Federal Agricultural Mortgage Corp 10-Q 3-31-2007


As filed with the Securities and Exchange Commission on
May 10, 2007

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 March 31, 2007

Commission File Number 0-17440

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer x
Non-accelerated filer 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 May 1, 2007, the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,787,947 shares of Class C Non-Voting Common Stock outstanding.
 




PART I - FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

The following interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations and cash flows of Farmer Mac for the interim periods presented. Certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. The December 31, 2006 consolidated balance sheet presented in this report has been derived from the Corporation’s audited 2006 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2006 consolidated financial statements of Farmer Mac included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.

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 March 31, 2007 and December 31, 2006
3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
5
Notes to Condensed Consolidated Financial Statements
6

-2-


FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)

   
March 31,
 
December 31,
 
   
2007
 
2006
 
Assets:
             
Cash and cash equivalents
 
$
816,930
 
$
877,714
 
Investment securities
   
2,273,679
   
1,830,904
 
Farmer Mac Guaranteed Securities
   
1,314,564
   
1,330,418
 
Loans held for sale
   
77,990
   
71,621
 
Loans held for investment
   
670,417
   
705,745
 
Allowance for loan losses
   
(1,730
)
 
(1,945
)
Loans held for investment, net
   
668,687
   
703,800
 
Real estate owned
   
2,097
   
2,097
 
Financial derivatives
   
7,382
   
9,218
 
Interest receivable
   
56,138
   
73,545
 
Guarantee and commitment fees receivable
   
43,198
   
40,743
 
Deferred tax asset, net
   
10,090
   
6,886
 
Prepaid expenses and other assets
   
5,007
   
6,727
 
Total Assets
 
$
5,275,762
 
$
4,953,673
 
 
             
Liabilities and Stockholders' Equity:
             
Liabilities:
             
Notes payable:
             
Due within one year
 
$
3,533,771
 
$
3,298,097
 
Due after one year
   
1,370,667
   
1,296,691
 
Total notes payable
   
4,904,438
   
4,594,788
 
               
Financial derivatives
   
25,559
   
23,474
 
Accrued interest payable
   
40,489
   
36,125
 
Guarantee and commitment obligation
   
39,665
   
35,359
 
Accounts payable and accrued expenses
   
15,785
   
12,828
 
Reserve for losses
   
2,197
   
2,610
 
Total Liabilities
   
5,028,133
   
4,705,184
 
               
Stockholders' Equity:
             
Preferred stock:
             
Series A, stated at redemption/liquidation value, $50 per share, 700,000 shares authorized, issued and outstanding
   
35,000
   
35,000
 
Common stock:
             
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares issued and outstanding
   
1,031
   
1,031
 
Class B Voting, $1 par value, no maximum authorization, 500,301 shares issued and outstanding
   
500
   
500
 
Class C Non-Voting, $1 par value, no maximum authorization, 8,724,785 and 9,075,862 shares issued and outstanding as of March 31, 2007 and December 31, 2006, respectively
   
8,725
   
9,076
 
Additional paid-in capital
   
83,364
   
85,349
 
Accumulated other comprehensive income
   
9,735
   
4,956
 
Retained earnings
   
109,274
   
112,577
 
Total Stockholders' Equity
   
247,629
   
248,489
 
               
Total Liabilities and Stockholders' Equity
 
$
5,275,762
 
$
4,953,673
 

See accompanying notes to condensed consolidated financial statements.

-3-


FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

   
Three Months Ended
 
   
March 31, 2007
 
March 31, 2006
 
Interest income:
             
Investments and cash equivalents
 
$
38,992
 
$
26,698
 
Farmer Mac Guaranteed Securities
   
19,403
   
18,037
 
Loans
   
11,319
   
11,383
 
Total interest income
   
69,714
   
56,118
 
               
Total interest expense
   
60,632
   
45,451
 
               
Net interest income
   
9,082
   
10,667
 
Recovery/(provision) for loan losses
   
215
   
1,013
 
Net interest income after recovery/(provision) for loan losses
   
9,297
   
11,680
 
               
Non-interest income:
             
Guarantee and commitment fees
   
5,858
   
5,049
 
(Losses)/gains on financial derivatives and trading assets
   
(4,033
)
 
11,700
 
Gains on the sale of real estate owned
   
-
   
210
 
Other income
   
409
   
169
 
Non-interest income
   
2,234
   
17,128
 
               
Non-interest expense:
             
Compensation and employee benefits
   
3,137
   
2,904
 
General and administrative
   
2,337
   
2,758
 
Regulatory fees
   
550
   
588
 
Real estate owned operating costs, net
   
-
   
115
 
Provision/(recovery) for losses
   
(413
)
 
(696
)
Non-interest expense
   
5,611
   
5,669
 
               
Income before income taxes
   
5,920
   
23,139
 
               
Income tax expense
   
1,438
   
7,488
 
Net income
   
4,482
   
15,651
 
Preferred stock dividends
   
(560
)
 
(560
)
Net income available to common stockholders
 
$
3,922
 
$
15,091
 
               
Earnings per common share:
             
Basic earnings per common share
 
$
0.37
 
$
1.36
 
Diluted earnings per common share
 
$
0.37
 
$
1.32
 
Common stock dividends per common share
 
$
0.10
 
$
0.10
 

See accompanying notes to condensed consolidated financial statements.

-4-


FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

   
Three Months Ended
 
   
March 31, 2007
 
March 31, 2006
 
Cash flows from operating activities:
         
Net income
 
$
4,482
 
$
15,651
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Net amortization/(accretion) of premiums and discounts on loans and investments
   
325
   
(234
)
Amortization of debt premiums, discounts and issuance costs
   
29,813
   
26,639
 
Proceeds from repayment of trading investment securities
   
388
   
467
 
Purchases of loans held for sale
   
(15,528
)
 
(13,328
)
Proceeds from repayment of loans held for sale
   
8,889
   
3,723
 
Net change in fair value of trading securities and financial derivatives
   
3,928
   
(12,501
)
Amortization of SFAS 133 transition adjustment on financial derivatives
   
91
   
131
 
Gains on the sale of real estate owned
   
-
   
(210
)
Total (recovery)/provision for losses
   
(628
)
 
(1,709
)
Deferred income taxes
   
(3,014
)
 
5,112
 
Stock-based compensation expense
   
729
   
426
 
Decrease in interest receivable
   
17,407
   
24,165
 
(Increase)/decrease in guarantee and commitment fees receivable
   
(2,455
)
 
2,031
 
(Increase)/decrease in other assets
   
(3,269
)
 
13,855
 
Increase/(decrease) in accrued interest payable
   
4,364
   
(6,696
)
Increase in other liabilities
   
5,721
   
21,172
 
Net cash provided by operating activities
   
51,243
   
78,694
 
               
Cash flows from investing activities:
             
Purchases of available-for-sale investment securities
   
(1,234,474
)
 
(899,793
)
Purchases of Farmer Mac II Guaranteed Securities and AgVantage Farmer Mac Guaranteed Securities
   
(61,098
)
 
(47,528
)
Purchases of loans held for investment
   
(6,116
)
 
(16,932
)
Purchases of defaulted loans
   
(833
)
 
