FEDERAL AGRICULTURAL MORTGAGE CORP (Form: 10-Q, Received: 05/10/2011 17:14:02)

As filed with the Securities and Exchange Commission on May 10, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File Number 001-14951

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

(Exact name of registrant as specified in its charter)

Federally chartered instrumentality
of the United States		52-1578738
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

1133 Twenty-First Street, N.W., Suite 600
Washington, D.C.		20036
(Address of principal executive offices)		(Zip code)

(202) 872-7700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

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

Large accelerated filer	¨	Accelerated filer x

Non-accelerated filer	¨	Smaller reporting company	¨

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

Yes ¨ No x

As of May 2, 2011 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,812,500 shares of Class C Non-Voting Common Stock outstanding.

PART I - FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

The following information concerning Farmer Mac’s interim unaudited condensed consolidated financial statements is included in this report beginning on the pages listed below:

Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010	4
Condensed Consolidated Statements of Equity for the three months ended March 31, 2011 and 2010	5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010	6
Notes to Condensed Consolidated Financial Statements	7

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,			December 31,
	2011			2010
	(in thousands)
Assets:
Cash and cash equivalents	$	779,443		$	729,920

Investment securities:
Available-for-sale, at fair value		1,976,522			1,677,233
Trading, at fair value		88,046			86,096
Total investment securities		2,064,568			1,763,329

Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value		2,909,914			2,907,264

USDA Guaranteed Securities:
Available-for-sale, at fair value		1,063,540			1,005,679
Trading, at fair value		274,561			311,765
Total USDA Guaranteed Securities		1,338,101			1,317,444
Loans:
Loans held for sale, at lower of cost or fair value		408,355			1,212,065
Loans held for investment, at amortized cost		1,093,559			90,674
Loans held for investment in consolidated trusts, at amortized cost		1,214,249			1,265,663
Allowance for loan losses		(11,084	)		(9,803	)
Total loans, net of allowance		2,705,079			2,558,599

Real estate owned, at lower of cost or fair value		2,881			1,992
Financial derivatives, at fair value		39,449			41,492
Interest receivable		65,576			90,295
Guarantee and commitment fees receivable		31,916			34,752
Deferred tax asset, net		12,735			14,530
Prepaid expenses and other assets		5,950			20,297
Total Assets	$	9,955,612		$	9,479,914

Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year	$	4,626,382		$	4,509,419
Due after one year		3,806,727			3,430,656
Total notes payable		8,433,109			7,940,075
Debt securities of consolidated trusts held by third parties		781,971			827,411
Financial derivatives, at fair value		97,820			113,687
Accrued interest payable		42,855			57,131
Guarantee and commitment obligation		28,668			30,308
Accounts payable and accrued expenses		74,368			22,113
Reserve for losses		8,378			10,312
Total Liabilities		9,467,169			9,001,037

Commitments and Contingencies (Note 5)

Equity:
Preferred stock:
Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 shares issued and outstanding		57,578			57,578
Common stock:
Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding		1,031			1,031
Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding		500			500
Class C Non-Voting, $1 par value, no maximum authorization, 8,770,092 shares outstanding as of March 31, 2011 and 8,752,711 shares outstanding as of December 31, 2010		8,770			8,753
Additional paid-in capital		100,450			100,050
Accumulated other comprehensive income		9,616			18,275
Retained earnings		68,645			50,837
Total Stockholders' Equity		246,590			237,024
Non-controlling interest - preferred stock		241,853			241,853
Total Equity		488,443			478,877
Total Liabilities and Equity	$	9,955,612		$	9,479,914

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	7,187		$	6,483
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		27,775			20,831
Loans		29,110			33,418
Total interest income		64,072			60,732
Total interest expense		37,053			37,115
Net interest income		27,019			23,617
Provision for loan losses		(1,281	)		(2,850	)
Net interest income after provision for loan losses		25,738			20,767

Non-interest income:
Guarantee and commitment fees		6,387			5,919
Gains/(losses) on financial derivatives		4,005			(5,804	)
Gains on trading assets		1,311			3,367
Gains on sale of available-for-sale investment securities		157			240
Gains on sale of real estate owned		97			-
Lower of cost or fair value adjustment on loans held for sale		(808	)		(2,274	)
Other income		3,898			829
Non-interest income		15,047			2,277

Non-interest expense:
Compensation and employee benefits		4,497			3,511
General and administrative		2,256			2,503
Regulatory fees		591			563
Real estate owned operating costs, net		368			10
Release of reserve for losses		(1,934	)		(1,468	)
Other expense		900			-
Non-interest expense		6,678			5,119
Income before income taxes		34,107			17,925
Income tax expense		9,517			4,336
Net income		24,590			13,589
Less: Net income attributable to non-controlling interest - preferred stock dividends		(5,547	)		(4,068	)
Net income attributable to Farmer Mac		19,043			9,521
Preferred stock dividends		(720	)		(1,970	)
Loss on retirement of preferred stock		-			(5,784	)
Net income available to common stockholders	$	18,323		$	1,767

Earnings per common share and dividends:
Basic earnings per common share	$	1.78		$	0.17
Diluted earnings per common share	$	1.72		$	0.17
Common stock dividends per common share	$	0.05		$	0.05

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

	For the Three Months Ended
	March 31, 2011					March 31, 2010
	Shares		Amount			Shares		Amount
	(in thousands)
Preferred stock:
Balance, beginning of period		58	$	57,578			58	$	57,578
Issuance of Series C preferred stock		-		-			-		-
Balance, end of period		58	$	57,578			58	$	57,578
Common stock:
Balance, beginning of period		10,284	$	10,284			10,142	$	10,142
Issuance of Class C common stock		15		15			2		2
Exercise of stock options and SARs		2		2			-		-
Balance, end of period		10,301	$	10,301			10,144	$	10,144
Additional paid-in capital:
Balance, beginning of period			$	100,050				$	97,090
Stock-based compensation expense				715					760
Issuance of Class C common stock				7					11
Exercise, vesting and cancellation of stock options,
SARs and restricted stock				(322	)				-
Balance, end of period			$	100,450				$	97,861
Retained earnings:
Balance, beginning of period			$	50,837				$	28,127
Net income attributable to Farmer Mac				19,043					9,521
Cash dividends:
Preferred stock, Series B ($8.33 per share)				-					(1,250	)
Preferred stock, Series C ($12.50 per share)				(720	)				(720	)
Common stock ($0.05 per share)				(515	)				(507	)
Loss on retirement of preferred stock				-					(5,784	)
Cumulative effect of adoption of new accounting standard, net of tax				-					2,679
Balance, end of period			$	68,645				$	32,066
Accumulated other comprehensive income:
Balance, beginning of period			$	18,275				$	3,254
Change in unrealized (loss)/gain on available-for-sale securities, net of tax and reclassification adjustments				(8,659	)				4,310
Change in unrealized gain on financial derivatives, net of tax and reclassification adjustments				-					23
Balance, end of period			$	9,616				$	7,587
Total Stockholders' Equity			$	246,590				$	205,236
Non-controlling interest:
Balance, beginning of period			$	241,853				$	-
Preferred stock - Farmer Mac II LLC				-					241,853
Balance, end of period			$	241,853				$	241,853
Total Equity			$	488,443				$	447,089

Comprehensive income:
Net income			$	24,590				$	13,589
Change in accumulated other comprehensive income, net of tax				(8,659	)				4,333
Comprehensive income				15,931					17,922
Less: Comprehensive income attributable to non-controlling interest				5,547					4,068
Total comprehensive income			$	10,384				$	13,854

See accompanying notes to condensed consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Three Months Ended
	March 31, 2011			March 31, 2010
				(restated)
	(in thousands)
Cash flows from operating activities:
Net income	$	24,590		$	13,589
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Net amortization of premiums and discounts on loans, investments, and
Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		4,294			1,632
Amortization of debt premiums, discounts and issuance costs		2,790			1,362
Net change in fair value of trading securities, financial derivatives and loans held for sale		(15,135	)		(6,262	)
Amortization of deferred gains on certain Farmer Mac Guaranteed
Securities and USDA Guaranteed Securities		(3,081	)		-
Gains on the sale of available-for-sale investment securities		(157	)		(240	)
Gains on the sale of real estate owned		(97	)		-
Total (release)/provision for losses		(653	)		1,382
Deferred income taxes		5,786			289
Stock-based compensation expense		715			760
Proceeds from repayment and sale of trading investment securities		382			236
Purchases of loans held for sale		(80,517	)		(127,740	)
Proceeds from repayment of loans held for sale		35,892			10,195
Net change in:
Interest receivable		24,719			2,384
Guarantee and commitment fees receivable		2,836			20,821
Other assets		15,342			15,956
Accrued interest payable		(14,276	)		7,968
Other liabilities		(349	)		(19,931	)
Net cash provided by/(used in) operating activities		3,081			(77,599	)
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(658,512	)		(284,149	)
Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		(617,370	)		(93,197	)
Purchases of loans held for investment		(215,867	)		(9,226	)
Purchases of defaulted loans		(16,925	)		(2,490	)
Proceeds from repayment of available-for-sale investment securities		336,681			57,766
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		572,505			56,912
Proceeds from repayment of loans held for investment		127,693			107,232
Proceeds from sale of available-for-sale investment securities		78,573			69,175
Proceeds from sale of trading securities - fair value option		-			5,013
Proceeds from sale of Farmer Mac Guaranteed Securities		7,363			7,487
Proceeds from sale of real estate owned		305			-
Net cash used in investing activities		(385,554	)		(85,477	)
Cash flows from financing activities:
Proceeds from issuance of discount notes		17,036,947			14,970,627
Proceeds from issuance of medium-term notes		616,503			339,653
Payments to redeem discount notes		(17,021,207	)		(15,099,610	)
Payments to redeem medium-term notes		(142,000	)		(296,590	)
Excess tax benefits related to stock-based awards		394			-
Payments to third parties on debt securities of consolidated trusts		(51,839	)		(72,971	)
Proceeds from common stock issuance		(20	)		13
Issuance costs on retirement of preferred stock		-			(5,784	)
Proceeds from preferred stock issuance - Farmer Mac II LLC		-			241,853
Retirement of Series B preferred stock		-			(144,216	)
Dividends paid - non-controlling interest - preferred stock		(5,547	)		(4,005	)
Dividends paid on common and preferred stock		(1,235	)		(2,477	)
Net cash provided by/(used in) financing activities		431,996			(73,507	)
Net increase/(decrease) in cash and cash equivalents		49,523			(236,583	)
Cash and cash equivalents at beginning of period		729,920			654,794
Cash and cash equivalents at end of period	$	779,443		$	418,211

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1.

