2,256			0.29%
1998		1,147,695		3,885			0.34%
1999		1,169,463		1,291			0.11%
2000		769,507		2,931			0.38%
2001		1,132,625		177			0.02%
2002		1,152,010		-			0.00%
2003		963,931		58			0.01%
2004		694,035		32			0.00%
2005		805,488		34			0.00%
2006		847,046		7,697			0.91%
2007		611,637		1,519			0.25%
2008		605,750		3,232			0.53%
2009		367,731		1,193			0.32%
2010		495,042		-			0.00%
2011		253,635		-			0.00%
Total	$	15,242,777	$	25,898			0.17%
By geographic region (1):
Northwest	$	2,883,453	$	11,028			0.38%
Southwest		5,785,779		7,421			0.13%
Mid-North		2,635,085		6,723			0.26%
Mid-South		1,407,119		(356	)		-0.03%
Northeast		1,372,859		83			0.01%
Southeast		1,158,482		999			0.09%
Total	$	15,242,777	$	25,898			0.17%
By commodity/collateral type:
Crops	$	6,209,398	$	2,673			0.04%
Permanent plantings		3,390,374		9,711			0.29%
Livestock		3,908,943		3,529			0.09%
Part-time farm		1,032,438		484			0.05%
AgStorage and processing
(including ethanol facilities) (2)		555,499		9,501			1.71%
Other		146,125		-			0.00%
Total	$	15,242,777	$	25,898			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 June 30, 2011, approximately $19.8 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 June 30, 2011, the properties that secure Farmer Mac’s non-performing assets were not concentrated in any region of the country, and many of these borrowers have experienced reduced profit margins caused by rapidly rising operating expenses or expanding business segments followed by a decline in demand for their products.

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.

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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.

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 $1.7 billion and $0.9 billion as of June 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 June 30, 2011 and December 31, 2010, respectively.  In addition, outstanding off-balance sheet AgVantage transactions totaled $2.5 billion and $3.0 billion as of June 30, 2011 and December 31, 2010, respectively.  See “—Business Volume” for information about off-balance sheet AgVantage securities that matured or are scheduled to mature 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 June 30, 2011 and December 31, 2010.

	June 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		1,428,880	A	100%		1,902,492	A	100%
M&I Bank (2)		475,000	A+	106%		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)		11,500	N/A	111% to 120%		11,500	N/A	111% to 120%
Total outstanding	$	5,615,380			$	5,788,992

(1) Includes securities issued by Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut.

(2) M&I Bank was acquired by BMO Financial Group of Canada in second quarter 2011 whose credit rating is reflected for June 30, 2011. M&I Bank was on credit watch positive (*+) at December 31, 2010.

(3) Consists of AgVantage securities issued by 4 different issuers.

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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.

Credit Risk – Other Investments.  As of June 30, 2011, Farmer Mac had $768.3 million of cash and cash equivalents and $2.1 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 indicated it would seek public comment at a later date regarding its use of credit ratings in its Liquidity and Investment Regulations.  For more information on these regulatory developments, 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 June 30, 2011, 25 percent of Farmer Mac’s regulatory capital was $125.7 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 June 30, 2011, 10 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 6 percent had other forms of prepayment protection (together covering 26 percent of all loans with fixed interest rates).  Of the Farmer Mac I newly originated and current seasoned loans purchased in second quarter 2011, none had yield maintenance or other forms of prepayment protection.  As of June 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 second quarter 2011, 4 percent contained various forms of prepayment penalties.  As of June 30, 2011, 70 percent of the rural utilities loans owned by Farmer Mac had yield maintenance provisions.  Of the rural utilities loans purchased in second quarter 2011, 59 percent had yield maintenance provisions.  As of June 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.

Taking into consideration the prepayment provisions and the default probabilities associated with its mortgage assets, Farmer Mac uses prepayment models to project and value cash flows 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 $768.3 million of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities.  As of June 30, 2011, $1.1 billion of the $2.1 billion of investment securities (54 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 June 30, 2011, Farmer Mac had outstanding discount notes of $4.4 billion, medium-term notes that mature within one year of $0.8 billion and medium-term notes that mature after one year of $3.8 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 durations and cash flows 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 June 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 Case
Interest Rate	June 30,	December 31,
Scenario	2011	2010
+ 300 bp	-6.3%	-1.0%
+ 200 bp	-2.4%	1.9%
+ 100 bp	-0.3%	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 June 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 0.3 months, compared to minus 1.6 months as of December 31, 2010.  This reduction in interest rate sensitivity is attributable primarily to the significant on-balance sheet program growth that occurred during the quarter.  Duration matching of those program assets and the corresponding liabilities helps maintain the correlation of cash flows and stabilize portfolio earnings even when interest rates are not stable.

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 June 30, 2011, a parallel increase of 100 basis points would have decreased Farmer Mac’s NII by 9.4 percent, while a parallel decrease of 25 basis points would have decreased NII by 5.6 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 June 30, 2011, both MVE and NII showed similar or lesser sensitivity to non-parallel shocks than to the parallel shocks.

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:

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·   “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 June 30, 2011, Farmer Mac had $5.5 billion combined notional amount of interest rate and credit default swaps, with terms ranging from one to fifteen years, of which $1.7 billion were pay-fixed interest rate swaps, $3.4 billion were receive-fixed interest rate swaps, $0.3 billion were basis swaps and $30.0 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 second quarter 2011.  Standard & Poor’s recent downgrade of the credit ratings of the United States, certain GSEs and other federal agencies linked to long-term U.S. debt could have material adverse impacts on financial markets and economic conditions in the United States and throughout the world. Because of the unprecedented nature of negative credit rating actions with respect to the U.S. government obligations and related securities, the ultimate impacts on global markets and Farmer Mac’s business, financial condition and liquidity are unpredictable and may not be immediately apparent. However, Farmer Mac’s access to the capital markets at favorable rates has not been negatively affected by the ratings downgrades to date. 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 166 days of liquidity during second quarter 2011 and had 166 days of liquidity as of June 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.

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 $8.9 billion was outstanding as of June 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.

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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.  Prior to 2009, Farmer Mac routinely used 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 have provided 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 widespread use of pay-fixed interest rate swaps subjected the Corporation’s regulatory capital surplus to the potential adverse effects of a reduction in the fair values of those interest rate swaps.  Such a reduction occurred in the third and fourth quarters of 2008.  After September 2008, Farmer Mac systematically entered into various offsetting interest rate swaps (receive-fixed swaps) to counteract the fair value movements of the previously-existing interest rate swaps.  These transactions reduced the susceptibility of Farmer Mac’s regulatory capital surplus to changes in the fair values of its financial derivatives.  Currently, 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.

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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 June 30, 2011 and December 31, 2010.

	June 30,		December 31,
	2011		2010
	(in thousands)
Cash and cash equivalents	$	768,335	$	729,920
Investment securities:
Guaranteed by U.S. Government and its agencies		1,162,995		929,793
Guaranteed by GSEs		481,898		405,631
Preferred stock issued by GSEs		168,317		169,524
Corporate debt securities		147,672		163,188
Asset-backed securities principally backed by Government-
guaranteed student loans		132,983		95,193
Total	$	2,862,200	$	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 $64.7 million of ARCs as of June 30, 2011, compared to $64.3 million as of December 31, 2010.  As of June 30, 2011, Farmer Mac’s carrying value of its ARCs was 87 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 first and second quarters 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.  On August 3, 2011, Farmer Mac’s board of directors declared a quarterly dividend of $0.05 per share on the Corporation’s common stock, payable on September 30, 2011 to shareholders of record on September 15, 2011.  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 first and second quarters 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 August 3, 2011, Farmer Mac’s board of directors declared a quarterly dividend of $12.50 per share on the Corporation’s Series C Preferred Stock, payable on September 30, 2011 to shareholders of record on September 15, 2011.

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 first and second quarters 2011, Farmer Mac II LLC paid a quarterly dividend of $22.1875 per share on the company’s preferred stock.  For first and second quarters 2010, Farmer Mac II LLC paid a quarterly dividend of $16.02 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 $11.1 million for the three and six months ended June 30, 2011, respectively, compared to $5.5 million and $9.6 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.  On August 3, 2011, Farmer Mac II LLC’s board of directors declared a quarterly dividend of $22.1875 per share on the company’s preferred stock, payable on September 30, 2011 to shareholders of record on September 15, 2011.