(4,054
)
Proceeds from repayment of investment securities
   
800,052
   
639,816
 
Proceeds from repayment of Farmer Mac Guaranteed Securities
   
73,495
   
68,723
 
Proceeds from repayment of loans
   
47,767
   
44,582
 
Proceeds from sale of Farmer Mac Guaranteed Securities
   
200
   
1,485
 
Proceeds from sale of real estate owned
   
-
   
818
 
Net cash used in investing activities
   
(381,007
)
 
(212,883
)
               
Cash flows from financing activities:
             
Proceeds from issuance of discount notes
   
23,802,544
   
15,145,352
 
Proceeds from issuance of medium-term notes
   
536,000
   
86,200
 
Payments to redeem discount notes
   
(23,855,507
)
 
(15,095,392
)
Payments to redeem medium-term notes
   
(203,200
)
 
(45,500
)
Tax benefit from tax deductions in excess of compensation cost recognized
   
13
   
239
 
Proceeds from common stock issuance
   
202
   
815
 
Purchases of common stock
   
(9,475
)
 
(1,085
)
Dividends paid
   
(1,597
)
 
(1,673
)
Net cash provided by financing activities
   
268,980
   
88,956
 
Net decrease in cash and cash equivalents
   
(60,784
)
 
(45,233
)
               
Cash and cash equivalents at beginning of period
   
877,714
   
458,852
 
Cash and cash equivalents at end of period
 
$
816,930
 
$
413,619
 
 
See accompanying notes to condensed consolidated financial statements.
 
-5-


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1.
Accounting Policies

 
(a)
Cash and Cash Equivalents

Farmer Mac considers highly liquid investment securities with maturities of three months or less at the time of purchase to be cash equivalents. Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows. The following table sets forth information regarding certain cash and non-cash transactions for the three months ended March 31, 2007 and 2006.

   
Three Months Ended
 
   
March 31, 2007
 
March 31, 2006
 
   
(in thousands)
 
Cash paid for:
         
Interest
 
$
28,529
 
$
26,119
 
Income taxes
   
-
   
-
 
Non-cash activity:
             
Real estate owned acquired through foreclosure
   
-
   
-
 
Loans acquired and securitized as Farmer Mac Guaranteed Securities
   
200
   
1,485
 
Loans previously under LTSPCs exchanged for Farmer Mac Guaranteed Securities
   
303,766
   
-
 

 
(b)
Allowance for Losses

As of March 31, 2007, Farmer Mac maintained an allowance for losses to cover estimated probable losses on loans held for investment, real estate owned, and loans underlying long-term standby purchase commitments (“LTSPCs”) and Farmer Mac I Guaranteed Securities issued after the Farm Credit System Reform Act of 1996 (the “1996 Act”) in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS 5”) and Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended (“SFAS 114”).

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

Farmer Mac’s methodology for determining its allowance for losses incorporates the Corporation’s proprietary automated loan classification system. That system scores loans based on criteria such as historical repayment performance, loan seasoning, loan size and loan-to-value ratio. For the purposes of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans and loans underlying post-1996 Act 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 3-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of 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 several factors, including:

-6-


 
·
economic conditions;
 
·
geographic and agricultural commodity/product concentrations in the portfolio;
 
·
the credit profile of the portfolio;
 
·
delinquency trends of the portfolio; and
 
·
historical charge-off and recovery activities of the portfolio.
 
If, based on that evaluation, management concludes that the assumption is not valid due to other more compelling indicators, the loss allowance calculation is modified by the addition of further assumptions to capture current portfolio trends and characteristics that differ from historical experience.

As of March 31, 2007, Farmer Mac concluded that the credit profile of its portfolio was consistent with Farmer Mac’s historical credit profile and trends. Management believes that its use of this methodology produces a reliable estimate of inherent probable losses, as of the balance sheet date, for all loans held, real estate owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs in accordance with SFAS 5 and SFAS 114.

-7-


The following table summarizes the changes in Farmer Mac’s allowance for losses for the three months ended March 31, 2007 and 2006:

   
March 31, 2007
 
                   
   
Allowance
for Loan
Losses
 
REO
Valuation
Allowance
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
   
(in thousands)
 
                   
Beginning balance
 
$
1,945
 
$
-
 
$
2,610
 
$
4,555
 
Provision/(recovery) for losses
   
(215
)
 
-
   
(413
)
 
(628
)
Charge-offs
   
-
   
-
   
-
   
-
 
Recoveries
   
-
   
-
   
-
   
-
 
Ending balance
 
$
1,730
 
$
-
 
$
2,197
 
$
3,927
 

   
March 31, 2006
 
                   
   
Allowance
for Loan
Losses
 
REO
Valuation
Allowance
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
   
(in thousands)
 
                   
Beginning balance
 
$
4,876
 
$
-
 
$
3,777
 
$
8,653
 
Provision/(recovery) for losses
   
(1,013
)
 
150
   
(846
)
 
(1,709
)
Charge-offs
   
-
   
(150
)
 
-
   
(150
)
Recoveries
   
20
   
-
   
-
   
20
 
Ending balance
 
$
3,883
 
$
-
 
$
2,931
 
$
6,814
 

The table below summarizes the components of Farmer Mac’s allowance for losses as of March 31, 2007 and December 31, 2006:

   
March 31,
2007
 
December 31,
2006
 
   
(in thousands)
 
Allowance for loan losses
 
$
1,730
 
$
1,945
 
Real estate owned valuation allowance
   
-
   
-
 
Reserve for losses:
             
On-balance sheet Farmer Mac I Guaranteed Securities
   
857
   
982
 
Off-balance sheet Farmer Mac I Guaranteed Securities
   
599
   
679
 
LTSPCs
   
741
   
949
 
Total
 
$
3,927
 
$
4,555
 

No allowance for losses has been made for loans underlying Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”). Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed first loss subordinated interests, which are expected to exceed the estimated credit losses on those loans. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible mortgage loans. As of March 31, 2007, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the high credit quality of the obligors as well as the underlying collateral. The guaranteed portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the United States Department of Agriculture (“USDA”). Each USDA guarantee is an obligation backed by the full faith and credit of the United States. As of March 31, 2007, Farmer Mac had not experienced any credit losses on any Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed Securities and does not expect to incur any such losses in the future.

-8-


As of March 31, 2007, Farmer Mac individually analyzed $16.2 million of its $55.0 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $38.8 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics. All of the $16.2 million of assets analyzed individually were adequately collateralized. Accordingly, Farmer Mac did not record any specific allowances for under-collateralized assets as of March 31, 2007. Farmer Mac’s non-specific or general allowances were $3.9 million as of March 31, 2007.

The balance of impaired assets, both on- and off-balance sheet, and the related allowance specifically allocated to those impaired assets as of March 31, 2007 and December 31, 2006 are summarized in the following table:

   
March 31, 2007
 
December 31, 2006
 
   
Balance
 
Specific
Allowance
 
Net
Balance
 
Balance
 
Specific
Allowance
 
Net
Balance
 
   
(in thousands)
 
Impaired assets:
                                     
Specific allowance for losses
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
No specific allowance for losses
   
55,004
   
-
   
55,004
   
56,854
   
-
   
56,854
 
Total
 
$
55,004
 
$
-
 
$
55,004
 
$
56,854
 
$
-
 
$
56,854
 

Farmer Mac recognized interest income of approximately $0.9 million and $0.8 million on impaired loans during the three months ended March 31, 2007 and 2006, respectively. During the three months ended March 31, 2007 and 2006, Farmer Mac’s average investment in impaired loans was $55.9 million and $70.8 million, respectively.