Accounting Policies

The interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. On May 10, 2011, Farmer Mac filed with the SEC a report on Form 8-K advising that its 2010 and 2009 consolidated financial statements and its condensed consolidated financial statements for the nine months ended September 30, 2010 and 2009 and for the six months ended June 30, 2010 and 2009 should no longer be relied upon because of incorrect classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows. These misclassifications have no impact on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity and do not affect core earnings, core capital, minimum capital surplus, or total cash flow. See Note 1(a) for further information. The December 31, 2010 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s 2010 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial statements as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2010 consolidated financial statements of Farmer Mac and subsidiaries included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Below is a summary of Farmer Mac’s significant accounting policies.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1) Farmer Mac Mortgage Securities Corporation (“FMMSC”), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities and to act as a registrant under registration statements filed with the Securities and Exchange Commission, and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the Farmer Mac II program – primarily the acquisition of USDA-guaranteed portions. Farmer Mac II LLC was formed as a Delaware limited liability company on December 10, 2009. The business operations of Farmer Mac II LLC began in January 2010. The condensed consolidated financial statements also include the accounts of variable interest entities (“VIEs”) in which Farmer Mac determined itself to be the primary beneficiary. See Note 2(g) for more information on consolidated VIEs.

A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities. When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished. For Farmer Mac Guaranteed Securities in the Corporation’s portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC. The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the condensed consolidated statements of operations. These guarantee fees totaled $2.0 million in the first quarter 2011, compared to $1.7 million in first quarter 2010. The corresponding expense of FMMSC has been eliminated against interest income in consolidation. All other inter-company balances and transactions have been eliminated in consolidation.

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

Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents. The carrying value of cash and cash equivalents is a reasonable estimate of their fair value. Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows. The following table sets forth information regarding certain cash and non-cash transactions for the three months ended March 31, 2011 and 2010.

	For the Three Months Ended
	March 31, 2011		March 31, 2010
	(in thousands)
Cash paid during the period for:
Interest	$	26,763	$	18,799
Income taxes		1,000		1,500
Non-cash activity:
Real estate owned acquired through loan liquidation		1,460		2,393
Loans acquired and securitized as loans held for investment in consolidated trusts		6,399		763
Purchases of investment securities traded, not yet settled		50,345		-
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts		6,399		1,400,371
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to debt securities of consolidated trusts held by third parties		6,399		1,400,371
Transfers of available-for-sale Farmer Mac I Guaranteed Securities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		-		5,385
Transfers of trading Farmer Mac Guaranteed Securities - Rural Utilities to loans held for investment in consolidated trusts, upon the adoption of new consolidation guidance		-		451,448
Transfers of loans held for sale to loans held for investment		878,798		-

Effective January 1, 2011, Farmer Mac transferred $878.8 million of loans in the Farmer Mac I program from held for sale to held for investment because Farmer Mac no longer has the intent to securitize or sell these loans in the foreseeable future. Farmer Mac transferred these loans at their cost, which was lower than the estimated fair value at the time of transfer.

At the time of purchase, loans are classified as either held for sale or held for investment depending upon management’s intent and ability to hold the loans for the foreseeable future. On two occasions, once in first quarter 2009 and again in first quarter 2011, consistent with a change in management’s intent, Farmer Mac reclassified loans from one classification to the other on the balance sheet. Historically, cash receipts from the repayment of loans were classified within the statements of cash flows consistent with the then current balance sheet classification as opposed to the original balance sheet classification assigned based on management's intent upon purchase of the loan, as prescribed by accounting guidance related to the statement of cash flows. As a result of these incorrect classifications, Farmer Mac will restate its previously issued interim condensed consolidated statements of cash flows for the six and nine month periods ended June 30, and September 30, 2009 and 2010, respectively, and its consolidated statements of cash flows for the years ended December 31, 2009 and 2010 by amending its Annual Report on Form 10-K for the year ended December 31, 2010, which will include the interim periods, subsequent to this filing but as soon as practicable. These corrections have no impact on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity and do not affect core earnings, core capital, minimum capital surplus, or total cash flow. For each of the six, nine and twelve month periods ended June 30, September 30, and December 31, 2009, respectively, the impact of the restatement will increase net cash provided by operating activities by $65.0 million, $46.7 million and $42.2 million, respectively, with offsetting increases in net cash used in investing activities. For each of the six, nine, and twelve month periods ended June 30, September 30, and December 31, 2010, respectively, the impact of the restatement will increase net cash used in operating activities by $31.6 million, $50.5 million, and $54.6 million, respectively, with offsetting decreases in cash used in investing activities. The condensed consolidated statement of cash flows for the three months ended March 31, 2010 has been restated in this Form 10-Q to reflect increased net cash used in operating activities of $22.8 million offset by decreased net cash used in investing activities.

(b) Allowance for Losses

Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held (“allowance for loan losses”) and loans underlying Long Term Standby Purchase Commitments (“LTSPCs”) and Farmer Mac Guaranteed Securities (“reserve for losses”) based on available information. Farmer Mac’s methodology for determining the allowance for losses separately considers its portfolio segments - Farmer Mac I, Farmer Mac II, and Rural Utilities, and disaggregates its analysis, where relevant, into classes of financing receivables, which currently include loans and AgVantage securities. Further disaggregation to commodity type is performed, where appropriate, in analyzing the need for an allowance for losses.

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

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

General Allowance for Losses

Farmer Mac I

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

economic conditions;

geographic and agricultural commodity/product concentrations in the portfolio;

the credit profile of the portfolio;

delinquency trends of the portfolio;

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

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

Management believes that its use of this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held in the Farmer Mac I portfolio and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs. There were no purchases or sales during first quarter 2011 that materially affected the credit profile of the Farmer Mac I portfolio.

Farmer Mac has not provided an allowance for losses for loans underlying Farmer Mac I AgVantage securities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security, with some level of overcollateralization also required for Farmer Mac I AgVantage securities. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans.

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Farmer Mac II

No allowance for losses has been provided for USDA Guaranteed Securities or Farmer Mac II Guaranteed Securities. The portions of loans (the “USDA-guaranteed portions”) guaranteed by the U.S. Department of Agriculture (“USDA”) presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets, as well as those that collateralize Famer Mac II Guaranteed Securities, are guaranteed by the USDA. Each USDA guarantee is an obligation backed by the full faith and credit of the United States. Farmer Mac excludes these guaranteed portions from the credit risk metrics it discloses because of the USDA guarantee.

Rural Utilities

Farmer Mac separately evaluates the rural utilities loans it owns, as well as the lender obligations and loans underlying or securing its Farmer Mac Guaranteed Securities – Rural Utilities, including AgVantage securities, to determine if there are probable losses inherent in those assets. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security. No allowance for losses has been provided for this portfolio segment based on the credit quality of the collateral supporting rural utilities assets and Farmer Mac’s counterparty risk analysis. As of March 31, 2011, there were no delinquencies and no probable losses inherent in Farmer Mac’s rural utilities loans held or in any Farmer Mac Guaranteed Securities – Rural Utilities.

Specific Allowance for Impaired Loans

Farmer Mac also analyzes assets in its portfolio for impairment in accordance with the Financial Accounting Standards Board (“FASB”) standard on measuring individual impairment of a loan. Farmer Mac’s impaired assets include:

non-performing assets (loans 90 days or more past due, in foreclosure, restructured, in bankruptcy – including loans performing under either their original loan terms or a court-approved bankruptcy plan);

loans for which Farmer Mac has adjusted the timing of borrowers’ payment schedules, but still expects to collect all amounts due and has not made economic concessions; and

additional performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress.

For loans with an updated appraised value, other updated collateral valuation or management’s estimate of discounted collateral value, this analysis includes the measurement of the fair value of the underlying collateral for individual loans relative to the total recorded investment, including principal, interest and advances and net of any charge-offs. In the event that the collateral value does not support the total recorded investment, Farmer Mac provides an allowance for the loan for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. For the remaining impaired assets without updated valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics.

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As of March 31, 2011 and 2010, Farmer Mac’s specific allowances for losses were $7.5 million and $2.4 million, respectively.

Allowance for Losses

The following is a summary of the changes in the allowance for losses for three months ended March 31, 2011 and 2010:

	For the Three Months Ended
	March 31, 2011								March 31, 2010
	Allowance					Total			Allowance					Total
	for Loan		Reserve			Allowance			for Loan		Reserve			Allowance
	Losses		for Losses			for Losses			Losses		for Losses			for Losses
	(in thousands)

Beginning Balance	$	9,803	$	10,312		$	20,115		$	6,292	$	7,895		$	14,187
Provision/(recovery) for losses		1,281		(1,934	)		(653	)		2,850		(1,468	)		1,382
Charge-offs		-		-			-			-		-			-
Recoveries		-		-			-			-		-			-
Ending Balance	$	11,084	$	8,378		$	19,462		$	9,142	$	6,427		$	15,569

During first quarter 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.3 million and releases from its reserve for losses of $1.9 million. In first quarter 2011, Farmer Mac purchased two defaulted loans pursuant to the terms of an LTSPC agreement. This resulted in the reclassification of $1.8 million of specific allowance, which had been recorded in fourth quarter 2010, from the reserve for losses to the allowance for loan losses. The provision/(recovery) for losses for first quarter 2011 reflects this reclassification as well as a decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol industry.