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.

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In the supplementary information published with the final rule, FCA estimated that Farmer Mac’s risk-based capital requirement would have been $125.5 million as of December 31, 2010 had the Final RBC 4.0 Rule been in effect on that date, compared to $42.1 million under the version of the risk-based capital stress test that was in effect on December 31, 2010.  As of that date, Farmer Mac’s regulatory capital was $480.7 million.  FCA also stated in the supplementary information that its tests indicated that changes related to credit losses on rural utilities loans combined with the concentration risk adjustment to the AgVantage general obligation adjustment would have the most significant impact on the risk-based capital requirement calculated by the new model.

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 June 30, 2011, Farmer Mac’s minimum capital requirement was $321.9 million, and Farmer Mac’s core capital level was $484.2 million, $162.3 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 June 30, 2011 was $122.9 million, and Farmer Mac’s regulatory capital of $502.7 million exceeded that requirement by approximately $379.8 million.  Based on the risk-based capital stress test in effect prior to second quarter 2011, Farmer Mac’s risk-based capital requirement as of June 30, 2011 would have been $32.7 million, and Farmer Mac’s regulatory capital of $502.7 million would have exceeded that requirement by approximately $470.0 million.

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.

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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.  FCA also indicated in the ANPRM that it would seek public comment at a later date regarding FCA’s use of credit ratings in the Liquidity and Investment Regulations applicable to Farmer Mac.  Farmer Mac intends to submit a comment letter on the ANPRM before the comment period closes on August 15, 2011.

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:
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
June 30, 2009		37,900		22,717		96,322		900,000		1,056,939
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 June 30, 2011, approximately $19.8 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:
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
June 30, 2009		5,241,145		2,181,712		1,115,025		1,819,033		10,356,915

(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 ofexisting 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:
June 30, 2011	$	4,193,131	$	1,198,740	$	1,907,698	$	7,299,569
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
June 30, 2009		1,673,947		646,550		1,286,126		3,606,623

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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 June 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 June 30, 2011.

(b)  Remediation of Previously Disclosed Material Weakness.  In connection with the restatement discussed in Note 1(a) to the condensed consolidated financial statements, under the direction of the CEO and CFO, management re-evaluated Farmer Mac’s disclosure controls and procedures during second quarter 2011.  Based on management’s assessment, the CEO and CFO identified a material weakness in internal control over financial reporting related to incorrect classifications of proceeds from the repayments of certain loans between operating activities and investing activities within the Corporation’s consolidated statements of cash flows.  Solely as a result of this material weakness, Farmer Mac concluded that its disclosure controls and procedures were not effective as of December 31, 2010 and for each of the quarterly periods ended March 31, 2010, June 30, 2010, September 30, 2010 and March 31, 2011.

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During second quarter 2011, management implemented changes in internal control over financial reporting to remediate the material weakness related to the classifications of cash flows from certain loans within the consolidated statements of cash flows.  The Corporation conducted a comprehensive evaluation of the classifications of cash flows within its consolidated statements of cash flows, established a new policy and developed a process to report cash flows based on management’s original intent upon purchase of a loan.  Management believes that these efforts and the June 1, 2011 filing of Amendment No. 1 on Form 10-K/A for the year ended December 31, 2010 have remediated the identified material weakness.

Changes in Internal Control Over Financial Reporting. Other than noted above, there were no changes in Farmer Mac’s internal control over financial reporting during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, Farmer Mac’s internal control over financial reporting.

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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 second 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 April 5, 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 457 shares of its Class C Non-Voting 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 $19.11 per share, which was the closing price of the Class C Non-Voting Common Stock on March 31, 2011 as reported by the New York Stock Exchange.

(b) Not applicable.

(c) None.

Item 3. Defaults Upon Senior Securities

(a)   None.

(b)   None.

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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 pursuant to a request for confidential treatment.

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†* 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 pursuant to a request for confidential treatment.

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*# 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 pursuant to a request for confidential treatment.

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*# 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 pursuant to a request for confidential treatment.

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* 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 Master Sale and Servicing Agreement dated as of July 24, 2009 between National Rural Utilities Cooperative Finance Corporation and the Registrant (Previously filed as Exhibit 10.37 to Form 10-Q filed August 9, 2010).

* 10.26.1 Amendment No. 1 to Master Sale and Servicing Agreement dated as of February 1, 2010 between National Rural Utilities Cooperative Finance Corporation and the Registrant (Previously filed as Exhibit 10.37.1 to Form 10-Q filed August 9, 2010).

*# 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 June 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 June 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 June 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 pursuant to a request for confidential treatment.

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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

August 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)

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael A. Gerber, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation for the fiscal quarter ended June 30, 2011;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2011

/s/ Michael A. Gerber

Michael A. Gerber

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Timothy L. Buzby, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation for the fiscal quarter ended June 30, 2011;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2011

/s/ Timothy L. Buzby

Timothy L. Buzby

Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation (the “Corporation”) for the quarterly period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Michael A. Gerber, Chief Executive Officer of the Corporation, and Timothy L. Buzby, Chief Financial Officer of the Corporation, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Michael A. Gerber

Michael A. Gerber

Chief Executive Officer

/s/ Timothy L. Buzby

Timothy L. Buzby

Chief Financial Officer

Date: August 9, 2011

XML



CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Preferred stock, Series C, par value	$ 1,000	$ 1,000
Preferred stock, Series C, shares authorized	100,000	100,000
Preferred stock, Series C, shares issued	57,578	57,578
Preferred stock, Series C, shares outstanding	57,578	57,578
Common Stock, Class A Voting
Common stock, par value	$ 1	$ 1
Common stock, shares outstanding	1,030,780	1,030,780
Common stock, Class B Voting
Common stock, par value	$ 1	$ 1
Common stock, shares outstanding	500,301	500,301
Common stock, Class C Non-Voting
Common stock, par value	$ 1	$ 1
Common stock, shares outstanding	8,812,500	8,752,711

XML



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Interest income:
Loans	$ 30,461	$ 32,142	$ 59,571	$ 65,560
Total interest income	66,852	57,327	130,924	118,059
Total interest expense	37,640	35,719	74,693	72,834
Net interest income	29,212	21,608	56,231	45,225
(Provision for)/release of loan losses	(160)	1,870	(1,441)	(980)
Net interest income after (provision for)/recovery of loan losses	29,052	23,478	54,790	44,245
Non-interest (loss)/income:
Guarantee and commitment fees	6,320	5,710	12,707	11,629
Losses on financial derivatives	(17,806)	(15,840)	(13,801)	(21,644)
Gains on trading assets	1,968	5,058	3,279	8,425
Gains on sale of available-for-sale investment securities	38	0	195	240
Gains on sale of real estate owned	627	0	724	0
Lower of cost or fair value adjustment on loans held for sale	(156)	90	(964)	(2,184)
Other income	1,124	211	5,022	1,040
Non-interest (loss)/ income	(7,885)	(4,771)	7,162	(2,494)
Non-interest expense:
Compensation and employee benefits	4,666	3,907	9,163	7,418
General and administrative	2,656	2,051	4,912	4,554
Regulatory fees	573	562	1,164	1,125
Real estate owned operating costs, net	231	298	599	308
(Release of)/provision for losses	(935)	3,043	(2,869)	1,575
Other expense	0	0	900	0
Non-interest expense	7,191	9,861	13,869	14,980
Income before income taxes	13,976	8,846	48,083	26,771
Income tax expense	2,539	756	12,056	5,092
Net income	11,437	8,090	36,027	21,679
Less: Net income attributable to non-controlling interest - preferred stock dividends	(5,547)	(5,546)	(11,094)	(9,614)
Net income attributable to Farmer Mac	5,890	2,544	24,933	12,065
Preferred stock dividends	(720)	(720)	(1,440)	(2,690)
Loss on retirement of preferred stock	0	0	0	(5,784)
Net income available to common stockholders	5,170	1,824	23,493	3,591
Earnings per common share and dividends:
Basic earnings per common share	$ 0.50	$ 0.18	$ 2.28	$ 0.35
Diluted earnings per common share	$ 0.48	$ 0.17	$ 2.20	$ 0.34
Common stock dividends per common share	$ 0.05	$ 0.05	$ 0.10	$ 0.10
Investments and Cash Equivalents
Interest income:
Interest and dividend income, securities	7,033	6,390	14,220	12,873
Farmer Mac and USDA Guaranteed Securities
Interest income:
Interest and dividend income, securities	$ 29,358	$ 18,795	$ 57,133	$ 39,626

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 01, 2011 Class A Voting Common Stock	Aug. 01, 2011 Class B Voting Common Stock	Aug. 01, 2011 Class C Non-Voting Common Stock
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Trading Symbol	AGM
Entity Registrant Name	FEDERAL AGRICULTURAL MORTGAGE CORP
Entity Central Index Key	0000845877
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		1,030,780	500,301	8,821,878

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Off-Balance Sheet Guarantees and Long Term Standby Purchase Commitments

6 Months Ended

Jun. 30, 2011

Off-Balance Sheet Guarantees and Long Term Standby Purchase Commitments

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.