 
(c)
Financial Derivatives

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets and future cash flows or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts principally to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term mortgage and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk. These transactions also may provide an overall lower effective cost of borrowing than would otherwise be available in the conventional debt market. Farmer Mac is required also to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative as promulgated by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”).

-9-


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 mortgage-backed securities and the debt of other government-sponsored enterprises (“GSEs”) and futures contracts involving U.S. Treasury securities. Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both Treasury rates and spreads on Farmer Mac debt and Farmer Mac Guaranteed Securities. 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 or Farmer Mac Guaranteed Securities sale prices that occur during the hedge period.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability in accordance with SFAS 133. 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 and trading assets in the condensed consolidated statements of operations.

The following table summarizes information related to Farmer Mac’s financial derivatives as of March 31, 2007 and December 31, 2006:

 
 
March 31, 2007
 
December 31, 2006
 
 
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
 
 
 
(in thousands)
 
Interest rate swaps:
                 
Pay-fixed
 
$
1,163,134
 
$
(14,228
)
$
803,436
 
$
(9,982
)
Receive-fixed
   
1,075,482
   
(6,349
)
 
810,482
   
(7,111
)
Basis
   
240,125
   
2,206
   
335,065
   
2,531
 
Treasury futures
   
21
   
8
   
-
   
-
 
Agency forwards
   
42,212
   
186
   
71,045
   
306
 
 
                 
Total
 
$
2,520,974
 
$
(18,177
)
$
2,020,028
 
$
(14,256
)

As of March 31, 2007, Farmer Mac had approximately $0.8 million of net after-tax unrealized losses on financial derivatives included in accumulated other comprehensive income related to the SFAS 133 transition adjustment. These amounts will be reclassified into earnings in the same period or periods during which the hedged forecasted transactions (either the payment of interest or the issuance of discount notes) affect earnings or immediately when it becomes probable that the original hedged forecasted transaction will not occur within two months of the originally specified date. Over the next twelve months, Farmer Mac estimates that $0.4 million of the amount currently reported in accumulated other comprehensive income will be reclassified into earnings.

-10-


As of March 31, 2007, Farmer Mac had outstanding basis swaps with a related party with a notional amount of $181.4 million and a fair value of $2.4 million.  Those swaps hedge 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. Under the terms of those basis swaps, which are not in designated hedge relationships, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. See Note 3 “Related Party Transactions” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007, for additional information on these related party transactions. As of December 31, 2006, these swaps had an outstanding notional amount of $193.0 million and a fair value of $2.8 million. 

 
(d)
Earnings Per Common Share

Basic earnings per common share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share are based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options. The following schedule reconciles basic and diluted earnings per common share (“EPS”) for the three months ended March 31, 2007 and 2006:
 
   
Three Months Ended
 
   
March 31, 2007
 
March 31, 2006
 
   
Basic
EPS
 
Dilutive
stock
options
 
Diluted
EPS
 
Basic
EPS
 
Dilutive
stock
options
 
Diluted
EPS
 
   
(in thousands, except per share amounts)
 
                           
Net income available to common stockholders
 
 
$3,922
       
 
$3,922
 
 
$15,091
       
 
$15,091
 
Weighted-average shares
   
10,468
   
178
   
10,646
   
11,107
   
318
   
11,425
 
Earnings per common share
 
 
$0.37
       
 
$0.37
 
 
$1.36
       
 
$1.32
 

During fourth quarter 2005, Farmer Mac established a program to repurchase up to 10 percent, or 958,632 shares, of the Corporation’s outstanding Class C Non-Voting Common stock. The aggregate number of shares repurchased by Farmer Mac under that program reached the maximum number of authorized shares during first quarter 2007, thereby terminating the program according to its terms. At that time, Farmer Mac announced the establishment of an additional program to repurchase up to one million additional shares of the Corporation’s outstanding Class C Non-Voting Common Stock. The authority for this new stock repurchase program expires in November 2008. Repurchases under that program commenced in accordance with its terms upon termination of the previous program. During first quarter 2007, Farmer Mac repurchased 360,482 shares of its Class C Non-Voting Common Stock at an average price of $26.24 per share pursuant to both of the Corporation’s previously announced stock repurchase programs. These repurchases reduced the Corporation’s stockholders’ equity by approximately $9.5 million.

-11-


All of the shares repurchased under Farmer Mac’s stock repurchase programs were purchased in open market transactions and were retired to become authorized but unissued shares available for future issuance.

 
(e)
Stock-Based Compensation

In 1997, Farmer Mac adopted a stock option plan for directors, officers and other employees to acquire shares of Class C Non-Voting Common Stock. Upon stock option exercise, new shares are issued by the Corporation. Under the plan, stock options awarded vest annually in thirds, with the first third vesting one year after the date of grant. If not exercised, any options granted under the 1997 plan expire 10 years from the date of grant, except that options issued to directors since June 1, 1998, if not exercised, expire five years from the date of grant. Of the 3,750,000 shares authorized to be issued under the plan, 456,426 remain available for future issuance as of March 31, 2007. For all stock options granted, the exercise price is equal to the closing price of the Class C Non-Voting Common Stock on or immediately preceding the date of grant.

Farmer Mac recognized $0.4 million and $0.4 million of compensation expense during the three-month periods ended March 31, 2007 and 2006, respectively, related to the non-vested portion of stock option awards that were outstanding as of December 31, 2005. Additionally, Farmer Mac recognized $0.3 million of compensation expense related to stock options awarded subsequent to December 31, 2005, for the three-month period ended March 31, 2007, compared to no such compensation expense recognized for the three-month period ended March 31, 2006. The effect of the recognition of compensation expense related to stock options on diluted EPS for first quarter 2007 was a reduction of $0.04 per diluted share, compared to $0.02 per diluted share for first quarter 2006.

As of March 31, 2007, there was $1.5 million of total unrecognized compensation cost related to stock options outstanding and unvested as of December 31, 2005. Of that cost, $1.0 million and $0.5 million is expected to be recognized in the remainder of 2007 and 2008, respectively.

-12-


The following table summarizes stock option activity for the three months ended March 31, 2007 and 2006:

   
Three Months Ended
 
   
March 31, 2007
 
March 31, 2006
 
   
Shares
 
Weighted-
Average
Exercise
Price
 
Shares
 
Weighted-
Average
Exercise
Price
 
                   
Outstanding, beginning of period
   
2,145,705
 
$
23.83
   
2,153,008
 
$
22.41
 
Granted
   
1,000
   
27.77
   
-
   
-
 
Exercised
   
(9,405
)
 
21.54
   
(61,800
)
 
13.14
 
Forfeited
   
(3,335
)
 
23.53
   
-
   
-
 
Outstanding, end of period
   
2,133,965
   
23.85
   
2,091,208
   
22.68
 
                           
Options exercisable at end of period
   
1,318,998
 
$
24.05
   
1,390,475
 
$
23.58
 

The cancellations of stock options during first quarter 2007 were due either to unvested options terminating in accordance with the provisions of the applicable stock option plans upon directors’ or employees’ departures from Farmer Mac or vested options terminating unexercised on their expiration date. There were no cancellations of stock options during first quarter 2006. For first quarter 2007 and first quarter 2006, the additional paid-in capital received from the exercise of stock options was $193 thousand and $750 thousand, respectively. During first quarter 2007 and first quarter 2006, the reduction of income taxes to be paid as a result of the deduction for the exercise of stock options was $20 thousand and $375 thousand, respectively.