During first quarter 2010, upon the adoption of new accounting guidance on consolidation on January 1, 2010, Farmer Mac reclassified $2.0 million from the reserve for losses to the allowance for loan losses as a result of Farmer Mac being determined the primary beneficiary of certain VIEs with beneficial interests owned by third party investors. The provision/(recovery) for losses for first quarter 2010 reflects this reclassification as well as provisions to its allowance for loan losses of $0.9 million and provisions to its reserve for losses of $0.5 million. Prior to the adoption of this guidance, Farmer Mac classified these interests as off-balance sheet Farmer Mac I Guaranteed Securities.

Farmer Mac’s reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of March 31, 2011 were $0.6 million and $7.8 million, respectively, compared to $0.6 million and $9.7 million, respectively as of December 31, 2010.

-11-

The following tables present the ending balances of Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities and the related allowance for losses by impairment method and commodity type as of March 31, 2011 and December 31, 2010.

	As of March 31, 2011
										AgStorage and
										Processing
			Permanent					Part-time		(including ethanol
	Crops		Plantings		Livestock			Farm		facilities)			Other			Total
	(in thousands)
Ending Balance
Evaluated collectively for impairment	$	1,732,773	$	819,134	$	1,153,805		$	275,628	$	226,131		$	21,173		$	4,228,644
Evaluated individually for impairment		29,260		29,672		12,789			7,170		6,553			240			85,684
	$	1,762,033	$	848,806	$	1,166,594		$	282,798	$	232,684		$	21,413		$	4,314,328

Allowance for Losses
Beginning balance	$	3,572	$	3,537	$	2,749		$	445	$	9,797		$	15		$	20,115
Provision/(recovery) for losses		350		265		(899	)		608		(974	)		(3	)		(653	)
Charge-offs		-		-		-			-		-			-			-
Recoveries		-		-		-			-		-			-			-
Ending balance	$	3,922	$	3,802	$	1,850		$	1,053	$	8,823		$	12		$	19,462

Evaluated collectively for impairment	$	1,645	$	1,209	$	1,320		$	760	$	6,973		$	11		$	11,918
Evaluated individually for impairment		2,277		2,593		530			293		1,850			1			7,544
	$	3,922	$	3,802	$	1,850		$	1,053	$	8,823		$	12		$	19,462

	As of December 31, 2010
									AgStorage and
									Processing
			Permanent				Part-time		(including ethanol
	Crops		Plantings		Livestock		Farm		facilities)		Other		Total
	(in thousands)
Ending Balance
Evaluated collectively for impairment	$	1,699,477	$	835,254	$	1,130,466	$	282,400	$	239,933	$	22,514	$	4,210,044
Evaluated individually for impairment		31,903		30,221		15,992		8,745		6,790		425		94,076
	$	1,731,380	$	865,475	$	1,146,458	$	291,145	$	246,723	$	22,939	$	4,304,120

Allowance for Losses
Evaluated collectively for impairment	$	1,499	$	783	$	2,236	$	222	$	7,947	$	13	$	12,700
Evaluated individually for impairment		2,073		2,754		513		223		1,850		2		7,415
	$	3,572	$	3,537	$	2,749	$	445	$	9,797	$	15	$	20,115

-12-

Farmer Mac recognized interest income of approximately $0.8 million and $0.5 million on impaired loans during the three months ended March 31, 2011 and 2010, respectively. During first quarter 2011 and 2010, Farmer Mac’s average investment in impaired loans was $87.7 million and $92.6 million, respectively.

The following tables present by commodity type the unpaid principal balances, recorded investment and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of March 31, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on impaired loans as of March 31, 2011.

	As of March 31, 2011
									AgStorage and
									Processing
			Permanent				Part-time		(including ethanol
	Crops		Plantings		Livestock		Farm		facilities)		Other		Total
	(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment	$	13,850	$	10,510	$	7,240	$	859	$	-	$	117	$	32,576
Unpaid principal balance		15,954		11,017		7,445		945		-		116		35,477

With a specific allowance:
Recorded investment		13,627		17,674		5,471		6,292		6,600		125		49,789
Unpaid principal balance		13,306		18,655		5,344		6,225		6,553		124		50,207
Associated allowance		2,277		2,593		530		293		1,850		1		7,544

Total:
Recorded investment		27,477		28,184		12,711		7,151		6,600		242		82,365
Unpaid principal balance		29,260		29,672		12,789		7,170		6,553		240		85,684
Associated allowance		2,277		2,593		530		293		1,850		1		7,544

Average recorded investment in impaired loans		29,452		28,841		14,318		7,995		6,720		336		87,662
Income recognized on impaired loans		156		27		217		41		382		-		823
Recorded investment of loans on Nonaccrual status:		11,756		24,348		3,490		4,987		-		-		44,581

-13-

	As of December 31, 2010
									AgStorage and
									Processing
			Permanent				Part-time		(including ethanol
	Crops		Plantings		Livestock		Farm		facilities)		Other		Total
	(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment	$	16,015	$	10,549	$	6,873	$	1,050	$	-	$	-	$	34,487
Unpaid principal balance		17,274		10,895		7,087		1,072		-		-		36,328

With a specific allowance:
Recorded investment		15,414		18,949		9,052		7,788		6,839		430		58,472
Unpaid principal balance		14,630		19,326		8,905		7,672		6,790		425		57,748
Associated allowance		2,073		2,754		513		223		1,850		2		7,415

Total:
Recorded investment		31,429		29,498		15,925		8,838		6,839		430		92,959
Unpaid principal balance		31,904		30,221		15,992		8,744		6,790		425		94,076
Associated allowance		2,073		2,754		513		223		1,850		2		7,415

Recorded Investment of Loans on Nonaccrual Status:	$	13,828	$	8,793	$	3,267	$	4,380	$	8,796	$	-	$	39,064

In accordance with the terms of all applicable trust agreements, Farmer Mac generally acquires all loans that collateralize Farmer Mac Guaranteed Securities that become and remain either 90 or 120 days or more past due (depending on the provisions of the applicable agreement) on the next subsequent loan payment date. In accordance with the terms of all LTSPCs, Farmer Mac acquires loans that are either 90 days or 120 days delinquent (depending on the provisions of the applicable agreement) upon the request of the counterparty.

Farmer Mac records all such defaulted loans at their unpaid principal balance during the period in which Farmer Mac becomes entitled to purchase the loans and therefore regains effective control over the transferred loans.

During first quarter 2011, Farmer Mac purchased 8 defaulted loans having an unpaid principal balance of $16.9 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs. During first quarter 2010, Farmer Mac purchased 5 defaulted loans having a principal balance of $2.5 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs. The following table presents Farmer Mac’s purchases of defaulted loans underlying Farmer Mac I Guaranteed Securities and LTSPCs.

	For the Three Months Ended
	March 31,		March 31,
	2011		2010
	(in thousands)
Defaulted loans purchased underlying off-balance sheet Farmer Mac I
Guaranteed Securities		1,369		2,323
Defaulted loans purchased underlying LTSPCs		15,556		167
Total loan purchases	$	16,925	$	2,490

-14-

Credit Quality Indicators

The following tables present credit quality indicators related to Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) as of March 31, 2011 and December 31, 2010. Farmer Mac uses 90-day delinquency information to evaluate its credit risk exposure on these assets because historically it has been the best measure of borrower credit quality deterioration. Most of the Farmer Mac I loans held and underlying LTSPCs and Farmer Mac I Guaranteed Securities have annual (January 1) or semi-annual (January 1 and July 1) payment dates and are supported by less frequent and less predictable revenue sources, such as the cash flows generated from the maturation of crops, sales of livestock and government farm support programs. Taking into account the reduced frequency of payment due dates and revenue sources, Farmer Mac considers the 90-day delinquency point to be the most significant observation point when evaluating its credit risk exposure.

	As of March 31, 2011
									AgStorage and
									Processing
			Permanent				Part-time		(including ethanol
	Crops		Plantings		Livestock		Farm		facilities)		Other		Total
	(in thousands)
Credit risk profile by internally assigned grade (1)
Grade:
Acceptable	$	1,660,846	$	778,460	$	1,003,739	$	259,363	$	113,369	$	18,746	$	3,834,523
Other assets especially mentioned ("OAEM") (2)		55,386		21,460		99,590		9,755		76,276		1,298		263,765
Substandard (2)		45,801		48,886		63,265		13,680		43,039		1,369		216,040
Total	$	1,762,033	$	848,806	$	1,166,594	$	282,798	$	232,684	$	21,413	$	4,314,328

Commodity analysis of past due loans (1)
Greater than 90 days	$	23,890	$	22,730	$	6,975	$	3,093	$	-	$	636	$	57,324
In bankruptcy and REO		4,519		4,692		1,379		1,792		-		-		12,382
Total non-performing	$	28,409	$	27,422	$	8,354	$	4,885	$	-	$	636	$	69,706

(1)	Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its Farmer Mac I portfolio, and recorded investment of past due loans. Amounts include real estate owned, at lower of cost or fair value less estimated selling costs, of $2.9 million.

(2)

Assets in the OAEM category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured. Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.

	As of December 31, 2010
									AgStorage and
									Processing
			Permanent				Part-time		(including ethanol
	Crops		Plantings		Livestock		Farm		facilities)		Other		Total
	(in thousands)
Credit risk profile by internally assigned grade (1)
Grade:
Acceptable	$	1,625,995	$	792,061	$	993,542	$	268,111	$	116,248	$	20,321	$	3,816,278
Other assets especially mentioned ("OAEM")(2)		59,768		17,112		86,500		9,652		76,947		639		250,618
Substandard(2)		45,617		56,302		66,416		13,382		53,528		1,979		237,224
Total	$	1,731,380	$	865,475	$	1,146,458	$	291,145	$	246,723	$	22,939	$	4,304,120

Commodity analysis of past due loans (1)
Greater than 90 days	$	21,423	$	26,312	$	7,177	$	3,803	$	10,892	$	641	$	70,248
In bankruptcy and REO		4,886		3,712		1,395		1,537		-		-		11,530
Total non-performing	$	26,309	$	30,024	$	8,572	$	5,340	$	10,892	$	641	$	81,778

(1)	Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its Farmer Mac I portfolio, and recorded investment of past due loans. Amounts include real estate owned, at lower of cost or fair value less estimated selling costs, of $2.0 million.

