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.