The following table summarizes information regarding options outstanding as of March 31, 2007:

   
Options Outstanding
 
Options Exercisable
 
Range of
Exercise
Prices
 
Number of
Shares
 
Weighted-
Average
Remaining
Contractual
Life
 
Number of
Shares
 
Weighted-
Average
Remaining
Contractual
Life
 
                   
 
$10.00 - $19.99
   
248,897
   
6.8 years
   
172,568
   
6.6 years
 
 
20.00 - 24.99
   
1,082,801
   
5.3 years
   
719,341
   
4.5 years
 
 
25.00 - 29.99
   
612,099
   
6.6 years
   
236,921
   
4.4 years
 
 
30.00 - 34.99
   
189,668
   
4.2 years
   
189,668
   
4.2 years
 
 
35.00 - 39.99
   
-
   
-
   
-
   
-
 
 
40.00 - 44.99
   
-
   
-
   
-
   
-
 
 
45.00 - 50.00
   
500
   
5.0 years
   
500
   
5.0 years
 
       
2,133,965
         
1,318,998
       


-13-


The weighted-average grant date fair values of options granted in 2007 and 2006 were $9.69 and $9.91 per share, respectively. The fair values were estimated using the Black-Scholes option pricing model based on the following assumptions:

 
 
2007
 
2006
 
Risk-free interest rate
   
4.9%
 
 
5.0%
 
Expected years until exercise
   
5 years
   
6 years
 
Expected stock volatility
   
36.3%
 
 
36.9%
 
Dividend yield
   
1.4%
 
 
1.6%
 


 
(f)
Reclassifications

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

 
(g)
New Accounting Standards

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments - an Amendment of FASB Statements No. 133 and 140 (“SFAS 155”), which resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155, among other things, permits the fair value re-measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 was effective for all financial instruments acquired or issued in a fiscal year beginning after September 15, 2006. Farmer Mac’s adoption of SFAS 155 on January 1, 2007 did not have a material effect on Farmer Mac’s results of operations and financial position.

In March 2006, FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for subsequent measurement. SFAS 156 was effective on January 1, 2007. Farmer Mac’s adoption of SFAS 156 on January 1, 2007 did not have a material effect on Farmer Mac’s results of operations or financial position.

Farmer Mac adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As part of the implementation of FIN 48, Farmer Mac evaluated its tax positions for its open tax years, 2003 through 2006, to identify and recognize any liabilities related to uncertain tax positions in its federal income tax returns. As of January 1, 2007, Farmer Mac recorded a liability for uncertain tax positions of $1.5 million with a corresponding $1.5 million increase in deferred tax assets. There were no significant changes in the components of the liability in first quarter 2007.

-14-


Farmer Mac’s policy for recording interest and penalties associated with uncertain tax positions is to record them as a component of income tax expense and the FIN 48 liability. Under the provisions of FIN 48, Farmer Mac will continue to evaluate its tax positions for potential liabilities related to unrecognized tax benefits at least quarterly, but does not expect any significant changes to its unrecognized tax benefits during the next 12 months. There are no income tax examinations of Farmer Mac in process.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under other accounting pronouncements that permit or require fair value measurements, changes the methods used to measure fair value and expands disclosures about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities, the inputs used to develop measurements and the effects of certain of the measurements on earnings or changes in net assets. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption, as of the beginning of an entity’s fiscal year, is also permitted, provided interim financial statements have not yet been issued. Farmer Mac is currently evaluating the potential impact, if any, that the adoption of SFAS 157 will have on its financial statements.

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing 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. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is also permitted as of the beginning of an entity’s fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. Farmer Mac is currently evaluating the potential impact that the adoption of SFAS 159 would have on its financial statements.

-15-


Note 2.
Farmer Mac Guaranteed Securities

The following table sets forth information about on-balance sheet Farmer Mac Guaranteed Securities as of March 31, 2007 and December 31, 2006.
 
   
March 31, 2007
 
December 31, 2006
 
   
Available-
for-Sale
 
Held-to-
Maturity
 
Total
 
Available-
for-Sale
 
Held-to-
Maturity
 
Total
 
   
(in thousands)
 
Farmer Mac I
 
$
378,416
 
$
27,931
 
$
406,347
 
$
404,938
 
$
28,489
 
$
433,427
 
Farmer Mac II
   
-
   
908,217
   
908,217
   
-
   
896,991
   
896,991
 
Total
 
$
378,416
 
$
936,148
 
$
1,314,564
 
$
404,938
 
$
925,480
 
$
1,330,418
 
                                       
Amortized cost
 
$
370,581
 
$
936,148
 
$
1,306,729
 
$
395,786
 
$
925,480
 
$
1,321,266
 
Unrealized gains
   
10,391
   
264
   
10,655
   
11,980
   
214
   
12,194
 
Unrealized losses
   
(2,556
)
 
(4,901
)
 
(7,457
)
 
(2,828
)
 
(6,715
)
 
(9,543
)
Fair value
 
$
378,416
 
$
931,511
 
$
1,309,927
 
$
404,938
 
$
918,979
 
$
1,323,917
 

The temporary unrealized losses presented above are principally due to changes in interest rates from the date of acquisition to March 31, 2007 and December 31, 2006, as applicable. The available-for-sale unrealized losses were on 10 and 12 individual securities as of March 31, 2007 and December 31, 2006, respectively.

As of March 31, 2007, 7 of the available-for-sale Farmer Mac Guaranteed Securities in loss positions had been in loss positions for more than 12 months. Those securities had a total unrealized loss of $2.5 million as of March 31, 2007, compared to an unrealized loss of $2.8 million as of December 31, 2006. The unrealized losses on those securities are due to overall increases in market interest rates and not due to any underlying credit deterioration of the issuers. All of the available-for-sale securities with unrealized losses aged greater than 12 months have losses that are less than 2 percent of the security cost. All aged unrealized losses are recoverable within a reasonable period of time by way of changes in market interest rates. Accordingly, Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities represent other-than-temporary impairment as of March 31, 2007. Farmer Mac has the intent and ability to hold its on-balance sheet Farmer Mac Guaranteed Securities until either the market value recovers or the securities mature.

-16-


The table below presents a sensitivity analysis for the Corporation’s on-balance sheet Farmer Mac Guaranteed Securities as of March 31, 2007.
 
 
 
March 31, 2007
 
   
(dollars in thousands)
 
       
Fair value of beneficial interests retained in Farmer Mac Guaranteed Securities
 
$
1,309,927
 
 
       
Weighted-average remaining life (in years)
   
4.7
 
 
       
Weighted-average prepayment speed (annual rate)
   
10.9
%
Effect on fair value of a 10% adverse change
 
$
(390
)
Effect on fair value of a 20% adverse change
 
$
(727
)
 
       
Weighted-average discount rate
   
5.8
%
Effect on fair value of a 10% adverse change
 
$
(20,515
)
Effect on fair value of a 20% adverse change
 
$
(41,557
)


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 value of the retained interest 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.