(2)

-15-

Concentrations of Credit Risk

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

	As of March 31,		As of December 31,
	2011		2010
	(in thousands)
By commodity/collateral type:
Crops	$	1,762,033	$	1,731,380
Permanent plantings		848,806		865,475
Livestock		1,166,594		1,146,458
Part-time farm		282,798		291,145
AgStorage and processing (including ethanol facilities)		232,684		246,723
Other		21,413		22,939
Total	$	4,314,328	$	4,304,120

By geographic region (1):
Northwest	$	728,679	$	660,845
Southwest		1,599,361		1,626,398
Mid-North		915,699		934,879
Mid-South		519,753		521,294
Northeast		308,956		317,715
Southeast		241,880		242,989
Total	$	4,314,328	$	4,304,120

By original loan-to-value ratio:
0.00% to 40.00%	$	1,054,957	$	1,030,580
40.01% to 50.00%		753,240		770,744
50.01% to 60.00%		1,242,452		1,246,675
60.01% to 70.00%		1,068,524		1,056,132
70.01% to 80.00%		151,284		155,363
80.01% to 90.00%		43,871		44,626
Total	$	4,314,328	$	4,304,120

(1)

Geographic regions: Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); Southeast (AL, AR, FL, GA, LA, MS, SC).

The original loan-to-value ratio is calculated by dividing the loan principal balance at the time of guarantee, purchase or commitment by the appraised value at the date of loan origination or, when available, the updated appraised value at the time of guarantee, purchase or commitment. Current loan-to-value ratios may be higher or lower than the original loan-to-value ratios.

-16-

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

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

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

-17-

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

	March 31, 2011
																	Weighted-
									Weighted-			Weighted-			Weighted-		Average
									Average			Average			Average		Remaining
	Notional		Fair Value						Pay			Receive			Forward		Life
	Amount		Asset			(Liability)			Rate			Rate			Price		(in years)
	(dollars in thousands)
Interest rate swaps:
Pay fixed non-callable	$	1,728,684	$	6,596		$	(94,526	)		3.97	%		0.30	%				4.07
Receive fixed non-callable		3,204,995		33,479			(2,017	)		0.43	%		1.29	%				1.46
Receive fixed callable		100,000		54			-			0.22	%		0.48	%				1.07
Basis swaps		419,117		141			(1,692	)		0.76	%		0.38	%				1.45
Credit default swaps		30,000		-			(203	)		1.00	%		0.00	%				0.81
Agency forwards		28,914		-			(50	)								106.01
Treasury futures		7,300		2			-									119.06
Credit valuation adjustment		-		(823	)		668
Total financial derivatives	$	5,519,010	$	39,449		$	(97,820	)

	December 31, 2010
																	Weighted-
									Weighted-			Weighted-			Weighted-		Average
									Average			Average			Average		Remaining
	Notional		Fair Value						Pay			Receive			Forward		Life
	Amount		Asset			(Liability)			Rate			Rate			Price		(in years)
	(dollars in thousands)
Interest rate swaps:
Pay fixed callable	$	13,144	$	-		$	(69	)		5.11	%		0.29	%				7.12
Pay fixed non-callable		1,275,108		2,814			(108,503	)		4.69	%		0.30	%				3.93
Receive fixed non-callable		2,874,534		39,551			(1,828	)		0.44	%		1.40	%				1.70
Basis swaps		254,991		52			(3,411	)		1.34	%		0.38	%				1.71
Credit default swaps		30,000		-			(216	)		1.00	%		0.00	%				1.05
Agency forwards		37,336		-			(174	)								101.03
Treasury futures		1,300		-			(6	)								119.95
Credit valuation adjustment		-		(925	)		520
Total financial derivatives	$	4,486,413	$	41,492		$	(113,687	)

In the normal course of business, collateral requirements contained in Farmer Mac’s derivative contracts are enforced by Farmer Mac and its counterparties. Upon enforcement of the collateral requirements, the amount of collateral posted is typically based on the net fair value of all derivative contracts with the counterparty, i.e., derivative assets net of derivative liabilities at the counterparty level. If Farmer Mac were to be in violation of certain provisions of the derivative contracts, the related counterparty could request payment or full collateralization on the derivative contracts. As of March 31, 2011, the fair value of Farmer Mac’s derivatives in a net liability position at the counterparty level, which includes accrued interest but excludes any adjustment for nonperformance risk, was $74.5 million. As of March 31, 2011, Farmer Mac posted cash of $2.2 million as collateral for its derivatives in net liability positions. Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. If Farmer Mac had breached certain provisions of the derivative contracts as of March 31, 2011, it could have been required to settle its obligations under the agreements or post additional collateral of $72.3 million.

-18-

The following table summarizes the effects of Farmer Mac’s financial derivatives on the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010:

	Gains/(Losses) on Financial Derivatives
	For the Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands)

Interest rate swaps	$	4,652		$	(4,546	)
Agency forwards		(848	)		(598	)
Treasury futures		185			(249	)
Credit default swaps		16			(377	)
		4,005			(5,770	)
Amortization of derivatives transition adjustment		-			(34	)
Total	$	4,005		$	(5,804	)

As of March 31, 2011, Farmer Mac had outstanding basis swaps with Zions First National Bank, a related party, with a total notional amount of $74.1 million and a fair value of $(1.7) million, compared to $85.0 million and $(3.4) million, respectively, as of December 31, 2010. Under the terms of those basis swaps, Farmer Mac pays Constant Maturity Treasury-based rates and receives LIBOR. Those swaps economically hedge most of the interest rate basis risk related to loans Farmer Mac purchases that pay a Constant Maturity Treasury based-rate and the discount notes Farmer Mac issues to fund the loan purchases (the pricing of discount notes is closely correlated to LIBOR rates). Farmer Mac recorded unrealized gains on those outstanding basis swaps for the three months ended March 31, 2011 and 2010 of $1.7 million and $0.1 million, respectively.

-19-

(d) Earnings Per Common Share

Basic earnings per common share is based on the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights (“SARs”) and nonvested restricted stock awards. The following schedule reconciles basic and diluted earnings per common share (“EPS”) for the three months ended March 31, 2011 and 2010:

	For the Three Months Ended
	March 31, 2011							March 31, 2010
	Net				$ per			Net				$ per
	Income		Shares		Share			Income		Shares		Share
	(in thousands, except per share amounts)
Basic EPS
Net income available to common stockholders	$	18,323		10,285	$	1.78		$	1,767		10,143	$	0.17
Effect of dilutive securities(1):
Stock options, SARs and restricted stock				379		(0.06	)				308		-
Diluted EPS	$	18,323		10,664	$	1.72		$	1,767		10,451	$	0.17

(1)

For the three months ended March 31, 2011 and 2010, stock options and SARs of 758,795 and 1,581,965, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended March 31, 2011 and 2010, 126,000 and 82,500 contingent shares of nonvested restricted stock were outstanding but not included in the computation of diluted earnings per share because the performance conditions were not met.

(e) Stock-Based Compensation

Farmer Mac’s 2008 Omnibus Incentive Compensation Plan authorizes the grants of restricted stock, stock options and SARs, among other alternative forms of equity-based compensation, to directors, officers and other employees. SARs awarded to officers and employees vest annually in thirds. If not exercised or terminated earlier due to the termination of employment, SARs granted to officers or employees expire after ten years. For all SARs granted, the exercise price is equal to the closing price of Farmer Mac’s Class C Non-Voting Common Stock on the date of grant. There were no SARs granted to officers in first quarter 2011. As of March 31, 2011, there are no outstanding SARs awarded to directors. Restricted stock awarded to directors during 2010 vested fully on March 31, 2011, approximately one year after grant. Restricted stock awarded to officers during 2009 and 2010 vests after approximately three years and only vests if certain performance conditions are met. Restricted stock awards granted to both directors and officers are not issued until full vesting occurs. No restricted stock was granted in first quarter 2011.

For the three months ended March 31, 2011, Farmer Mac recognized $0.7 million of compensation expense related to stock options, SARs and restricted stock, compared to $0.8 million for the same periods in 2010.

-20-

The following tables summarize activity related to stock options, SARs and nonvested restricted stock awards for the three months ended March 31, 2011 and 2010:

	For the Three Months Ended
	March 31, 2011					March 31, 2010
	Stock			Weighted-		Stock		Weighted-
	Options			Average		Options		Average
	and			Exercise		and		Exercise
	SARs			Price		SARs		Price
Outstanding, beginning of year		1,924,133		$	21.16		1,799,465	$	22.68
Granted		-			-		-		-
Exercised		(5,667	)		7.48		-		-
Canceled		(596,005	)		25.25		-		-
Outstanding, end of year		1,322,461		$	19.37		1,799,465	$	22.68

Options and SARs exercisable at end of year		915,206		$	23.16		1,398,269	$	25.17

	For the Three Months Ended
	March 31, 2011					March 31, 2010
				Weighted-				Weighted-
	Non-vested			Average		Non-vested		Average
	Restricted			Grant-date		Restricted		Grant-date
	Stock			Fair Value		Stock		Fair Value
Outstanding, beginning of year		182,609		$	9.63		200,548	$	5.93
Granted		-			-		-		-
Canceled		-			-		-		-
Vested and issued		(56,609	)		12.22		-		-
Outstanding, end of year		126,000		$	8.47		200,548	$	5.93

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

For the three months ended March 31, 2011 adjustments to additional paid-in capital from exercises or expiration of stock options and SARs and the vesting or expiration of restricted stock was $0.3 million. There was no such stock-based compensation activity during first quarter 2010. The reduction of income taxes to be paid as a result of the deduction for exercises of stock options and SARs was $0.4 million for the three months ended March 31, 2011.