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 six months ended June 30, 2011 and 2010 were $10.7 million and $12.9 million, respectively.  The following table summarizes cash flows received from and paid to trusts used for Farmer Mac securitizations:

	For the Six Months Ended
	June 30, 2011			June 30, 2010
	(in thousands)
Proceeds from new securitizations	$	10,734		$	12,906
Guarantee fees received		4,286			2,620
Purchases of assets from the trusts		(1,369	)		(2,323	)
Servicing advances		(20	)		(343	)
Repayments of servicing advances		14			174

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 June 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
	June 30,		December 31,
	2011		2010
	(in thousands)
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
Farmer Mac Guaranteed Securities		696,257		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,120		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		18,080		15,292
Total off-balance sheet Farmer Mac Guaranteed Securities	$	3,204,457	$	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 $14.5 million as of June 30, 2011 and $17.7 million as of December 31, 2010.  Upon adoption of the new 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 June 30, 2011, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 13.6 years.  As of June 30, 2011, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 2.4 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).

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 $1.7 billion as of June 30, 2011 and $1.8 billion as of December 31, 2010.

As of June 30, 2011, the weighted-average remaining maturity of all loans underlying LTSPCs was 13.8 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 $13.1 million as of June 30, 2011 and $12.6 million as of December 31, 2010.

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Accounting Policies

6 Months Ended

Jun. 30, 2011

Accounting Policies

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/A 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 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 Securities and Exchange Commission, and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the Farmer Mac II program – primarily the acquisition of 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.

A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities.  When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished.  For Farmer Mac Guaranteed Securities in the Corporation’s portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC.  The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the condensed consolidated statements of operations.  These guarantee fees totaled $2.0 million and $4.1 million for the three and six months ended June 30, 2011, respectively, compared to $1.5 million and $3.2 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 six months ended June 30, 2011 and 2010.

	For the Six Months Ended
	June 30, 2011		June 30, 2010
	(in thousands)
Cash paid during the period for:
Interest	$	49,261	$	37,989
Income taxes		11,500		12,000
Non-cash activity:
Real estate owned acquired through loan liquidation		2,639		3,580
Loans acquired and securitized as loans held for investment in consolidated trusts		8,729		1,288
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to
loans held for investment in consolidated trusts		8,729		1,401,659
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to
debt securities of consolidated trusts held by third parties		8,729		1,401,659
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		-

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, on Amendment No.1 of Form 10-K/A filed 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 to 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 are reduced by charge-offs for actual losses, net of recoveries.  Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.

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

General Allowance for Losses

Farmer Mac I

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

·   economic conditions;

·   geographic and agricultural commodity/product concentrations in the portfolio;

·   the credit profile of the portfolio;

·   delinquency trends of the portfolio;

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

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

Management believes that its use of this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held in the Farmer Mac I portfolio and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs.  There were no purchases or sales during the first half 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.

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 June 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.

           As of June 30, 2011 and 2010, Farmer Mac’s specific allowances for losses were $7.5 million and $3.0 million, respectively.

Allowance for Losses

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

	June 30, 2011									June 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	$	11,084		$	8,378		$	19,462		$	9,142		$	6,427	$	15,569
Provision for/(release of) losses		160			(935	)		(775	)		(1,870	)		3,043		1,173
Charge-offs		(191	)		-			(191	)		-			-		-
Recoveries		-			-			-			2,223			-		2,223
Ending Balance	$	11,053		$	7,443		$	18,496		$	9,495		$	9,470	$	18,965
For the Six Months Ended:
Beginning Balance	$	9,803		$	10,312		$	20,115		$	6,292		$	7,895	$	14,187
Provision for/(release of) losses		1,441			(2,869	)		(1,428	)		980			1,575		2,555
Charge-offs		(191	)		-			(191	)		-			-		-
Recoveries		-			-			-			2,223			-		2,223
Ending Balance	$	11,053		$	7,443		$	18,496		$	9,495		$	9,470	$	18,965

During second quarter 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.2 million and releases from its reserve for losses of $0.9 million.  The net release from the allowance for losses in second quarter 2011 was primarily due to a decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries.  Farmer Mac also charged off $0.2 million of losses upon acquisition of real estate owned (“REO”) during second quarter 2011.  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 six months ended June 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.

During second quarter 2010, Farmer Mac recorded releases from its allowance for loan losses of $1.9 million and provisions to its reserve for losses of $3.0 million.  Farmer Mac also recorded recoveries of $2.2 million on a loan secured by an ethanol plant during second quarter 2010.  For the six months ended June 30, 2010, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $1.0 million and $1.6 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 the new consolidation guidance in first quarter 2010.

Farmer Mac’s reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of June 30, 2011 were $0.5 million and $6.9 million, respectively, compared to $0.6 million and $9.7 million, respectively as of December 31, 2010.

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

	As of June 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	$	1,771,634		$	813,080		$	1,138,248		$	259,825	$	218,938		$	19,322		$	4,221,047
Evaluated individually
for impairment		31,611			30,788			13,553			11,532		6,316			1,140			94,940
	$	1,803,245		$	843,868		$	1,151,801		$	271,357	$	225,254		$	20,462		$	4,315,987
Allowance for Losses:
Evaluated collectively
for impairment	$	1,637		$	1,204		$	1,118		$	782	$	6,250		$	8		$	10,999
Evaluated individually
for impairment		2,078			2,599			656			313		1,850			1			7,497
	$	3,715		$	3,803		$	1,774		$	1,095	$	8,100		$	9		$	18,496
For the Three Months Ended:
Beginning balance	$	3,922		$	3,802		$	1,850		$	1,053	$	8,823		$	12		$	19,462
Provision for/(release of) losses		(31	)		8			(68	)		42		(723	)		(3	)		(775	)
Charge-offs		(176	)		(7	)		(8	)		-		-			-			(191	)
Ending balance	$	3,715		$	3,803		$	1,774		$	1,095	$	8,100		$	9		$	18,496
For the Six Months Ended:
Beginning balance	$	3,572		$	3,537		$	2,749		$	445	$	9,797		$	15		$	20,115
Provision for/(release of) losses		319			273			(967	)		650		(1,697	)		(6	)		(1,428	)
Charge-offs		(176	)		(7	)		(8	)		-		-			-			(191	)
Ending balance	$	3,715		$	3,803		$	1,774		$	1,095	$	8,100		$	9		$	18,496

Farmer Mac recognized interest income of approximately $0.3 million and $1.1 million on impaired loans during the three months and six months ended June 30, 2011, respectively, compared to $0.4 million and $0.9 million, respectively, for the same periods in 2010.  During the three and six months ended June 30, 2011, Farmer Mac’s average investment in impaired loans was $89.1 million and $94.4 million, respectively, compared to $115.7 million and $124.3 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 June 30, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2011.

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 six months ended June 30, 2011, Farmer Mac purchased 5 defaulted loans having an unpaid principal balance of $1.4 million and 13 defaulted loans having an unpaid principal balance of $18.3 million, respectively, from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs.  During the three and six months ended June 30, 2010, Farmer Mac purchased 2 defaulted loans  having an unpaid principal balance of $0.9 million and 7 defaulted loans having an unpaid principal balance of $3.4 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 Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
	(in thousands)
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities	$	-	$	-	$	1,369	$	2,323
Defaulted loans purchased
underlying LTSPCs		1,420		913		16,976		1,080
Total defaulted loan purchases	$	1,420	$	913	$	18,345	$	3,403

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 June 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 June 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	$	1,705,342	$	758,248	$	997,538	$	239,603	$	116,498	$	17,797	$	3,835,026
Other assets especially mentioned ("OAEM") (2)		51,229		31,452		94,127		13,380		64,435		1,296		255,919
Substandard (2)		46,674		54,168		60,136		18,374		44,321		1,369		225,042
Total	$	1,803,245	$	843,868	$	1,151,801	$	271,357	$	225,254	$	20,462	$	4,315,987
Commodity analysis of past due loans (1)
Greater than 90 days	$	17,060	$	22,072	$	7,773	$	7,077	$	-	$	651	$	54,633
In bankruptcy and REO		5,099		4,683		1,618		1,221		-		-		12,621
Total non-performing	$	22,159	$	26,755	$	9,391	$	8,298	$	-	$	651	$	67,254

(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 $4.1 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.

Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs as of June 30, 2011 and December 31, 2010:

	June 30,		December 31,
	2011		2010
	(in thousands)
By commodity/collateral type:
Crops	$	1,803,245	$	1,731,380
Permanent plantings		843,868		865,475
Livestock		1,151,801		1,146,458
Part-time farm		271,357		291,145
AgStorage and processing
(including ethanol facilities)		225,254		246,723
Other		20,462		22,939
Total	$	4,315,987	$	4,304,120
By geographic region (1):
Northwest	$	768,974	$	660,845
Southwest		1,578,702		1,626,398
Mid-North		928,976		934,879
Mid-South		502,724		521,294
Northeast		300,177		317,715
Southeast		236,434		242,989
Total	$	4,315,987	$	4,304,120
By original loan-to-value ratio:
0.00% to 40.00%	$	1,034,365	$	1,030,580
40.01% to 50.00%		772,677		770,744
50.01% to 60.00%		1,241,290		1,246,675
60.01% to 70.00%		1,067,894		1,056,132
70.01% to 80.00%		147,255		155,363
80.01% to 90.00%		52,506		44,626
Total	$	4,315,987	$	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.

(c)       Financial Derivatives

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

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

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

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

	June 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	$	1,721,842	$	2,317		$	(107,896	)		3.96	%		0.27	%				3.87
Receive fixed non-callable		3,305,910		41,976			(20	)		0.38	%		1.24	%				1.35
Receive fixed callable		100,000		76			-			0.19	%		0.48	%				0.82
Basis swaps		319,117		163			(1,763	)		0.92	%		0.40	%				1.62
Credit default swaps		30,000		-			(118	)		1.00	%		0.00	%				0.56
Agency forwards		17,248		266			-									113.41
Treasury futures		4,200		28			-									122.99
Credit valuation adjustment		-		(850	)		646
Total financial derivatives	$	5,498,317	$	43,976		$	(109,151	)

	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 June 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 $87.2 million.  As of June 30, 2011, Farmer Mac posted cash of $5.1 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.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2011, it could have been required to settle its obligations under the agreements or post additional collateral of $82.1 million.

The following table summarizes the effects of Farmer Mac’s financial derivatives on the condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010:

	Losses on Financial Derivatives
	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(in thousands)
Interest rate swaps	$	(16,451	)	$	(14,624	)	$	(11,721	)	$	(19,390	)
Agency forwards		(1,153	)		(1,339	)		(2,001	)		(1,938	)
Treasury futures		(211	)		(393	)		(26	)		(641	)
Credit default swaps		9			561			(53	)		405
		(17,806	)		(15,795	)		(13,801	)		(21,564	)
Amortization of derivatives transition adjustment		-			(45	)		-			(80	)
Total	$	(17,806	)	$	(15,840	)	$	(13,801	)	$	(21,644	)

As of June 30, 2011, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $74.1 million and a fair value of $(1.8) 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 $0.1 million and unrealized gains of $1.6 million on those outstanding basis swaps for the three and six months ended June 30, 2011, respectively, compared to unrealized losses of $0.1 million and $25,000, respectively, for the same periods in 2010.

(d)       Earnings Per Common Share

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

	For the Three Months Ended
	June 30, 2011							June 30, 2010
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available
to common stockholders	$	5,170		10,343	$	0.50		$	1,824		10,210	$	0.18
Effect of dilutive securities(1):
Stock options, SARs
and restricted stock				376		(0.02	)				400		(0.01	)
Diluted EPS	$	5,170		10,719	$	0.48		$	1,824		10,610	$	0.17

(1) For the three months ended June 30, 2011 and 2010, stock options and SARs of 652,234 and 1,650,050, 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 June 30, 2011 and 2010, contingent shares of non-vested restricted stock of 170,760 and 126,000, respectively, were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

	For the Six Months Ended
	June 30, 2011							June 30, 2010
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income/(loss) available
to common stockholders	$	23,493		10,314	$	2.28		$	3,591		10,177	$	0.35
Effect of dilutive securities(1):
Stock options, SARs
and restricted stock				378		(0.08	)				354		(0.01	)
Diluted EPS	$	23,493		10,692	$	2.20		$	3,591		10,531	$	0.34

(1) For the six months ended June 30, 2011 and 2010, stock options and SARs of 705,515 and 1,616,008, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the six months ended June 30, 2011 and 2010, contingent shares of non-vested restricted stock of 148,380 and 104,250, respectively, were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

(e)       Stock-Based Compensation

Farmer Mac’s 2008 Omnibus Incentive Compensation Plan authorizes the grants of restricted stock, stock options and SARs, among other alternative forms of equity-based compensation, to directors, officers and other employees.  SARs awarded to officers and employees vest annually in thirds.  If not exercised or terminated earlier due to the termination of employment, SARs granted to officers or employees expire after ten years.  For all SARs granted, the exercise price is equal to the closing price of Farmer Mac’s Class C Non-Voting Common Stock on the date of grant.  SARs granted to officers in second quarter 2011 have an exercise price of $18.77.  As of June 30, 2011, there were no outstanding SARs awarded to directors.  Restricted stock awarded to directors during second quarter 2011 vests fully on March 31, 2012, approximately one year after grant.  Restricted stock awarded to officers during second quarter 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 six months ended June 30, 2011, Farmer Mac recognized $0.8 million and $1.5 million, respectively, of compensation expense related to stock options, SARs and restricted stock, compared to $0.8 million and $1.5 million, respectively, for the same periods in 2010.

The following tables summarize activity related to stock options, SARs and nonvested restricted stock awards for the three and six months ended June 30, 2011 and 2010:

	June 30, 2011					June 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		1,322,461		$	19.37		1,799,465		$	22.68
Granted		113,000			18.77		247,000			12.20
Exercised		-			-		(21,331	)		13.15
Canceled		(106,561	)		28.83		(102,084	)		20.88
Outstanding, end of period		1,328,900		$	18.57		1,923,050		$	21.53
For the Six 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		(5,667	)		7.48		(21,331	)		13.15
Canceled		(702,566	)		25.79		(102,084	)		20.88
Outstanding, end of period		1,328,900		$	18.57		1,923,050		$	21.53
Options and SARs
exercisable at end of period		886,237		$	21.68		1,433,792		$	25.04

	June 30, 2011					June 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		126,000		$	8.47		200,548		$	5.93
Granted		73,060			18.77		111,085			12.28
Canceled		-			-		(11,599	)		8.15
Vested and issued		-			-		(118,048	)		5.93
Outstanding, end of period		199,060		$	12.25		181,986		$	9.66
For the Six Months Ended:
Outstanding, beginning of period		182,609		$	9.63		200,548		$	5.93
Granted		73,060			18.77		111,085			12.28
Canceled		-			-		(11,599	)		8.15
Vested and issued		(56,609	)		12.22		(118,048	)		5.93
Outstanding, end of period		199,060		$	12.25		181,986		$	9.66

The cancellations of stock options, SARs and nonvested restricted stock during the first six months of 2011 were due to vested options terminating unexercised on their expiration dates.

For the three and six months ended June 30, 2011 adjustments 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 $0.3 million for the three and six months ended June 30, 2010.  The reduction of income taxes to be paid as a result of the deduction for exercises of stock options and SARs was $0.4 million for the six months ended June 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 the three and six months ended June 30, 2010.