The table below presents the outstanding principal balances as of the periods indicated for Farmer Mac Guaranteed Securities, loans, and LTSPCs.

 
 
March 31,
2007
 
December 31,
2006
 
 
 
(in thousands)
 
On-balance sheet assets:
         
Farmer Mac I:
         
Loans
 
$
740,304
 
$
770,236
 
Guaranteed Securities
   
397,581
   
423,624
 
Farmer Mac II:
         
Guaranteed Securities
   
903,939
   
892,667
 
Total on-balance sheet
 
$
2,041,824
 
$
2,086,527
 
 
         
 
         
Off-balance sheet assets:
         
Farmer Mac I:
         
LTSPCs
 
$
1,920,848
 
$
1,969,734
 
AgVantage
   
1,500,000
   
1,500,000
 
Guaranteed Securities
   
1,874,458
   
1,649,895
 
Farmer Mac II:
         
Guaranteed Securities
   
28,117
   
33,132
 
Total off-balance sheet
 
$
5,323,423
 
$
5,152,761
 
 
         
Total
 
$
7,365,247
 
$
7,239,288
 
 
-17-


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 these loans at their fair values in the consolidated financial statements during the period in which Farmer Mac becomes entitled to purchase the loans and therefore regains effective control over the transferred loans. Fair values are determined by current collateral valuations or management’s estimate of discounted collateral values, and represent the cash flows expected to be collected. Farmer Mac records, at acquisition, the difference between each loan’s acquisition cost and its fair value, if any, as a charge-off to the reserve for losses. 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. No impairment was recognized during the three months ended March 31, 2007 and 2006. The following table presents information related to Farmer Mac’s acquisition of defaulted loans for the three months ended March 31, 2007 and 2006 and the outstanding balances and carrying amounts of all such loans as of March 31, 2007 and December 31, 2006, respectively.

 
 
Three Months Ended
 
 
 
March 31,
2007
 
March 31,
2006
 
 
 
(in thousands)
 
 
 
 
 
 
 
Fair value at acquistion date
 
$
833
 
$
4,054
 
Contractually required payments receivable
   
871
   
4,120
 

 
 
As of
 
 
 
March 31,
2007
 
December 31,
2006
 
 
 
(in thousands)
 
 
 
 
 
 
 
Outstanding balance
 
$
45,650
 
$
45,330
 
Carrying amount
   
41,617
   
42,687
 

Net credit losses and 90-day delinquencies as of and for the periods indicated for Farmer Mac Guaranteed Securities, loans and LTSPCs are presented in the table below. Information is not presented for loans underlying Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed first loss subordinated interests, which are expected to exceed the estimated credit losses on those loans. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible mortgage loans. As of March 31, 2007, there were no probable losses inherent in Farmer Mac’s AgVantage securities due to the high credit quality of the obligors, as well as the underlying collateral. The guaranteed portions collateralizing 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 March 31, 2007, Farmer Mac had not experienced any credit losses on any Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed Securities and does not expect to incur any such losses in the future.

-18-

 
 
 
90-Day
Delinquencies (1)
 
Net Credit
Losses/(Recoveries)
 
 
 
As of
March 31,
 
As of
December 31,
 
As of
March 31,
 
For the Three Months Ended
March 31,
 
 
 
2007
 
2006
 
2006
 
2007
 
2006
 
 
 
(in thousands)
 
On-balance sheet assets:
 
 
 
 
 
 
 
 
 
 
 
Farmer Mac I:
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
22,864
 
$
18,457
 
$
25,535
 
$
-
 
$
(20
)
Total on-balance sheet
 
$
22,864
 
$
18,457
 
$
25,535
 
$
-
 
$
(20
)
 
                         
Off-balance sheet assets:
                         
Farmer Mac I:
                         
LTSPCs
 
$
5,477
 
$
1,198
 
$
3,227
 
$
-
 
$
-
 
Total off-balance sheet
 
$
5,477
 
$
1,198
 
$
3,227
 
$
-
 
$
-
 
 
                         
Total
 
$
28,341
 
$
19,655
 
$
28,762
 
$
-
 
$
(20
)

(1)
Includes loans and loans underlying post-1996 Act 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.

Note 3.
Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments

Overview

Farmer Mac offers approved agricultural and rural residential mortgage 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 either the Farmer Mac I program or the Farmer Mac II program; and (2) LTSPCs, which are available only through the Farmer Mac I program. Both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac in the ordinary course of its business.

-19-


Off-Balance Sheet Farmer Mac Guaranteed Securities

Agricultural mortgage loans and other mortgage 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. The following table summarizes cash flows received from and paid to these trusts:

 
 
Three Months Ended
 
 
 
March 31, 2007
 
March 31, 2006
 
 
 
(in thousands)
 
Proceeds from new securitizations
 
$
200
 
$
1,485
 
Guarantee fees received
   
2,748
   
1,408
 
Purchases of assets from the trusts
   
-
   
506
 
Servicing advances
   
36
   
1
 
Repayment of servicing advances
   
67
   
4
 
 
The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under off-balance sheet Farmer Mac Guaranteed Securities as of March 31, 2007 and December 31, 2006, 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
 
 
 
March 31,
2007
 
December 31,
2006
 
 
 
(in thousands)
 
 
 
 
 
 
 
Post-1996 Act Farmer Mac I Guaranteed Securities
 
$
3,374,458
 
$
3,149,895
 
Farmer Mac II Guaranteed Securities
   
28,117
   
33,132
 
Total Farmer Mac I and II
 
$
3,402,575
 
$
3,183,027
 

As of March 31, 2007, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 14.2 years. 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 $21.6 million as of March 31, 2007 and $13.6 million as of December 31, 2006.

Long-Term Standby Purchase Commitments (“LTSPCs”)

An LTSPC is a commitment by Farmer Mac to purchase eligible loans from a segregated pool of loans, either for cash or in exchange for Farmer Mac I 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 a swap for Farmer Mac Guaranteed Securities.

-20-


As of March 31, 2007 and December 31, 2006, the maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans, was $1.9 billion and $2.0 billion, respectively.

As of March 31, 2007, the weighted-average remaining maturity of all loans underlying LTSPCs was 15.4 years. For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the condensed consolidated balance sheet. This liability approximated $18.1 million as of March 31, 2007 and $21.8 million as of December 31, 2006.

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 months ended March 31, 2007 and 2006:

 
 
Three Months Ended
 
 
 
March 31,
2007
 
March 31,
2006
 
 
 
(in thousands)
 
 
 
 
 
 
 
Net income
 
$
4,482
 
$
15,651
 
 
         
Unrealized gains/(losses) on available for sale securities, net of tax
   
4,688
   
(9,042
)
Amortization of SFAS 133 transition adjustment on financial derivatives, net of tax
   
91
   
131
 
 
         
Change in accumulated other comprehensive income/(loss), net of tax
   
4,779
   
(8,911
)
 
         
Comprehensive income
 
$
9,261
 
$
6,740
 
 
-21-


The following table presents Farmer Mac’s accumulated other comprehensive income as of and for the three months ended March 31, 2007 and December 31, 2006.