-21-

The following tables summarize information regarding stock options, SARs and nonvested restricted stock outstanding as of March 31, 2011:

Outstanding

Exercisable

Vested or Expected to Vest

Weighted-

Stock

Average

Stock

Average

Stock

Average

Range of

Options

Remaining

Options

Remaining

Options

Remaining

Exercise

and

Contractual

and

Contractual

and

Contractual

Prices

SARs

Life

SARs

Life

SARs

Life

$5.00 - $ 9.99

261,666

8.0 years

101,669

7.9 years

233,667

8.0 years

10.00 - 14.99

302,000

9.1 years

82,333

9.0 years

269,033

9.1 years

15.00 - 19.99

50,786

3.4 years

50,786

3.4 years

50,786

3.4 years

20.00 - 24.99

172,289

4.0 years

172,289

4.0 years

172,289

4.0 years

25.00 - 29.99

452,659

4.0 years

425,068

3.8 years

449,698

4.0 years

30.00 - 34.99

83,061

2.0 years

83,061

2.0 years

83,061

2.0 years

1,322,461

915,206

1,258,534

	Outstanding			Expected to Vest
			Weighted-			Weighted-
Weighted-			Average			Average
Average	Nonvested		Remaining	Nonvested		Remaining
Grant-Date	Restricted		Contractual	Restricted		Contractual
Fair Value	Stock		Life	Stock		Life

$5.00 - $ 9.99		75,000	1.0 years		67,500	1.0 years
10.00 - 14.99		51,000	2.0 years		45,900	2.0 years
		126,000			113,400

There were no stock options, SARs or restricted stock awards granted during first quarter 2011 or first quarter 2010. The weighted-average grant date fair value of SARs granted during 2010 was $9.24 per share. The fair values for SARs were estimated using the Black-Scholes option pricing model based on the following assumptions:

		2010
Risk-free interest rate		2.9%
Expected years until exercise		7 years
Expected stock volatility		91.5%
Dividend yield		1.8%

(f) Fair Value Measurement

Farmer Mac follows accounting guidance for fair value measurements that defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a fair value hierarchy that ranks the quality and reliability of the inputs to valuation techniques used to measure fair value. The hierarchy gives highest rank to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest rank to unobservable inputs (level 3 measurements).

-22-

Farmer Mac’s assessment of the significance of the input to the fair value measurement requires judgment, and considers factors specific to the financial instrument. Both observable and unobservable inputs may be used to determine the fair value of positions that Farmer Mac has classified within the level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in long-dated volatilities) inputs.

See Note 7 for more information regarding fair value measurement.

(g) Consolidation of Variable Interest Entities

Farmer Mac has interests in various entities that are considered to be VIEs. These interests include investments in securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed securities created pursuant to Farmer Mac’s securitization transactions and mortgage and asset-backed trusts that Farmer Mac did not create. Effective January 1, 2010, Farmer Mac adopted two new accounting standards that eliminated the concept of qualifying special purpose entities (“QSPEs”) and amended the accounting for transfers of financial assets and the consolidation model for VIEs. All formerly designated QSPEs were evaluated for consolidation in accordance with the new consolidation model, which changed the method of analyzing which party to a VIE should consolidate the VIE. The new consolidation model uses a qualitative evaluation that requires consolidation of an entity when the reporting enterprise both (1) has the power to direct matters which significantly impact the activities and success of the entity, and (2) has exposure to benefits and/or losses that could potentially be significant to the entity. The reporting enterprise that meets both these conditions is deemed the primary beneficiary of the VIE.

The new consolidation standard requires the incremental assets and liabilities consolidated upon adoption to initially be reported at their carrying amounts. Carrying amount refers to the amount at which the assets and liabilities would have been carried in the consolidated financial statements if the new guidance had been effective when Farmer Mac first met the conditions to be the primary beneficiary of the VIE. If determining the carrying amounts is not practicable, the assets and liabilities of the VIE shall be measured at fair value at the date the new standards first apply. For the outstanding trusts consolidated effective January 1, 2010, Farmer Mac initially recorded the assets and liabilities on the consolidated balance sheet at their carrying amounts, adjusted, where applicable, for fair value option elections that had been made previously. Accrued interest and allowance for losses have also been recognized as appropriate.

Although these new accounting standards did not change the economic risk to Farmer Mac’s business, specifically Farmer Mac’s liquidity, credit and interest rate risks, the adoption of these new accounting standards had a significant impact on the presentation of Farmer Mac’s consolidated financial statements. On the consolidated balance sheet, there was an increase in loans held for investment, interest receivable, debt and accrued interest payable, and a decrease in available-for-sale and trading Farmer Mac Guaranteed Securities, the reclassification of a portion of the reserve for losses to allowance for loan losses, and the elimination of the guarantee and commitment fees receivable and guarantee and commitment obligations related to the consolidated trusts. On the income statement, there was an increase in interest income and interest expense attributable to the assets and liabilities of the consolidated trusts and a reclassification of a portion of guarantee fee income to interest income.

-23-

The VIEs in which Farmer Mac has a variable interest are limited to securitization trusts. The major judgment in determining if Farmer Mac is the primary beneficiary was whether Farmer Mac had the power to direct the activities of the trust that potentially had the most significant impact on the economic performance of the trust. Generally, the ability to make decisions regarding default mitigation was evidence of that power. Farmer Mac determined that it was the primary beneficiary for the securitization trusts related to most Farmer Mac I and all Rural Utilities securitization transactions because of its rights as guarantor under both programs to control the default mitigation activities of the trusts. For certain securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities, Farmer Mac determined that it was not the primary beneficiary since the power to make decisions regarding default mitigation was shared among unrelated parties. For similar securitization transactions where the power to make decisions regarding default mitigation was shared with a related party, Farmer Mac determined that it was the primary beneficiary because the applicable accounting guidance does not permit parties within a related party group to conclude that the power is shared.

For those trusts that Farmer Mac is the primary beneficiary, the assets and liabilities are presented on the condensed consolidated balance sheet as “Loans held for investment in consolidated trusts” and “Debt securities of consolidated trusts held by third parties,” respectively. These assets can only be used to satisfy the obligations of the related trust.

For those trusts where Farmer Mac has a variable interest but has not been determined to be the primary beneficiary, Farmer Mac’s interests are presented as either “Farmer Mac Guaranteed Securities” or “Investment securities” on the condensed consolidated balance sheets. Farmer Mac’s involvement in on-balance sheet VIEs classified as Farmer Mac Guaranteed Securities include securitization trusts under the Farmer Mac II program and trusts related to AgVantage securities. In the case of Farmer Mac II trusts, Farmer Mac was not determined to be the primary beneficiary because it does not have the decision-making power over default mitigation activities. For the AgVantage trusts, Farmer Mac currently does not have the power to direct the activities that have the most significant economic impact to the trust unless, as guarantor, there is a default by the issuer of the trust securities. Should there be a default, Farmer Mac would reassess whether it is the primary beneficiary of those trusts. For VIEs classified as investment securities, which include auction-rate certificates, asset-backed securities and GSE-guaranteed mortgage-backed securities, Farmer Mac was determined not to be the primary beneficiary because of the lack of voting rights or other powers to direct the activities of the trust. As of March 31, 2011, the Farmer Mac Guaranteed Securities trusts and investment securities trusts have carrying amounts on the condensed consolidated balance sheet totaling $1.5 billion and $818.4 million, respectively, which is Farmer Mac’s maximum exposure to loss. In addition, Farmer Mac has a variable interest in off-balance sheet VIEs, which include a guarantee of timely payment of principal and interest, totaling $2.7 billion as of March 31, 2011.

-24-

(h) New Accounting Standards

Troubled Debt Restructurings: Accounting Standards Updates 2011-01 and 2011-02

In January 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (discussed below). The effective date of the new disclosures about troubled debt restructurings was delayed to coordinate the disclosures with the FASB project on determining what constitutes a troubled debt restructuring. In April 2011, the FASB completed that project and issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring . ASU 2011-02 states that a troubled debt restructuring exists when a creditor concludes that both the restructuring constitutes a concession and the debtor is experiencing financial difficulties and clarifies the guidance on evaluating these criteria. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption (i.e., for Farmer Mac, it will be effective for third quarter 2011 reporting). The troubled debt restructuring disclosures in ASU 2010-20 also will be effective in third quarter 2011. Farmer Mac does not expect the adoption of these standards to have a significant impact on the Corporation’s financial position, results of operations or cash flows.

(i) Reclassifications

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

-25-

Note 2.

Investment Securities

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

	March 31, 2011
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	74,100	$	-	$	(9,561	)	$	64,539
Floating rate asset-backed securities		134,117		68		(1	)		134,184
Floating rate corporate debt securities		159,634		378		(52	)		159,960
Fixed rate corporate debt securities		34,715		50		(38	)		34,727
Floating rate Government/GSE guaranteed mortgage-backed securities		609,767		4,341		(559	)		613,549
Fixed rate GSE guaranteed mortgage-backed securities		4,125		278		-			4,403
Floating rate GSE subordinated debt		70,000		-		(11,031	)		58,969
Fixed rate GSE preferred stock		79,922		7,605		-			87,527
Fixed rate senior agency debt		9,999		-		-			9,999
Fixed rate U.S. Treasuries		808,410		296		(41	)		808,665
Total available-for-sale		1,984,789		13,016		(21,283	)		1,976,522

Trading:
Floating rate asset-backed securities		5,579		-		(3,889	)		1,690
Fixed rate GSE preferred stock		83,603		2,753		-			86,356
Total trading		89,182		2,753		(3,889	)		88,046
Total investment securities	$	2,073,971	$	15,769	$	(25,172	)	$	2,064,568

	December 31, 2010
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	74,100	$	-	$	(9,765	)	$	64,335
Floating rate asset-backed securities		29,437		24		(3	)		29,458
Floating rate corporate debt securities		162,891		422		(125	)		163,188
Floating rate Government/GSE guaranteed mortgage-backed securities		573,288		4,173		(681	)		576,780
Fixed rate GSE guaranteed mortgage-backed securities		4,525		296		-			4,821
Floating rate GSE subordinated debt		70,000		-		(14,671	)		55,329
Fixed rate GSE preferred stock		80,001		4,827		-			84,828
Fixed rate senior agency debt		5,500		-		-			5,500
Fixed rate U.S.Treasuries		692,808		232		(46	)		692,994
Total available-for-sale		1,692,550		9,974		(25,291	)		1,677,233

Trading:
Floating rate asset-backed securities		5,961		-		(4,561	)		1,400
Fixed rate GSE preferred stock		83,813		883		-			84,696
Total trading		89,774		883		(4,561	)		86,096
Total investment securities	$	1,782,324	$	10,857	$	(29,852	)	$	1,763,329

-26-

During the three months ended March 31, 2011 and 2010, Farmer Mac did not recognize in earnings any other-than-temporary impairment charges.