The following tables summarize information regarding stock options, SARs and nonvested restricted stock outstanding as of June 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		261,666	7.8 years		151,670	7.8 years		238,667	7.8 years
10.00 - 14.99		302,000	8.8 years		82,333	8.8 years		269,030	8.8 years
15.00 - 19.99		163,786	7.7 years		50,786	3.1 years		155,876	7.6 years
20.00 - 24.99		172,289	3.7 years		172,289	3.7 years		172,289	3.7 years
25.00 - 29.99		400,159	4.3 years		400,159	4.3 years		400,159	4.3 years
30.00 - 34.99		29,000	5.2 years		29,000	5.2 years		29,000	5.2 years
		1,328,900			886,237			1,265,021
	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	1.0 years		67,500	1.0 years
10.00 - 14.99		51,000	2.0 years		45,900	2.0 years
15.00 - 19.99		73,060	2.2 years		63,024	2.2 years
		199,060			176,424

The weighted-average grant date fair value of SARs granted during the first six months of 2011 and 2010 were $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%

(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 long-dated volatilities) 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 new 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 new 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.

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 that 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 June 30, 2011, these Farmer Mac Guaranteed Securities trusts and investment securities trusts have carrying amounts on the condensed consolidated balance sheet totaling $1.8 billion and $867.6 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 $2.7 billion as of June 30, 2011.

(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 will be effective for third quarter 2011 reporting).  The troubled debt restructuring disclosures in ASU 2010-20 also will be effective in third quarter 2011.  Farmer Mac does not expect the adoption of these standards to 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 significant impact on Farmer Mac’s 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.

(i)       Reclassifications

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

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Fair Value Disclosure

6 Months Ended

Jun. 30, 2011

Fair Value Disclosure

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.

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.

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.  Prior to 2010, Farmer Mac used a discounted cash flow model to determine the estimated fair value of these investments as of each quarter end.  The assumptions used in preparing the model included estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment.  In making these assumptions, Farmer Mac considered relevant factors including: the formula for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the underlying student loans are backed by the full faith and credit of the United States; and, publicly available pricing data for student loan asset-backed securities that are not subject to auctions.  Farmer Mac classified these fair value measurements as level 3.

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 in the first half of 2011.  Transfers within the fair value hierarchy for the fair value measurements of investment securities in first quarter 2010 are described below.

During the first half 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 June 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 in the first six months of 2011.  Transfers out of level 3 during first quarter 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 are 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 new 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.

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 June 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 $(0.2) 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 June 30, 2011, Farmer Mac recorded an adjustment of $9.9 million 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.

Real Estate Owned

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.

Fair Value Classification and Transfers

As of June 30, 2011, Farmer Mac’s assets and liabilities recorded at fair value include financial instruments valued at $5.1 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 70 percent of financial instruments measured at fair value as of June 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.

The following tables present information about Farmer Mac’s asset and liabilities measured at fair value on a recurring and nonrecurring basis as of June 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 June 30, 2011
	Level 1		Level 2		Level 3		Total
Recurring:	(in thousands)
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	-	$	-	$	64,682	$	64,682
Floating rate asset-backed securities		-		162,534		-		162,534
Floating rate corporate debt securities		-		113,290		-		113,290
Floating rate Government/GSE
guaranteed mortgage-backed securities		-		633,972		-		633,972
Fixed rate GSE guaranteed mortgage-backed
securities		-		4,167		-		4,167
Floating rate GSE subordinated debt		-		62,565		-		62,565
Fixed rate GSE preferred stock		-		82,377		-		82,377
Fixed rate corporate debt		-		34,382		-		34,382
U.S. Treasuries		834,744		-		-		834,744
Senior agency debt		-		13,001		-		13,001
Total available-for-sale		834,744		1,106,288		64,682		2,005,714
Trading:
Floating rate asset-backed securities		-		-		2,209		2,209
Fixed rate GSE preferred stock		-		85,942		-		85,942
Total trading		-		85,942		2,209		88,151
Total Investment Securities		834,744		1,192,230		66,891		2,093,865
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		-		-		1,759,205		1,759,205
Farmer Mac II		-		-		36,530		36,530
Rural Utilities		-		-		1,448,230		1,448,230
Total Farmer Mac Guaranteed Securities		-		-		3,243,965		3,243,965
USDA Guaranteed Securities:
Available-for-sale		-		-		1,120,397		1,120,397
Trading		-		-		249,074		249,074
Total USDA Guaranteed Securities		-		-		1,369,471		1,369,471
Financial derivatives		28		43,948		-		43,976
Total Assets at fair value	$	834,772	$	1,236,178	$	4,680,327	$	6,751,277
Liabilities:
Financial derivatives	$	-	$	107,396	$	1,755	$	109,151
Total Liabilities at fair value	$	-	$	107,396	$	1,755	$	109,151
Nonrecurring:
Assets:
Loans held for sale	$	-	$	-	$	441,890	$	441,890
Loans held for investment		-		-		12,246		12,246
REO		-		-		705		705
Total Nonrecurring Assets at fair value	$	-	$	-	$	454,841	$	454,841

Assets and Liabilities Measured at Fair Value as of December 31, 2010
	Level 1		Level 2		Level 3		Total
Recurring:	(in thousands)
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
U.S. Treasuries		692,994		-		-		692,994
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

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 June 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
Recurring:	(in thousands)
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed
by Government guaranteed student loans	$	64,539		$	-	$	-		$	-		$	-		$	143		$	-	$	-		$	64,682
Trading:
Floating rate asset-backed securities(1)		1,690			-		-			(168	)		687			-			-		-			2,209
Total Investment Securities		66,229			-		-			(168	)		687			143			-		-			66,891
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		1,429,318			300,000		-			(6	)		-			29,893			-		-			1,759,205
Farmer Mac II		37,803			981		(1,041	)		(1,134	)		-			(79	)		-		-			36,530
Rural Utilities		1,442,793			-		-			-			-			5,437			-		-			1,448,230
Total Farmer Mac Guaranteed Securities		2,909,914			300,981		(1,041	)		(1,140	)		-			35,251			-		-			3,243,965
USDA Guaranteed Securities:
Available-for-sale		1,063,540			98,464		-			(48,951	)		-			7,344			-		-			1,120,397
Trading(2)		274,561			-		-			(26,985	)		1,498			-			-		-			249,074
Total USDA Guaranteed Securities		1,338,101			98,464		-			(75,936	)		1,498			7,344			-		-			1,369,471
Total Assets at fair value	$	4,314,244		$	399,445	$	(1,041	)	$	(77,244	)	$	2,185		$	42,738		$	-	$	-		$	4,680,327
Liabilities:
Financial derivatives(3)	$	(1,671	)	$	-	$	-		$	-		$	(84	)	$	-		$	-	$	-		$	(1,755	)
Total Liabilities at fair value	$	(1,671	)	$	-	$	-		$	-		$	(84	)	$	-		$	-	$	-		$	(1,755	)
Nonrecurring:
Assets:
Loans held for sale	$	406,168		$	-	$	-		$	-		$	(156	)	$	-		$	35,878	$	-		$	441,890
Loans held for investment		12,399			-		-			-			-			-			-		(153	)		12,246
REO		1,573			-		-			(974	)		(101	)		-			207		-			705
Total Nonrecurring Assets at fair value	$	420,140		$	-	$	-		$	(974	)	$	(257	)	$	-		$	36,085	$	(153	)	$	454,841

(1) Unrealized gains are attributable to assets still held as of June 30, 2011 and are recorded in gains on trading assets.

(2) Includes unrealized gains of $0.3 million attributable to assets still held as of June 30, 2011 that are recorded in gains on trading assets.

(3) Unrealized losses are attributable to liabilities still held as of June 30, 2011 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.

Farmer Mac made no fair value option elections for the three and six months ended June 30, 2011 and 2010.  For the three and six months ended June 30, 2011, Farmer Mac recorded net gains on trading assets of $1.3 million and $1.9 million, respectively, for changes in fair values of assets previously selected for the fair value option, compared to net gains of $4.9 million and $8.4 million, respectively, for the same periods ended June 30, 2010.  These changes in fair value are presented as “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 June 30, 2011 and December 31, 2010 in accordance with accounting guidance on disclosures about fair value of financial instruments.