 
 
March 31,
2007
 
December 31,
2006
 
 
 
(in thousands)
 
Available-for-sale securities:
         
Beginning balance
 
$
5,802
 
$
16,637
 
Net unrealized gains/(losses), net of tax
   
4,688
   
(10,835
)
Ending balance
 
$
10,490
 
$
5,802
 
 
         
Financial derivatives:
         
Beginning balance
 
$
(846
)
$
(1,390
)
Amortization of SFAS 133 transition adjustment on financial derivatives, net of tax
   
91
   
544
 
Ending balance
 
$
(755
)
$
(846
)
 
         
Accumulated other comprehensive income, net of tax
 
$
9,735
 
$
4,956
 
 
-22-


Note 5.
Investments

The following table presents the amortized cost and estimated fair values of Farmer Mac’s investments as of March 31, 2007 and December 31, 2006.

   
As of March 31, 2007
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
 
 
(in thousands)
 
Available-for-sale:
                 
Floating rate asset-backed securities
 
$
366,471
 
$
-
 
$
(6
)
$
366,465
 
Fixed rate asset-backed securities
   
365,650
   
2,894
   
-
   
368,544
 
Floating rate corporate debt securities
   
436,383
   
432
   
(180
)
 
436,635
 
Fixed rate corporate debt securities
   
545,072
   
-
   
(2,718
)
 
542,354
 
Fixed rate preferred stock
   
236,173
   
7,646
   
(86
)
 
243,733
 
Floating rate commercial paper
   
50,140
   
-
   
-
   
50,140
 
Fixed rate commercial paper
   
101,862
   
-
   
-
   
101,862
 
Floating rate mortgage-backed securities
   
149,752
   
546
   
(78
)
 
150,220
 
Fixed rate mortgage-backed securities
   
9,115
   
-
   
(147
)
 
8,968
 
Total available-for-sale
   
2,260,618
   
11,518
   
(3,215
)
 
2,268,921
 
 
                 
Trading:
                 
Adjustable rate mortgage-backed securities
   
4,702
   
56
   
-
   
4,758
 
Total trading
   
4,702
   
56
   
-
   
4,758
 
Total investment securities
 
$
2,265,320
 
$
11,574
 
$
(3,215
)
$
2,273,679
 

 
 
As of December 31, 2006
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
                 
Floating rate asset-backed securities
 
$
361,822
 
$
-
 
$
-
 
$
361,822
 
Floating rate corporate debt securities
   
406,374
   
527
   
(6
)
 
406,895
 
Fixed rate corporate debt securities
   
579,389
   
17
   
(4,153
)
 
575,253
 
Fixed rate preferred stock
   
236,771
   
3,628
   
(284
)
 
240,115
 
Fixed rate commercial paper
   
73,371
   
-
   
-
   
73,371
 
Floating rate mortgage-backed securities
   
158,521
   
552
   
(45
)
 
159,028
 
Fixed rate mortgage-backed securities
   
9,444
   
-
   
(177
)
 
9,267
 
Total available-for-sale
   
1,825,692
   
4,724
   
(4,665
)
 
1,825,751
 
 
                 
Trading:
                 
Adjustable rate mortgage-backed securities
   
5,091
   
62
   
-
   
5,153
 
Total trading
   
5,091
   
62
   
-
   
5,153
 
Total investment securities
 
$
1,830,783
 
$
4,786
 
$
(4,665
)
$
1,830,904
 

The temporary unrealized losses presented above are principally due to changes in interest rates from the date of acquisition to March 31, 2007 and December 31, 2006, as applicable. All investment securities in an unrealized loss position are at least “A” rated and have not experienced any decline in credit rating during 2007 or 2006. The unrealized losses were on 31 and 21 individual investment securities as of March 31, 2007 and December 31, 2006, respectively.

-23-


As of March 31, 2007, 13 of the securities in loss positions had been in loss positions for more than 12 months. Those securities had a total unrealized loss of $3.0 million as of March 31, 2007, compared to an unrealized loss of $4.4 million as of December 31, 2006. The unrealized losses on those securities are due to overall increases in market interest rates and not due to any underlying credit deterioration of the issuers. All of the securities with unrealized losses aged greater than 12 months have losses that are less than 3 percent of the security cost. All aged unrealized losses are recoverable within a reasonable period of time by way of changes in market interest rates. Accordingly, Farmer Mac has concluded that none of the unrealized losses on our investment securities represent other-than-temporary impairment as of March 31, 2007. Farmer Mac has the intent and ability to hold its investment securities in loss positions until either the market value recovers or the securities mature.

As of March 31, 2007, Farmer Mac did not own any held-to-maturity investments and owned trading investment securities that mature in less than one year with an amortized cost of $4.7 million, a fair value of $4.8 million, and a weighted average yield of 5.38 percent. The amortized cost, fair value and yield of investments by remaining contractual maturity for available-for-sale investment securities as of March 31, 2007 are set forth below. Asset- 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 March 31, 2007
 
 
 
Amortized Cost
 
Fair Value
 
Yield
 
 
 
(dollars in thousands)
 
Due within one year
 
$
286,681
 
$
286,567
   
4.22
%
Due after one year through five years
   
991,676
   
990,697
   
5.30
%
Due after five years through ten years
   
567,709
   
576,979
   
5.50
%
Due after ten years
   
414,552
   
414,678
   
4.37
%
Total
 
$
2,260,618
 
$
2,268,921
   
5.06
%


-24-


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

Financial information is consolidated to include the accounts of Farmer Mac and its wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation.

This discussion and analysis of financial condition and results of operations should be read together with: (1) the 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, 2006.

The discussion below is not necessarily indicative of future results.

Special Note Regarding Forward-Looking Statements

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

Management’s expectations for Farmer Mac’s future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac’s actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under “Risk Factors” in Part I, Item 1A of Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007, and uncertainties regarding:
 
 
·
lender interest in Farmer Mac credit products and the Farmer Mac secondary market;
 
·
increases in general and administrative expenses attributable to growth of the business and regulatory environment, including the hiring of additional personnel with expertise in key functional areas;
 
·
the rate and direction of development of the secondary market for agricultural mortgage loans;
 
·
the general rate of growth in agricultural mortgage indebtedness;
 
·
borrower preferences for fixed-rate agricultural mortgage indebtedness;
 
·
the willingness of investors to invest in Farmer Mac Guaranteed Securities; and
 
·
possible reaction in the financial markets to events involving GSEs other than Farmer Mac.

-25-


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.

Critical Accounting Policy and Estimates

The critical accounting policy that is both important to the portrayal of Farmer Mac’s financial condition and results of operations and requires complex, subjective judgments is the accounting policy for the allowance for losses. For a discussion of Farmer Mac’s critical accounting policy, as well as Farmer Mac’s use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policy and Estimates” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007.