During the three months ended March 31, 2011, Farmer Mac received proceeds of $78.6 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.2 million, compared to proceeds of $69.6 million for the same period in 2010, resulting in gross realized gains of $0.4 million and gross realized losses of $0.2 million.

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

	March 31, 2011
	Available-for-Sale Securities
	Unrealized loss position for					Unrealized loss position for
	less than 12 months					more than 12 months
			Unrealized					Unrealized
	Fair Value		Loss			Fair Value		Loss
	(in thousands)

Floating rate corporate debt securities	$	-	$	-		$	99,947	$	(52	)
Fixed rate corporate debt securities		10,710		(38	)
Floating rate asset-backed securities		-		-			1,816		(1	)
Floating rate auction-rate certificates backed by Government guaranteed student loans		-		-			64,539		(9,561	)
Floating rate Government/GSE guaranteed mortgage-backed securities		173,204		(555	)		1,332		(4	)
Floating rate GSE subordinated debt		-		-			58,969		(11,031	)
Fixed rate U.S. Treasuries		95,637		(41	)		-		-
Total	$	279,551	$	(634	)	$	226,603	$	(20,649	)

	December 31, 2010
	Available-for-Sale Securities
	Unrealized loss position for					Unrealized loss position for
	less than 12 months					more than 12 months
			Unrealized					Unrealized
	Fair Value		Loss			Fair Value		Loss
	(in thousands)

Floating rate corporate debt securities	$	-	$	-		$	99,874	$	(125	)
Floating rate asset-backed securities		-		-			2,779		(3	)
Floating rate auction-rate certificates backed by Government guaranteed student loans		-		-			64,335		(9,765	)
Floating rate Government/GSE guaranteed mortgage-backed securities		159,294		(587	)		4,138		(94	)
Floating rate GSE subordinated debt		-		-			55,329		(14,671	)
Fixed rate U.S. Treasuries		163,026		(46	)		-		-
Total	$	322,320	$	(633	)	$	226,455	$	(24,658	)

-27-

The temporary unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to March 31, 2011 and December 31, 2010, as applicable. The resulting decreases in fair values reflect an increase in the perceived risk by the financial markets related to those securities. As of March 31, 2011, all of the investment securities in an unrealized loss position were rated at least “A” by a nationally recognized statistical rating organization except one which was rated “A-”. As of December 31, 2010, all of the investment securities in an unrealized loss position were rated at least “A”. The unrealized losses were on 48 and 47 individual investment securities as of March 31, 2011 and December 31, 2010, respectively.

As of March 31, 2011, 17 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $20.6 million. As of December 31, 2010, 29 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $24.7 million. Securities in unrealized loss positions 12 months or more have a fair value as of March 31, 2011 that is, on average, approximately 92 percent of their amortized cost basis. Farmer Mac believes that all these unrealized losses are recoverable within a reasonable period of time through changes in credit spreads or maturity and expects to recover the amortized cost basis of these securities. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represent other-than-temporary impairment as of March 31, 2011. Farmer Mac does not intend to sell these securities and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

Farmer Mac did not own any held-to-maturity investments as of March 31, 2011 and December 31, 2010. As of March 31, 2011, Farmer Mac owned trading investments with an amortized cost of $89.2 million, a fair value of $88.0 million, and a weighted-average yield of 8.14 percent. As of December 31, 2010, Farmer Mac owned trading investments with an amortized cost of $89.8 million, a fair value of $86.1 million and a weighted average yield of 8.12 percent.

The amortized cost, fair value and weighted-average yield of investments by remaining contractual maturity for available-for-sale investment securities as of March 31, 2011 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.

	Investment Securities Available-for-Sale
	as of March 31, 2011
	Amortized				Weighted-
	Cost		Fair Value		Average Yield
	(dollars in thousands)

Due within one year	$	967,010	$	967,406		0.93	%
Due after one year through five years		53,774		53,980		2.35	%
Due after five years through ten years		387,351		389,159		1.25	%
Due after ten years		576,654		565,977		2.65	%
Total	$	1,984,789	$	1,976,522		1.53	%

-28-

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 March 31, 2011 and December 31, 2010.

	March 31, 2011
	Available-
	for-Sale			Trading			Total
	(in thousands)
Farmer Mac I	$	1,429,318		$	-		$	1,429,318
Farmer Mac II		37,803			-			37,803
Rural Utilities		1,442,793			-			1,442,793
Farmer Mac Guaranteed Securities		2,909,914			-			2,909,914
USDA Guaranteed Securities		1,063,540			274,561			1,338,101
Total	$	3,973,454		$	274,561		$	4,248,015

Amortized cost	$	3,958,220		$	279,682		$	4,237,902
Unrealized gains		41,339			-			41,339
Unrealized losses		(26,105	)		(5,121	)		(31,226	)
Fair value	$	3,973,454		$	274,561		$	4,248,015

	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 March 31, 2011 and December 31, 2010, as applicable. As of March 31, 2011, the unrealized losses presented above are related to Farmer Mac I Guaranteed Securities, 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; therefore, Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities represent other-than-temporary impairment as of March 31, 2011. The unrealized losses related to Farmer Mac I Guaranteed Securities are AgVantage securities which are general obligations of an institution approved by Farmer Mac and are secured by a pool of eligible loans with a collateralization level of 103 percent or greater. Therefore, Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac I Guaranteed Securities - AgVantage represent other-than-temporary impairment as of March 31, 2011. As of December 31, 2010, the unrealized losses presented above are related to Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities. Because of the USDA guarantee noted above, Farmer Mac concluded that none of these unrealized losses represented other-than-temporary impairment as of 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.

-29-

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 months ended March 31, 2011 and 2010.

-30-

The table below presents a sensitivity analysis for the Corporation’s on-balance sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities as of March 31, 2011 and December 31, 2010.

	March 31,			December 31,
	2011			2010
	(dollars in thousands)

Fair value of beneficial interests retained in
Farmer Mac Guaranteed Securities and
USDA Guaranteed Securities	$	4,248,015		$	4,224,708

Weighted-average remaining life (in years)		4.0			3.5

Weighted-average prepayment speed (annual rate)		3.2	%		3.5	%
Effect on fair value of a 10% adverse change	$	(121	)	$	(18	)
Effect on fair value of a 20% adverse change	$	(218	)	$	(17	)

Weighted-average discount rate		2.8	%		2.3	%
Effect on fair value of a 10% adverse change	$	(30,664	)	$	(20,257	)
Effect on fair value of a 20% adverse change	$	(61,246	)	$	(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.

-31-

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

Outstanding Balance of Loans, Loans Underlying Farmer Mac Guaranteed Securities and LTSPCs, and USDA Guaranteed Securities
	March 31,		December 31,
	2011		2010
	(in thousands)
On-balance sheet:
Farmer Mac I:
Loans	$	1,092,831	$	972,206
Loans held in trusts:
Beneficial interests owned by Farmer Mac		1,400		3,697
Beneficial interests owned by third party investors		779,543		821,411
Farmer Mac Guaranteed Securities - AgVantage		1,441,500		941,500
Farmer Mac II:
USDA Guaranteed Securities		1,319,033		1,297,439
Farmer Mac Guaranteed Securities		38,522		39,856
Rural Utilities:
Loans		415,863		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	$	6,893,064	$	6,703,500

Off-balance sheet:
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
LTSPCs		1,712,791		1,754,597
Farmer Mac Guaranteed Securities		724,882		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,276		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		15,287		15,292
Total off-balance sheet	$	4,943,236	$	5,513,209
Total	$	11,836,300	$	12,216,709

-32-

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. Considering the low loan-to-value ratios in its portfolio, Farmer Mac believes that it is probable at the acquisition of these loans that it will be able to collect all contractually required payments receivable. 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 months ended March 31, 2011 and 2010 and the outstanding balances and carrying amounts of all such loans as of March 31, 2011 and December 31, 2010, respectively.

	For the Three Months Ended
	March 31,		March 31,
	2011		2010
	(in thousands)

Unpaid principal balance at acquisition date	$	16,925	$	2,490
Contractually required payments receivable		16,971		2,557
Impairment recognized subsequent to acquisition		3,770		1,381
Recovery/release of allowance for defaulted loans		10		-

	March 31,		December 31,
	2011		2010
	(in thousands)

Outstanding balance	$	39,333	$	34,473
Carrying amount		31,653		30,365

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Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs are presented in the table below. Information is not presented for loans underlying AgVantage securities, USDA Guaranteed Securities, Farmer Mac II Guaranteed Securities, or rural utilities loans held or underlying Farmer Mac Guaranteed Securities – Rural Utilities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans. As of March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 Three Months Ended
	March 31,		December 31,		March 31,		March 31,		March 31,
	2011		2010		2010		2011		2010
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	36,522	$	37,665	$	43,569	$	-	$	-
Farmer Mac Guaranteed Securities		-		-		-		-		-
Total on-balance sheet	$	36,522	$	37,665	$	43,569	$	-	$	-

Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	20,802	$	32,583	$	26,866	$	-	$	-
Farmer Mac Guaranteed Securities		-		-		-		-		-
Total off-balance sheet	$	20,802	$	32,583	$	26,866	$	-	$	-

Total	$	57,324	$	70,248	$	70,435	$	-	$	-

(1)

Includes Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

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Note 4. Comprehensive Income

Comprehensive income represents all changes in stockholders’ equity except those resulting from investments by or distributions to stockholders, and is comprised primarily of net income and unrealized gains and losses on securities available-for-sale, net of related taxes. The following table sets forth Farmer Mac’s comprehensive income for the three months ended March 31, 2011 and 2010:

	For the Three Months Ended
	March 31,			March 31,
	2011			2010
	(in thousands)
Net income	$	24,590		$	13,589
Available-for-sale securities, net of tax:
Net unrealized holding (losses)/gains		(6,554	)		4,500
Reclassification adjustment for realized gains (1)		(2,105	)		(190	)
Net change from available-for-sale securities (2)		(8,659	)		4,310
Financial derivatives, net of tax:
Reclassification for amortization of financial derivatives transition adjustment (3)		-			23
Other comprehensive (loss)/income, net of tax		(8,659	)		4,333
Comprehensive income		15,931			17,922
Less: Comprehensive income attributable to non- controlling interest		5,547			4,068
Total comprehensive income	$	10,384		$	13,854

(1)	Includes the reclassification of deferred gains recognized on certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities of $2.0 million, after tax, for the three months ended March 31, 2011.