	June 30, 2011				December 31, 2010
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	768,335	$	768,335	$	729,920	$	729,920
Investment securities		2,093,865		2,093,865		1,763,329		1,763,329
Farmer Mac Guaranteed Securities		3,243,965		3,243,965		2,907,264		2,907,264
USDA Guaranteed Securities		1,369,471		1,369,471		1,317,444		1,317,444
Loans		2,890,033		2,787,437		2,642,399		2,558,599
Financial derivatives		43,976		43,976		41,492		41,492
Interest receivable		88,852		88,852		90,295		90,295
Guarantee and commitment fees receivable:
LTSPCs		23,905		13,988		14,191		13,666
Farmer Mac Guaranteed Securities		20,608		17,836		19,058		21,086
Financial liabilities:
Notes payable:
Due within one year		5,205,836		5,201,832		4,510,758		4,509,419
Due after one year		3,868,825		3,744,877		3,530,656		3,430,656
Debt securities of consolidated trusts held by
third parties		818,189		755,357		883,669		827,411
Financial derivatives		109,151		109,151		113,687		113,687
Accrued interest payable		56,152		56,152		57,131		57,131
Guarantee and commitment obligations:
LTSPCs		23,018		13,100		13,152		12,627
Farmer Mac Guaranteed Securities		17,298		14,528		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.

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Business Segment Reporting

6 Months Ended

Jun. 30, 2011

Business Segment Reporting

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 more accurately reflects 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 similar to 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 June 30, 2011, Farmer Mac II LLC held assets with a fair value of $1.4 billion, had debt outstanding of $141.0 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.

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.

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

Core Earnings by Business Segment
For the Three Months Ended June 30, 2011
													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	34,555		$	14,045		$	13,131		$	7,033		$	(1,912	)			$	66,852
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(839	)		-			-			-			839					-
Interest expense (2)		(22,398	)		(11,321	)		(10,044	)		(3,174	)		9,297					(37,640	)
Net effective spread		11,318			2,724			3,087			3,859			8,224					29,212
Guarantee and commitment fees		5,824			50			1,285			-			(839	)				6,320
Other income/(expense) (3)		1,261			59			-			(646	)		(14,879	)				(14,205	)
Non-interest income/(loss)		7,085			109			1,285			(646	)		(15,718	)				(7,885	)
Provision for loan losses		(160	)		-			-			-			-					(160	)
Reserve for losses		935			-			-			-			-					935
Other non-interest expense		(3,992	)		(712	)		(1,247	)		(2,175	)		-					(8,126	)
Non-interest expense (4)		(3,057	)		(712	)		(1,247	)		(2,175	)		-					(7,191	)
Core earnings before income taxes		15,186			2,121			3,125			1,038			(7,494	)	(5	)		13,976
Income tax (expense)/benefit		(5,315	)		(742	)		(1,094	)		1,989			2,623					(2,539	)
Core earnings before preferred stock
dividends and attribution of income to
non-controlling interest		9,871			1,379			2,031			3,027			(4,871	)	(5	)		11,437
Preferred stock dividends		-			-			-			(720	)		-					(720	)
Non-controlling interest		-			-			-			(5,547	)		-					(5,547	)
Segment core earnings	$	9,871		$	1,379		$	2,031		$	(3,240	)	$	(4,871	)	(5	)	$	5,170
Total assets at carrying value	$	3,743,934		$	1,422,554		$	2,353,748		$	2,924,592		$	-				$	10,444,828
Total principal balance of on- and
off-balance sheet program assets		8,498,421			1,425,883			2,274,193			-			-					12,198,497

(1) Includes reconciling adjustments for yield maintenance income and 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and financial derivatives and trading assets.  Also includes a reconciling adjustment related to the recognition of deferred gains upon prepayment 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.

Core Earnings by Business Segment
For the Three Months Ended June 30, 2010
													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	27,081		$	13,825		$	13,987		$	6,390		$	(3,956	)			$	57,327
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(1,282	)		-			-			-			1,282					-
Interest expense (2)		(18,210	)		(11,262	)		(11,342	)		(3,638	)		8,733					(35,719	)
Net effective spread		7,589			2,563			2,645			2,752			6,059					21,608
Guarantee and commitment fees		5,450			50			1,492			-			(1,282	)				5,710
Other income/(expense) (3)		411			-			-			(784	)		(10,108	)				(10,481	)
Non-interest income/(loss)		5,861			50			1,492			(784	)		(11,390	)				(4,771	)
Recoveries of loan losses		1,870			-			-			-			-					1,870
Reserve for losses		(3,043	)		-			-			-			-					(3,043	)
Other non-interest expense		(3,350	)		(721	)		(1,038	)		(1,709	)		-					(6,818	)
Non-interest expense (4)		(6,393	)		(721	)		(1,038	)		(1,709	)		-					(9,861	)
Core earnings before income taxes		8,927			1,892			3,099			259			(5,331	)	(5	)		8,846
Income tax (expense)/benefit		(3,124	)		(662	)		(1,085	)		2,249			1,866					(756	)
Core earnings before preferred stock
dividends, attribution of income to
non-controlling interest, and loss on
retirement of preferred stock		5,803			1,230			2,014			2,508			(3,465	)	(5	)		8,090
Preferred stock dividends		-			-			-			(720	)		-					(720	)
Non-controlling interest		-			-			-			(5,546	)		-					(5,546	)
Segment core earnings	$	5,803		$	1,230		$	2,014		$	(3,758	)	$	(3,465	)	(5	)	$	1,824
Total assets at carrying value	$	1,836,374		$	1,324,674		$	2,262,314		$	1,676,128		$	-				$	7,099,490
Total principal balance of on- and
off-balance sheet program assets		7,288,389			1,300,944			2,173,660			-			-					10,762,993

(1) Includes reconciling adjustments for yield maintenance income and 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and 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.

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Equity

6 Months Ended

Jun. 30, 2011

Equity

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.

From first quarter 2009 through second 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 June 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 June 30, 2011 and December 31, 2010, were all held by the 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.

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 June 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 June 30, 2011, Farmer Mac’s minimum and critical capital requirements were $321.9 million and $161.0 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 $484.2 million, $162.3 million above the minimum capital requirement and $323.2 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 which became effective in second quarter 2011, Farmer Mac’s risk-based capital requirement as of June 30, 2011 was $122.9 million and Farmer Mac’s regulatory capital (core capital plus the allowance for losses) of $502.7 million exceeded that requirement by approximately $379.8 million.  Based on the risk-based capital stress test in effect prior to second quarter 2011, Farmer Mac’s risk-based capital requirement as of June 30, 2011 would have been $32.7 million and Farmer Mac’s regulatory capital (core capital plus the allowance for losses) of $502.7 million would have exceeded that requirement by approximately $470.0 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.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Parenthetical) (Retained earnings:, USD $)	6 Months Ended
	Jun. 30, 2011 Retained earnings	Jun. 30, 2010 Retained earnings
Common stock, per share	$ 0.10	$ 0.10
Series B Preferred Stock
Preferred stock, per share	$ 0.00	$ 8.33
Series C Preferred Stock
Preferred stock, per share	$ 25.00	$ 25.00

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Investment Securities

6 Months Ended

Jun. 30, 2011

Investment Securities

Note 2. Investment Securities

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

	June 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	$	-	$	(9,418	)	$	64,682
Floating rate asset-backed securities		162,347		224		(37	)		162,534
Floating rate corporate debt securities		112,999		300		(9	)		113,290
Fixed rate corporate debt securities		34,322		60		-			34,382
Floating rate Government/GSE
guaranteed mortgage-backed securities		629,773		4,417		(218	)		633,972
Fixed rate GSE guaranteed mortgage-backed
securities		3,852		315		-			4,167
Floating rate GSE subordinated debt		70,000		-		(7,435	)		62,565
Fixed rate GSE preferred stock		79,838		2,539		-			82,377
Fixed rate senior agency debt		13,000		1		-			13,001
Fixed rate U.S. Treasuries		834,128		619		(3	)		834,744
Total available-for-sale		2,014,359		8,475		(17,120	)		2,005,714
Trading:
Floating rate asset-backed securities		5,411		-		(3,202	)		2,209
Fixed rate GSE preferred stock		83,406		2,536		-			85,942
Total trading		88,817		2,536		(3,202	)		88,151
Total investment securities	$	2,103,176	$	11,011	$	(20,322	)	$	2,093,865

	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 six months ended June 30, 2011 and 2010, Farmer Mac did not recognize in earnings any other-than-temporary impairment charges.

During the three and six months ended June 30, 2011, Farmer Mac received proceeds of $75.1 million and $153.6 million, respectively,  from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $38,000 and $0.2 million, respectively.  During the three months ended June 30, 2010, Farmer Mac did not receive any proceeds from the sale of securities from its available-for-sale investment portfolio.  During the six months ended June 30, 2010, Farmer Mac received proceeds of $69.2 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.4 million and gross realized losses of $0.2 million.