Results of Operations

 
Overview. Net income available to common stockholders for first quarter 2007 was $3.9 million or $0.37 per diluted common share, compared to $15.1 million or $1.32 per diluted common share for first quarter 2006. These decreases were due principally to the effects of losses on financial derivatives used to manage interest rate risk. During first quarter 2007, Farmer Mac recorded losses of $4.0 million on financial derivatives due to market value changes caused by decreases in long-term interest rates. By comparison, Farmer Mac recorded gains of $11.7 million on financial derivatives for first quarter 2006 due to market value changes caused by increases in long-term interest rates. Although Farmer Mac’s financial derivatives provided highly effective economic hedges of interest rate risk, accounting under SFAS 133 caused the losses on the financial derivatives to be reflected in net income for first quarter 2007 while the offsetting economic gains on the hedged items were not. Similarly, under SFAS 133 the gains on financial derivatives for first quarter 2006 were reflected in net income, while the offsetting economic losses on the hedged items were not. As a result of Farmer Mac’s classification of its financial derivatives as undesignated hedges under SFAS 133, factors unrelated to the performance of the Corporation’s business, such as changes in interest rates, may cause the Corporation’s earnings under accounting principles generally accepted in the United States of America (“GAAP”) to be more volatile than - and even counter-directional to - the underlying economics of its business operations. Notwithstanding that increased volatility, the Corporation intends to continue to use financial derivatives to manage interest rate risk and optimize its cost of funds. Consistent with that strategy, the Board and management of Farmer Mac focus on the long-term growth of its business and its overall economic return to stockholders, rather than the short-term volatility of GAAP net income.

-26-


During first quarter 2007, Farmer Mac:
 
 
·
added $396.3 million of Farmer Mac I loans under LTSPCs;
 
·
purchased $21.6 million of newly originated and current seasoned Farmer Mac I loans;
 
·
purchased $53.5 million of Farmer Mac II USDA-guaranteed portions of loans; and
 
·
converted $303.8 million of pre-existing LTSPCs into Farmer Mac I Guaranteed Securities in swap transactions.
 
As of March 31, 2007, Farmer Mac’s outstanding program volume was $7.4 billion, which represented approximately 14.9 percent of management’s estimate of a $49.7 billion market of eligible agricultural mortgage loans. In addition, on April 19, 2007 Farmer Mac guaranteed $1.0 billion of AgVantage securities, increasing Farmer Mac’s outstanding program volume above $8.0 billion for the first time.

As part of Farmer Mac’s continuing evaluation of the overall credit quality of its portfolio, the state of the U.S. agricultural economy, the continued upward trends in agricultural land values, and the level of Farmer Mac’s outstanding guarantees and commitments, Farmer Mac determined that the appropriate allowance for losses as of March 31, 2007 was $3.9 million. This resulted in the release of approximately $0.6 million from the allowance for losses in first quarter 2007. As of March 31, 2007, the allowance for losses was $3.9 million and 8 basis points relative to the outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage securities), compared to $4.6 million and 10 basis points as of December 31, 2006 and $6.8 million and 16 basis points as of March 31, 2006.

As of March 31, 2007, Farmer Mac’s 90-day delinquencies (Farmer Mac I loans purchased or placed under Farmer Mac I Guaranteed Securities or LTSPCs after enactment of the 1996 Act that were 90 days or more past due, in foreclosure, restructured after delinquency, or in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan) were $28.3 million, representing 0.58 percent of the principal balance of the outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage securities), compared to $28.8 million (0.68 percent) as of March 31, 2006.

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

Net Interest Income. Net interest income was $9.1 million for first quarter 2007, compared to $10.7 million for first quarter 2006. The net interest yield was 73 basis points for the three months ended March 31, 2007, compared to 100 basis points for the three months ended March 31, 2006.

Net interest income includes guarantee fees for loans purchased after April 1, 2001 (the effective date of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”)), but not for loans purchased prior to that date. The effect of SFAS 140 was a reclassification of approximately $0.8 million (7 basis points) of guarantee fee income as interest income for first quarter 2007, compared to $0.9 million (8 basis points) for first quarter 2006.

As discussed in Note 1(c) to the condensed consolidated financial statements, Farmer Mac accounts for its financial derivatives as undesignated financial derivatives. Accordingly, the Corporation classifies the net interest income and expense realized on financial derivatives as gains and losses on financial derivatives and trading assets. For the three months ended March 31, 2007 and 2006, this classification resulted in the increase of the net interest yield of 1 basis point and 19 basis points, respectively.

-27-


The net interest yields for the three months ended March 31, 2007 and 2006 included the benefits of yield maintenance payments of 10 basis points and 9 basis points, respectively. Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans. Because the timing and size of these payments vary greatly, variations do not necessarily indicate positive or negative trends to gauge future financial results. For the three months ended March 31, 2007 and 2006, the after-tax effects of yield maintenance payments on net income and diluted earnings per share were $0.8 million or $0.08 per diluted share and $0.7 million or $0.06 per diluted share, respectively.

The following table provides information regarding interest-earning assets and funding for the three months ended March 31, 2007 and 2006. The balance of non-accruing loans is included in the average balance of interest-earning loans presented, though no related income is included in the income figures presented. Therefore, as the balance of non-accruing loans increases or decreases, the net interest yield will decrease or increase accordingly. Net interest income and the yield will also fluctuate due to the uncertainty of the timing and size of yield maintenance payments. The average rate earned on cash and cash equivalents reflects the increase in short-term market rates from first quarter 2006 through first quarter 2007. The increase in the average rate for investments reflects the increase in short-term rates from first quarter 2006 through first quarter 2007 and the short-term or floating rate nature of most investments acquired or reset during first quarter 2007. The higher average rate on loans and Farmer Mac Guaranteed Securities during first quarter 2007 reflects the increase in market rates during 2006, which affected the rates on loans acquired or reset during that period and outstanding during first quarter 2007. The higher average rate on Farmer Mac’s notes payable due within one year is consistent with general trends in average short-term rates during the periods presented. The upward trend in the average rate on notes payable due after one year reflects the retirement of older debt and the issuance of new debt at higher market rates during 2006.

-28-

 
 
 
Three Months Ended
 
 
 
March 31, 2007
 
March 31, 2006
 
 
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
 
 
(dollars in thousands)
 
Interest-earning assets:
                         
Cash and cash equivalents
 
$
1,028,376
 
$
13,563
   
5.28
%
$
593,615
 
$
6,664
   
4.49
%
Investments
   
1,892,787
   
25,430
   
5.37
%
 
1,616,628
   
20,034
   
4.96
%
Loans and Farmer Mac
                         
Guaranteed Securities
   
2,023,941
   
30,721
   
6.07
%
 
2,060,797
   
29,420
   
5.71
%
Total interest-earning assets
   
4,945,104
   
69,714
   
5.64
%
 
4,271,040
   
56,118
   
5.26
%
 
                         
Funding:
                         
Notes payable due within one year
   
2,246,940
   
28,837
   
5.13
%
 
2,372,349
   
25,742
   
4.34
%
Notes payable due after one year
   
2,494,288
   
31,795
   
5.10
%
 
1,654,704
   
19,709
   
4.76
%
Total interest-bearing liabilities
   
4,741,228
   
60,632
   
5.12
%
 
4,027,053
   
45,451
   
4.51
%
Net non-interest-bearing funding
   
203,876
   
 
   
 
   
243,987
   
 
   
 
 
Total funding
 
$
4,945,104
   
60,632
   
4.90
%
$
4,271,040
   
45,451
   
4.26
%
Net interest income/yield
     
$
9,082
   
0.73
%
 
 
 
$
10,667
   
1.00
%

The following table sets forth information regarding the changes in the components of Farmer Mac’s net interest income for the periods indicated. For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size. The increases in income due to changes in rate reflect the reset of variable-rate investments and adjustable-rate mortgages to higher rates and the acquisition of new higher-yielding investments, loans and Farmer Mac Guaranteed Securities, as described above. The increases in expense reflect the increased cost of short-term or floating rate funding due to the increase in short-term interest rates.