(2)	Unrealized (losses)/gains on available for sale securities are shown net of income tax benefit of $4.7 million and net of income tax expense of $2.2 million for the three months ended March 31, 2011 and 2010, respectively.

(3)	Amortization of the financial derivatives transition adjustment is shown net of income tax expense of $12,000 in 2010.

In first quarter 2011, Farmer Mac reclassified $2.0 million (of a total $7.0 million) of after-tax unrealized gains into earnings related to fair value changes of Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities designated as available-for-sale that were transferred to Farmer Mac II LLC in January 2010. Included in this reclassification are amortization amounts of $1.8 million that relate to prior periods, beginning with first quarter 2010. Farmer Mac does not believe that this adjustment is material to any reported prior period financial results and has not adjusted prior period amounts nor is the aggregate adjustment in the first quarter 2011 material to the financial results for that period. These gains are presented as “Other income” on the condensed consolidated statements of operations. Going forward, Farmer Mac will recognize in earnings the remainder of these deferred gains over the estimated remaining lives of the underlying USDA-guaranteed portions. However, there will be no net effect on income on a consolidated basis because these gains will be offset by the amortization of premium expense on the assets held by Farmer Mac II LLC.

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

	March 31,			December 31,
	2011			2010
	(in thousands)
Available-for-sale securities:
Beginning balance	$	18,275		$	3,300
Net unrealized (losses)/gains, net of tax		(8,659	)		14,975
Ending balance	$	9,616		$	18,275

Financial derivatives:
Beginning balance	$	-		$	(46	)
Amortization of financial derivatives transition adjustment, net of tax		-			46
Ending balance	$	-		$	-
Accumulated other comprehensive income, net of tax	$	9,616		$	18,275

Note 5.

Off-Balance Sheet Guarantees and Long Term Standby Purchase Commitments

Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through the Farmer Mac I program, the Farmer Mac II program or the Rural Utilities program, and (2) LTSPCs, which are available through the Farmer Mac I program or the Rural Utilities program. For securitization trusts where Farmer Mac is the primary beneficiary, as described in Note 1(g), the trust assets and liabilities are included on Farmer Mac’s condensed consolidated balance sheet. Upon consolidation, Farmer Mac eliminates the portion of the guarantee and commitment fees receivable and guarantee and commitment obligations related to the consolidated trusts. For the remainder of these transactions, or in the event of deconsolidation, both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac. Farmer Mac accounts for these transactions and other financial guarantees in accordance with accounting guidance on accounting for guarantees. Farmer Mac records, at the inception of a guarantee, a liability for the fair value of its obligation to stand ready to perform under the terms of each guarantee and an asset that is equal to the fair value of the fees that will be received over the life of each guarantee. The fair values of the guarantee obligation and asset at inception are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model. The guarantee obligation and corresponding asset are subsequently amortized into guarantee and commitment fee income in relation to the decline in the unpaid principal balance on the underlying agricultural real estate mortgage and rural utilities loans.

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Off-Balance Sheet Farmer Mac Guaranteed Securities

Eligible loans and other eligible assets may be placed into trusts that are used as vehicles for the securitization of the transferred assets and the Farmer Mac-guaranteed beneficial interests in the trusts are sold to investors. Proceeds from new securitizations during the three months ended March 31, 2011 and 2010 were $6.4 million and $0.8 million, respectively. The following table summarizes cash flows received from and paid to trusts used for Farmer Mac I securitizations:

	For the Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands)
Proceeds from new securitizations	$	6,399		$	763
Guarantee fees received		2,124			1,237
Purchases of assets from the trusts		(1,369	)		(2,323	)
Servicing advances		(6	)		(236	)
Repayments of servicing advances		4			77

The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of March 31, 2011 and December 31, 2010, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans.

Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
	March 31,		December 31,
	2011		2010
	(in thousands)
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
Farmer Mac Guaranteed Securities		724,882		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,276		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		15,287		15,292
Total off-balance sheet Farmer Mac Guaranteed Securities	$	3,230,445	$	3,758,612

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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 $16.0 million as of March 31, 2011 and $17.7 million as of December 31, 2010. Upon adoption of the new accounting guidance on consolidation on January 1, 2010, Farmer Mac eliminated $15.5 million of the guarantee and commitment obligation related to the consolidated trusts. During second quarter 2010, Farmer Mac deconsolidated $414.5 million of certain securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities because Farmer Mac was no longer determined to be the primary beneficiary when the counterparty to the transaction ceased being a related party as a result of changes to the membership of Farmer Mac’s board of directors. This deconsolidation resulted in an increase to the guarantee and commitment obligation of $2.7 million as of June 30, 2010. See Note 1(g) for more information. As of March 31, 2011, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 13.7 years. As of March 31, 2011, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 2.6 years. For information on Farmer Mac’s methodology for determining the reserve for losses on off-balance sheet Farmer Mac Guaranteed Securities, see Note 1(b).

LTSPCs

An LTSPC is a commitment by Farmer Mac to purchase eligible loans from a segregated pool of loans under enumerated circumstances, either for cash or in exchange for Farmer Mac Guaranteed Securities, on one or more undetermined future dates. As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly in arrears in an amount approximating what would have been the guarantee fee if the transaction were structured as Farmer Mac Guaranteed Securities.

The maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties or collateral for the underlying loans, was $1.7 billion as of March 31, 2011 and $1.8 billion as of December 31, 2010.

As of March 31, 2011, the weighted-average remaining maturity of all loans underlying LTSPCs was 13.9 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 $12.7 million as of March 31, 2011 and $12.6 million as of December 31, 2010.

Note 6.

Equity

Common Stock

Farmer Mac has three classes of common stock outstanding:

Class A Voting Common Stock, which may be held only by banks, insurance companies and other financial institutions or similar entities that are not institutions of the Farm Credit System. By federal statute, no holder of Class A Voting Common Stock may directly or indirectly be a beneficial owner of more than 33 percent of the outstanding shares of that class of stock;

Class B Voting Common Stock, which may be held only by institutions of the Farm Credit System. There are no restrictions on the maximum holdings of Class B Voting Common Stock; and

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Class C Non-Voting Common Stock, which has no ownership restrictions.

From first quarter 2009 through first quarter 2011, Farmer Mac paid a quarterly dividend of $0.05 per share on all classes of the Corporation’s common stock. Farmer Mac’s ability to declare and pay a dividend could be restricted if it failed to comply with regulatory capital requirements.

Preferred Stock

As of March 31, 2011 and December 31, 2010, Farmer Mac had 57,578 shares of Series C preferred stock outstanding. The Series C preferred stock is a component of Stockholders’ Equity on the condensed consolidated balance sheets. The 57,578 shares of Series C preferred stock outstanding as of March 31, 2011 and December 31, 2010, were all held by the National Rural Utilities Cooperative Finance Corporation (“CFC”), a related party.

Farmer Mac’s ability to declare and pay dividends on its outstanding preferred stock could be restricted if it failed to comply with regulatory capital requirements. All series of Farmer Mac’s preferred stock are included as components of core capital for regulatory and statutory capital compliance measurements.

Non-Controlling Interest in Farmer Mac II LLC

On January 25, 2010, Farmer Mac completed a private offering of $250.0 million of securities issued by a newly formed Delaware statutory trust. The trust securities represent undivided beneficial ownership interests in 250,000 shares of non-cumulative perpetual preferred stock (the “Farmer Mac II LLC Preferred Stock”) of Farmer Mac’s subsidiary, Farmer Mac II LLC, a Delaware limited liability company. The Farmer Mac II LLC Preferred Stock has a liquidation preference of $1,000 per share.

Dividends on the Farmer Mac II LLC Preferred Stock will be payable if, when and as declared by Farmer Mac II LLC’s board of directors, quarterly, on a non-cumulative basis, on March 30, June 30, September 30, and December 30 of each year. For each quarterly period from the date of issuance to but excluding the payment date occurring on March 30, 2015, the dividend rate on the Farmer Mac II LLC Preferred Stock will be 8.875 percent per annum. For each quarterly period from March 30, 2015 to but excluding the payment date occurring on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875 percent per annum. For each quarterly period beginning on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be an annual rate equal to three-month LIBOR plus 8.211 percent. Dividends on the Farmer Mac II LLC Preferred Stock will be non-cumulative, so dividends that are not declared for a payment date will not accrue. The Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented as “Non-controlling interest – preferred stock” within permanent equity on the condensed consolidated balance sheets of Farmer Mac. Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the Farmer Mac II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred stock. The accrual of declared dividends is presented as “Net income attributable to non-controlling interest – preferred stock dividends” on the condensed consolidated statements of operations on a pre-tax basis. The consolidated tax benefit is included in income tax expense.