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

	June 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	$	-	$	-		$	49,992	$	(9	)
Floating rate asset-backed securities		9,970		(37	)		-		-
Floating rate auction-rate certificates backed
by Government guaranteed student loans		-		-			64,682		(9,418	)
Floating rate Government/GSE
guaranteed mortgage-backed securities		64,058		(216	)		518		(2	)
Floating rate GSE subordinated debt		-		-			62,565		(7,435	)
Fixed rate U.S. Treasuries		65,603		(3	)		-		-
Total	$	139,631	$	(256	)	$	177,757	$	(16,864	)
	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 June 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 June 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 30 and 47 individual investment securities as of June 30, 2011 and December 31, 2010, respectively.

As of June 30, 2011, 12 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $16.9 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 June 30, 2011 that is, on average, approximately 91 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 June 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 June 30, 2011 and December 31, 2010.  As of June 30, 2011, Farmer Mac owned trading investments with an amortized cost of $88.8 million, a fair value of $88.2 million, and a weighted-average yield of 8.14 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 June 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 June 30, 2011
	Amortized				Weighted-
	Cost		Fair Value		Average Yield
	(dollars in thousands)
Due within one year	$	920,611	$	921,252	1.01%
Due after one year through five years		80,217		80,558	1.77%
Due after five years through ten years		418,586		420,553	1.13%
Due after ten years		594,945		583,351	2.52%
Total	$	2,014,359	$	2,005,714	1.51%

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Farmer Mac Guaranteed Securities and USDA Guaranteed Securities

6 Months Ended

Jun. 30, 2011

Farmer Mac Guaranteed Securities and USDA Guaranteed Securities

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 June 30, 2011 and December 31, 2010.

	June 30, 2011
	Available-
	for-Sale			Trading			Total
	(in thousands)
Farmer Mac I	$	1,759,205		$	-		$	1,759,205
Farmer Mac II		36,530			-			36,530
Rural Utilities		1,448,230			-			1,448,230
Farmer Mac Guaranteed Securities		3,243,965			-			3,243,965
USDA Guaranteed Securities		1,120,397			249,074			1,369,471
Total	$	4,364,362		$	249,074		$	4,613,436
Amortized cost	$	4,306,533		$	252,697		$	4,559,230
Unrealized gains		60,697			322			61,019
Unrealized losses		(2,868	)		(3,945	)		(6,813	)
Fair value	$	4,364,362		$	249,074		$	4,613,436
	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 changes in interest rates from the date of acquisition to June 30, 2011 and December 31, 2010, as applicable.  As of June 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 June 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.

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 six months ended June 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 June 30, 2011 and December 31, 2010.

	June 30,			December 31,
	2011			2010
	(dollars in thousands)
Fair value of beneficial interests retained in
Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities	$	4,613,436		$	4,224,708
Weighted-average remaining life (in years)		3.7			3.5
Weighted-average prepayment speed (annual rate)		3.0	%		3.5	%
Effect on fair value of a 10% adverse change	$	(205	)	$	(18	)
Effect on fair value of a 20% adverse change	$	(418	)	$	(17	)
Weighted-average discount rate		2.5	%		2.3	%
Effect on fair value of a 10% adverse change	$	(27,998	)	$	(20,257	)
Effect on fair value of a 20% adverse change	$	(55,912	)	$	(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.

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.

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

Outstanding Balance of Loans, Loans Underlying Farmer Mac
Guaranteed Securities and LTSPCs, and USDA Guaranteed Securities
	June 30,		December 31,
	2011		2010
	(in thousands)
On-balance sheet:
Farmer Mac I:
Loans	$	1,171,522	$	972,206
Loans held in trusts:
Beneficial interests owned by Farmer Mac		829		3,697
Beneficial interests owned by third party investors		748,843		821,411
Farmer Mac Guaranteed Securities - AgVantage		1,741,500		941,500
Farmer Mac II:
USDA Guaranteed Securities		1,343,480		1,297,439
Farmer Mac Guaranteed Securities		37,283		39,856
Rural Utilities:
Loans		451,741		339,963
Loans held in trusts:
Beneficial interests owned by Farmer Mac		393,572		400,228
Farmer Mac Guaranteed Securities - AgVantage		1,410,800		1,887,200
Total on-balance sheet	$	7,299,570	$	6,703,500
Off-balance sheet:
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
LTSPCs		1,694,470		1,754,597
Farmer Mac Guaranteed Securities		696,257		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,120		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		18,080		15,292
Total off-balance sheet	$	4,898,927	$	5,513,209
Total	$	12,198,497	$	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.

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

	For the Three Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010
	(in thousands)				(in thousands)
Unpaid principal balance at acquisition date		1,420		913		18,345		3,403
Contractually required payments
receivable		1,420		913		18,392		3,470
Impairment recognized subsequent
to acquisition		-		359		3,770		1,740
Recovery/release of allowance for defaulted
loans		4		2,924		14		2,924
	June 30,		December 31,
	2011		2010
	(in thousands)
Outstanding balance		37,442		34,473
Carrying amount		29,865		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 June 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 June 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 June 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 June 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 June 30, 2011 and 2010, Farmer Mac had not experienced any credit losses on any of those loans or securities.

	90-Day						Net Credit
	Delinquencies (1)						Losses/(Recoveries)
	As of		As of		As of		For the Six Months Ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2011		2010		2010		2011		2010
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	32,862	$	37,665	$	38,709	$	191	$	(1,926	)
Total on-balance sheet	$	32,862	$	37,665	$	38,709	$	191	$	(1,926	)
Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	21,771	$	32,583	$	17,302	$	-	$	-
Total off-balance sheet	$	21,771	$	32,583	$	17,302	$	-	$	-
Total	$	54,633	$	70,248	$	56,011	$	191	$	(1,926	)

(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.

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Comprehensive Income

6 Months Ended

Jun. 30, 2011

Comprehensive Income

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 six months ended June 30, 2011 and 2010:

	For the Three Months Ended					For the Six Months Ended
	June 30,			June 30,		June 30,			June 30,
	2011			2010		2011			2010
	(in thousands)
Net income	$	11,437		$	8,090	$	36,027		$	21,679
Available-for-sale securities, net of tax:
Net unrealized holding gains		27,466			23,853		20,911			28,353
Reclassification adjustment for realized gains (1)		(645	)		-		(2,750	)		(190	)
Net change from available-for-sale securities (2)		26,821			23,853		18,161			28,163
Financial derivatives, net of tax:
Reclassification for amortization of financial derivatives
transition adjustment (3)		-			29		-			52
Other comprehensive income, net of tax		26,821			23,882		18,161			28,215
Comprehensive income		38,258			31,972		54,188			49,894
Less: Comprehensive income attributable to non-
controlling interest		5,547			5,546		11,094			9,614
Total comprehensive income	$	32,711		$	26,426	$	43,094		$	40,280

(1) Includes the reclassification of deferred gains recognized on certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities of $0.6 million and $2.6 million, after tax, for the three and six months ended June 30, 2011, respectively.

(2) Unrealized gains on available for sale securities are shown net of income tax expense of $14.4 million and $12.8 million for the three months ended June 30, 2011 and 2010, respectively, and $9.8 million and $15.3 million for the six months ended June 30, 2011 and 2010, respectively.

(3) Amortization of the financial derivatives transition adjustment is shown net of income tax expense of $16,000 and $28,000 for the three and six months ended June 30, 2010, respectively.

During the three and six months ended June 30, 2011, Farmer Mac reclassified $0.6 million and $2.6 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.

The following table presents Farmer Mac’s accumulated other comprehensive income as of June 30, 2011 and December 31, 2010 and changes in the components of accumulated other comprehensive income for the six months ended June 30, 2011 and the year ended December 31, 2010.