 
 
Three Months Ended March 31, 2007
Compared to Three Months Ended
March 31, 2006
 
 
 
Increase/(Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
 
 
(in thousands)
 
Income from interest-earning assets:
             
Cash and cash equivalents
 
$
1,329
 
$
5,569
 
$
6,898
 
Investments
   
1,781
   
3,615
   
5,396
 
Loans and Farmer Mac Guaranteed Securities
   
4,296
   
(2,995
)
 
1,301
 
Total
   
7,406
   
6,189
   
13,595
 
Expense from interest-bearing liabilities
   
6,508
   
8,672
   
15,180
 
Change in net interest income
 
$
898
 
$
(2,483
)
$
(1,585
)
 
-29-


Guarantee and Commitment Fees. Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs, were $5.9 million for first quarter 2007 compared to $5.0 million for first quarter 2006. The increase in guarantee and commitment fee income reflect the increase in the average balance of outstanding guarantees and LTSPCs. The effects of SFAS 140 classified guarantee fees of $0.8 million as interest income for first quarter 2007 compared to $0.9 million for first quarter 2006, although management considers the amounts to have been earned in consideration for the assumption of credit risk. That portion of the difference or “spread” between the cost of Farmer Mac’s debt funding for loans and the yield on post-1996 Act Farmer Mac I Guaranteed Securities held on its books compensates for credit risk. When a post-1996 Act Farmer Mac I Guaranteed Security is sold to a third party, Farmer Mac continues to receive the guarantee fee component of that spread, which continues to compensate Farmer Mac for its assumption of credit risk. The portion of the spread that compensates for interest rate risk would not typically continue to be received by Farmer Mac if the asset were sold, except to the extent attributable to any retained interest-only strip.

Expenses. General and administrative expenses were $2.3 million for first quarter 2007 compared to $2.8 million for first quarter 2006. The decrease was largely attributable to reduced legal fees from those in first quarter 2006 which included fees for a $500.0 million AgVantage transaction and compliance matters. Compensation and employee benefits were $3.1 million for first quarter 2007, compared to $2.9 million for first quarter 2006. Farmer Mac recognized compensation expense related to stock options of $0.7 million for first quarter 2007, compared to $0.4 million for first quarter 2006. For more information on stock option expense, see Note 1(e).

Regulatory fee expense for each of first quarter 2007 and 2006 were $0.6 million and $0.6 million, respectively. The Farm Credit Administration (“FCA”) has advised the Corporation that its estimated fees for the federal fiscal year ended September 30, 2007 will be $2.2 million compared to $2.4 million for the federal fiscal year ended September 30, 2006. After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past. Farmer Mac expects all of the above-mentioned expenses and regulatory fees to continue at approximately the same levels through 2007.

During first quarter 2007, Farmer Mac released $0.6 million from the allowance for losses, compared to a release of $1.7 million for first quarter 2006. See “—Quantitative and Qualitative Disclosures About Market Risk Management—Credit Risk” for additional information regarding Farmer Mac’s provision for losses, provision for loan losses and Farmer Mac’s methodology for determining its allowance for losses. As of March 31, 2007, Farmer Mac’s total allowance for losses was $3.9 million, or 0.08 percent relative to the outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage securities), compared to $4.6 million and 0.10 percent as of December 31, 2006.

Gains and Losses on Financial Derivatives and Trading Assets. SFAS 133 requires the change in the fair values of financial derivatives to be reflected in a company’s net income or accumulated other comprehensive income. As discussed in Note 1(c) to the condensed consolidated financial statements, the Corporation accounts for its financial derivatives as undesignated financial derivatives. The pre-tax net effect of gains and losses on financial derivatives, and trading assets recorded in Farmer Mac’s consolidated statements of operations was a net loss of $4.0 million for first quarter 2007 due to market value changes caused by decreases in interest rates compared to a net gain of $11.7 million for first quarter 2006 due to market value changes caused by increases in interest rates.

-30-


Farmer Mac records financial derivatives at fair value on its balance sheet with the related changes in fair value recognized in the condensed consolidated statement of operations. Although the Corporation’s use of financial derivatives achieves its economic and risk management objectives, its classification of financial derivatives as undesignated hedges under SFAS 133 allows factors unrelated to the economic performance of the Corporation’s business, such as changes in interest rates, to increase the volatility - or even change the direction - of the Corporation’s earnings under GAAP.

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

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

Business Volume. New business volume for first quarter 2007 was $471.5 million, compared to $396.2 million in fourth quarter 2006 and $648.5 million in first quarter 2006. Much of Farmer Mac’s recent business volume has been a product of the Corporation’s ongoing efforts to diversify its marketing focus to include large program transactions that emphasize high asset quality, with greater protection against adverse credit performance and commensurately lower compensation for the assumption of credit risk and administrative costs, resulting in projected risk-adjusted marginal returns on equity approximately equal to those of other Farmer Mac program transactions. During first quarter 2007, those efforts resulted in $396.3 million of LTSPCs and in April 2007, the guarantee of a $1 billion AgVantage security.

-31-


While Farmer Mac achieved a dramatic increase in new business volume during 2006 and continuing into 2007, its future business with agricultural mortgage lenders may still be constrained by:
 
 
·
high levels of available capital and liquidity of agricultural lenders;
 
·
changes in the capital, liquidity or funding needs of major business partners;
 
·
alternative sources of funding and credit enhancement for agricultural lenders; and
 
·
increased competition in the secondary market for agricultural mortgage loans.

Looking ahead, Farmer Mac remains confident of opportunities for increased business volume and income growth as a result of the Corporation’s product development and marketing efforts. Farmer Mac’s marketing initiatives are generating business opportunities for 2007 and, it believes, beyond. Current initiatives include:
 
 
·
expanded use of AgVantage transactions, targeting highly-rated financial institutions with large agricultural mortgage portfolios;
 
·
agribusiness and rural development loans associated with agriculture, in fulfillment of Farmer Mac’s Congressional mission; and
 
·
an ongoing alliance with the American Bankers Association (“ABA”), under which Farmer Mac facilitates access and offers improved pricing to ABA member institutions and the ABA promotes member participation in the Farmer Mac I program.

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

Management believes that legislative or regulatory developments or interpretations of Farmer Mac’s statutory charter could adversely affect Farmer Mac, its ability to offer new products, the ability or motivation of certain lenders to participate in its programs or the terms of any such participation, or increase the cost of regulation and related corporate activities. See “Risk Factors” in Part I, Item 1A of Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007.

For a more detailed discussion of the above factors and the related effects on Farmer Mac’s business volume, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook for 2007” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 15, 2007.

<