	June 30,		December 31,
	2011		2010
	(in thousands)
Available-for-sale securities:
Beginning balance	$	18,275	$	3,300
Net unrealized gains, net of tax		18,161		14,975
Ending balance	$	36,436	$	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	$	36,436	$	18,275

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (USD $) In Thousands	Total	Preferred stock:	Common stock:	Additional paid-in capital:	Retained earnings:	Retained earnings: Series B Preferred Stock	Retained earnings: Series C Preferred Stock	Accumulated other comprehensive income:	Total Stockholders' Equity	Non-controlling interest:
Balance, beginning of period at Dec. 31, 2009		$ 57,578	$ 10,142	$ 97,090	$ 28,127			$ 3,254		$ 0
Balance, beginning of period at Dec. 31, 2009		58	10,142
Issuance of stock		0	121
Exercise of stock options and SARs			13
Net income attributable to Farmer Mac	12,065				12,065
Stock-based compensation expense				1,507
Change in unrealized gain on available-for-sale securities, net of tax and reclassification adjustments								28,163
Preferred stock - Farmer Mac II LLC										241,853
Cash dividends:
Common stock ($0.10 per share)					(1,020)
Preferred stock, Series B ($8.33 per share) and Series C ($25.00 per share)						(1,250)	(1,440)
Issuance of stock		0	121	22
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments								52
Loss on retirement of preferred stock	(5,784)				(5,784)
Exercise, vesting and cancellation of stock options, SARs and restricted stock				306
Exercise of stock options and SARs			13
Cumulative effect of adoption of new accounting standard, net of tax					2,679
Comprehensive income:
Net income	21,679
Change in accumulated other comprehensive income, net of tax	28,215
Comprehensive income	49,894
Less: Comprehensive income attributable to non-controlling interest	9,614
Total comprehensive income	40,280
Balance, end of period at Jun. 30, 2010	473,478	57,578	10,276	98,925	33,377			31,469	231,625	241,853
Balance, end of period at Jun. 30, 2010		58	10,276
Balance, beginning of period at Dec. 31, 2010	478,877	57,578	10,284	100,050	50,837			18,275		241,853
Balance, beginning of period at Dec. 31, 2010		58	10,284
Issuance of stock		0	58
Exercise of stock options and SARs			2
Net income attributable to Farmer Mac	24,933				24,933
Stock-based compensation expense				1,490
Change in unrealized gain on available-for-sale securities, net of tax and reclassification adjustments								18,161
Preferred stock - Farmer Mac II LLC										0
Cash dividends:
Common stock ($0.10 per share)					(1,031)
Preferred stock, Series B ($8.33 per share) and Series C ($25.00 per share)						0	(1,440)
Issuance of stock		0	58	15
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments								0
Loss on retirement of preferred stock	0				0
Exercise, vesting and cancellation of stock options, SARs and restricted stock				(458)
Exercise of stock options and SARs			2
Cumulative effect of adoption of new accounting standard, net of tax					0
Comprehensive income:
Net income	36,027
Change in accumulated other comprehensive income, net of tax	18,161
Comprehensive income	54,188
Less: Comprehensive income attributable to non-controlling interest	11,094
Total comprehensive income	43,094
Balance, end of period at Jun. 30, 2011	$ 520,607	$ 57,578	$ 10,344	$ 101,097	$ 73,299			$ 36,436	$ 278,754	$ 241,853
Balance, end of period at Jun. 30, 2011		58	10,344

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net income	$ 36,027	$ 21,679
Adjustments to reconcile net income to net cash used in operating activities:
Net amortization of premiums and discounts on loans, investments, and Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	9,365	6,150
Amortization of debt premiums, discounts and issuance costs	5,765	3,033
Net change in fair value of trading securities, financial derivatives and loans held for sale	(10,299)	(5,288)
Amortization of deferred gains on certain Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	(4,036)	0
Gains on the sale of available-for-sale investment securities	(195)	(240)
Gains on the sale of real estate owned	(724)	0
Total (release of)/provision for losses	(1,428)	2,555
Deferred income taxes	393	(3,347)
Stock-based compensation expense	1,490	1,508
Proceeds from repayment and sale of trading investment securities	550	400
Purchases of loans held for sale	(119,410)	(293,003)
Proceeds from repayment of loans purchased as held for sale	51,012	15,242
Net change in:
Interest receivable	1,434	(5,438)
Guarantee and commitment fees receivable	2,928	18,437
Other assets	12,650	(2,496)
Accrued interest payable	(979)	13,351
Other liabilities	(3,976)	(19,294)
Net cash used in operating activities	(19,433)	(246,751)
Cash flows from investing activities:
Purchases of loans held for investment	(329,782)	(19,924)
Purchases of defaulted loans	(18,345)	(3,403)
Proceeds from repayment of available-for-sale investment securities	511,562	112,337
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities	647,701	202,526
Proceeds from repayment of loans purchased as held for investment	181,792	173,921
Proceeds from sale of available-for-sale investment securities	153,609	69,175
Proceeds from sale of trading securities - fair value option	0	5,013
Proceeds from sale of Farmer Mac Guaranteed Securities	10,734	12,906
Proceeds from sale of real estate owned	1,279	0
Net cash (used in)/provided by investing activities	(848,833)	30,010
Cash flows from financing activities:
Excess tax benefits related to stock-based awards	144	747
Payments to third parties on debt securities of consolidated trusts	(80,783)	(113,749)
Proceeds from common stock issuance	16	168
Issuance costs on retirement of preferred stock	0	(5,784)
Proceeds from preferred stock issuance - Farmer Mac II LLC	0	241,853
Retirement of Series B preferred stock	0	(144,216)
Dividends paid - non-controlling interest - preferred stock	(11,094)	(9,551)
Dividends paid on common and preferred stock	(2,471)	(3,710)
Net cash provided by/(used in) financing activities	906,681	(112,720)
Net increase/(decrease) in cash and cash equivalents	38,415	(329,461)
Cash and cash equivalents at beginning of period	729,920	654,794
Cash and cash equivalents at end of period	768,335	325,333
Investment Securities
Cash flows from investing activities:
Purchases of securities	(990,568)	(306,239)
Farmer Mac and USDA Guaranteed Securities
Cash flows from investing activities:
Purchases of securities	(1,016,815)	(216,302)
Discount Notes
Cash flows from financing activities:
Proceeds from issuance of debt	34,663,582	31,919,565
Repayments of debt	(34,114,562)	(32,095,725)
Medium-term Notes
Cash flows from financing activities:
Proceeds from issuance of debt	991,849	1,006,272
Repayments of debt	$ (540,000)	$ (908,590)

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Assets:
Cash and cash equivalents	$ 768,335	$ 729,920
Loans:
Loans held for sale, at lower of cost or fair value	447,087	1,212,065
Loans held for investment, at amortized cost	1,168,995	90,674
Loans held for investment in consolidated trusts, at amortized cost	1,182,408	1,265,663
Allowance for loan losses	(11,053)	(9,803)
Total loans, net of allowance	2,787,437	2,558,599
Real estate owned, at lower of cost or fair value	4,067	1,992
Financial derivatives, at fair value	43,976	41,492
Interest receivable	88,852	90,295
Guarantee and commitment fees receivable	31,824	34,752
Deferred tax asset, net	3,591	14,530
Prepaid expenses and other assets	9,445	20,297
Total Assets	10,444,828	9,479,914
Notes payable:
Due within one year	5,201,832	4,509,419
Due after one year	3,744,877	3,430,656
Total notes payable	8,946,709	7,940,075
Debt securities of consolidated trusts held by third parties	755,357	827,411
Financial derivatives, at fair value	109,151	113,687
Accrued interest payable	56,152	57,131
Guarantee and commitment obligation	27,628	30,308
Accounts payable and accrued expenses	21,781	22,113
Reserve for losses	7,443	10,312
Total Liabilities	9,924,221	9,001,037
Commitments and Contingencies (Note 5)
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:
Additional paid-in capital	101,097	100,050
Accumulated other comprehensive income	36,436	18,275
Retained earnings	73,299	50,837
Total Stockholders' Equity	278,754	237,024
Non-controlling interest - preferred stock	241,853	241,853
Total Equity	520,607	478,877
Total Liabilities and Equity	10,444,828	9,479,914
Common Stock, Class A Voting
Common stock:
Common stock	1,031	1,031
Common stock, Class B Voting
Common stock:
Common stock	500	500
Common stock, Class C Non-Voting
Common stock:
Common stock	8,813	8,753
Investment Securities
Loans:
Available-for-sale, at fair value	2,005,714	1,677,233
Trading, at fair value	88,151	86,096
Total securities	2,093,865	1,763,329
Farmer Mac Guaranteed Securities
Loans:
Available-for-sale, at fair value	3,243,965	2,907,264
USDA Guaranteed Securities
Loans:
Available-for-sale, at fair value	1,120,397	1,005,679
Trading, at fair value	249,074	311,765
Total securities	$ 1,369,471	$ 1,317,444