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Farmer Mac used part of the proceeds from the sale of $250.0 million of the Farmer Mac II LLC Preferred Stock to repurchase and retire all $150.0 million of the outstanding Series B Preferred Stock, which was newly issued during 2008 and reported as Mezzanine Equity on the condensed consolidated balance sheets.

Statutory and Regulatory Capital Requirements

Farmer Mac is subject to, and as of March 31, 2011 was in compliance with, its three statutory and regulatory capital requirements:

Minimum capital – Farmer Mac’s minimum capital level is equal to the sum of 2.75 percent of Farmer Mac’s aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, including Farmer Mac Guaranteed Securities and LTSPCs;

Critical capital – Farmer Mac’s critical capital level is equal to 50 percent of the minimum capital requirement at that time; and

Risk-based capital – the Farm Credit Administration (“FCA”) has established a risk-based capital stress test for Farmer Mac.

As of March 31, 2011, Farmer Mac’s minimum and critical capital requirements were $310.1 million and $155.1 million, respectively, and Farmer Mac’s core capital level (common and preferred stock outstanding plus non-controlling interest – preferred stock, additional paid-in-capital and retained earnings) was $478.8 million, $168.7 million above the minimum capital requirement and $323.7 million above the critical capital requirement. As of December 31, 2010, Farmer Mac’s minimum and critical capital requirements were $301.0 million and $150.5 million, respectively, and its actual core capital level was $460.6 million, $159.6 million above the minimum capital requirement and $310.1 million above the critical capital requirement.

Based on the risk-based capital stress test, Farmer Mac’s risk-based capital requirement as of March 31, 2011 was $41.8 million and Farmer Mac’s regulatory capital (core capital plus the allowance for losses) of $498.3 million exceeded that requirement by approximately $456.5 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters” for more information about changes to the risk-based capital stress test applicable to Farmer Mac.

Note 7.

Fair Value Disclosure

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price).

In determining fair value, Farmer Mac uses various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of Farmer Mac’s financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness prior to use in the condensed consolidated financial statements.

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When observable market prices are not readily available, Farmer Mac estimates fair value using techniques that rely on alternate market data or internally-developed models using significant inputs that are generally less readily observable. Market data includes prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. If market data needed to estimate fair value is not available, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach. Even when market assumptions are not readily available, Farmer Mac’s assumptions reflect those that market participants would likely use in pricing the asset or liability at the measurement date.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The standard describes the following three levels used to classify fair value measurements:

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2

Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3

Prices or valuations that require unobservable inputs that are significant to the fair value measurement.

Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the appropriate level based on the transparency of the inputs used in the valuation techniques. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Farmer Mac’s assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument. While Farmer Mac believes its valuation methods are appropriate and consistent with those of other market participants, using different methodologies or assumptions to determine fair value could result in a materially different estimate of the fair value of some financial instruments.

The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy described above. Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as non-recurring fair value measurements.

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Recurring Fair Value Measurements and Classification

Available-for-Sale and Trading Investment Securities

The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets. Farmer Mac classifies these fair value measurements as level 1.

For a significant portion of Farmer Mac’s investment portfolio, including most asset-backed securities, corporate debt securities, senior agency debt securities, Government/GSE guaranteed mortgage-backed securities and preferred stock issued by GSEs, fair value is primarily determined using a reputable and nationally recognized third party pricing service. The prices obtained are non-binding and generally representative of recent market trades. The fair value of certain asset-backed and Government guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers. Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another independent third party pricing service. Farmer Mac classifies these fair value measurements as level 2.

For investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach. Farmer Mac maximizes the use of observable market data, including prices of financial instruments with similar maturities and characteristics, duration, interest rate yield curves, measures of volatility and prepayment rates. Farmer Mac generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is a limited availability of public market information. Farmer Mac classifies these fair value measurements as level 3.

Farmer Mac classifies its estimates of fair value for auction-rate certificates (“ARCs”) as level 3 measurements. Farmer Mac uses unadjusted quotes from a broker specializing in these types of securities to determine the estimated fair value of these investments as of each quarter end. Farmer Mac believes these quotes are the best indication of fair value as of the measurement date, although there is uncertainty regarding the ability to transact at such levels. Considering (1) there is no active secondary market for these securities, although limited observable transactions do occasionally occur, (2) price quotes vary significantly among dealers or independent pricing services, if provided at all, and (3) there is little transparency in the price determination, Farmer Mac believes these measurements are appropriately classified as level 3. Prior to 2010, Farmer Mac used a discounted cash flow model to determine the estimated fair value of these investments as of each quarter end. The assumptions used in preparing the model include estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment. In making these assumptions, Farmer Mac considered relevant factors including: the formula for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the underlying student loans are backed by the full faith and credit of the United States; and, publicly available pricing data for student loan asset-backed securities that are not subject to auctions. Farmer Mac classified these fair value measurements as level 3.

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Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets as of the beginning of the quarterly reporting period. Farmer Mac made no transfers within the fair value hierarchy for the fair value measurements of its investment securities in the first quarter 2011. Transfers within the fair value hierarchy for the fair value measurements of investment securities in first quarter 2010 are described below.

During first quarter 2010, Farmer Mac transferred its investments in the subordinated debt and preferred stock of CoBank, ACB and its investment in the preferred stock of AgFirst Farm Credit Bank, with par values of $70.0 million, $88.5 million and $88.0 million, respectively, as of December 31, 2009, from level 3 measurements to level 2 measurements. Taking into consideration its own recently executed trades during first quarter 2010, along with an increase in observable trading activity for these securities, Farmer Mac determined that the best estimates of fair value for these securities as of March 31, 2010 and continuing through March 31, 2011, were the fair values provided by an independent third party pricing service. Farmer Mac transferred these securities out of level 3 based on their fair values as of the beginning of the first quarter 2010.

Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Guaranteed Securities

Farmer Mac estimates the fair value of its Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Farmer Mac classifies these measurements as level 3 because there is limited market activity and therefore little or no price transparency. On a sample basis, Farmer Mac corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by obtaining a secondary valuation from an independent third party service.

Farmer Mac made no transfers within the fair value hierarchy for the fair value measurements of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities in the first quarter 2011. Transfers out of level 3 during first quarter 2010 resulted from the consolidation of certain trusts whereby the underlying assets were no longer reported at fair value on a recurring basis. Transfers out of level 3 are based on the fair values of the assets as of the beginning of the quarterly reporting period and are described in more detail below.

Upon the adoption of the new accounting guidance on consolidation on January 1, 2010, Farmer Mac was deemed to be the primary beneficiary of certain VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of agricultural real estate mortgage loans or rural utilities loans. Prior to 2010, Farmer Mac presented these beneficial interests as “Farmer Mac Guaranteed Securities” on the condensed consolidated balance sheet and reported them at their fair value. Upon consolidation, Farmer Mac transferred these assets from “Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated trusts.” These loans are reported at their amortized cost and are no longer included in recurring fair value measurements. Farmer Mac transferred these securities out of level 3 based on their fair values as of the beginning of the first quarter 2010.

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Financial Derivatives

The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical financial instruments. Farmer Mac classifies these fair value measurements as level 1.

Farmer Mac’s derivative portfolio consists primarily of interest rate swaps, credit default swaps and forward sales contracts on the debt of other GSEs. Farmer Mac estimates the fair value of these financial instruments based upon the counterparty valuations. Farmer Mac internally values its derivative portfolio using a discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps to corroborate the counterparty valuations. Farmer Mac also regularly reviews the counterparty valuations as part of the collateral exchange process. Farmer Mac classifies these fair value measurements as level 2.

Certain basis swaps are nonstandard interest rate swap structures and are therefore internally modeled using significant assumptions and unobservable inputs, resulting in level 3 classification. Farmer Mac uses a discounted cash flow valuation technique, using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discounted rates commensurate with the risks involved.

As of March 31, 2011 and December 31, 2010, the consideration of credit risk related to both Farmer Mac and the counterparties resulted in an adjustment to the valuations of Farmer Mac’s derivative portfolio of $(0.2) million and $(0.4) million, respectively. See Note 1(c) for further information regarding Farmer Mac’s derivative portfolio.

Nonrecurring Fair Value Measurements and Classification

Loans Held for Sale

Loans held for sale are reported at the lower of cost or fair value in the condensed consolidated balance sheets. Farmer Mac internally models the fair value of loans by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. The fair values of these instruments are classified as level 3 measurements. As of March 31, 2011, Farmer Mac recorded an adjustment of $9.7 million to report loans held for sale at the lower of cost or fair value. As of December 31, 2010, Farmer Mac recorded an adjustment of $8.7 million to report loans held for sale at the lower of cost or fair value.

Real Estate Owned

Farmer Mac initially records REO properties at fair value less costs to sell and subsequently records them at the lower of carrying value or fair value less costs to sell. The fair value of REO is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties. Farmer Mac classifies the REO fair values as level 3 measurements.

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Fair Value Classification and Transfers

As of March 31, 2011, Farmer Mac’s assets and liabilities recorded at fair value include financial instruments valued at $4.7 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3). These financial instruments measured as level 3 represented 48 percent of the total assets and 69 percent of financial instruments measured at fair value as of March 31, 2011. As of December 31, 2010, Farmer Mac’s asset and liabilities recorded at fair value included financial instruments valued at $4.6 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3). These financial instruments measured as level 3 represented 49 percent of the total assets and 71 percent of financial instruments measured at fair value as of December 31, 2010.

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The following tables present information about Farmer Mac’s asset and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2011 and December 31, 2010, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value.

Assets and Liabilities Measured at Fair Value as of March 31, 2011

	Level 1		Level 2		Level 3		Total
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	-	$	-	$	64,539	$	64,539
Floating rate asset-backed securities		-		134,184		-		134,184
Floating rate corporate debt securities		-		194,687		-		194,687
Floating rate Government/GSE guaranteed mortgage-backed securities		-		613,549		-		613,549
Fixed rate GSE guaranteed mortgage-backed securities		-		4,403		-		4,403
Floating rate GSE subordinated debt		-		58,969		-		58,969
Fixed rate GSE preferred stock		-		87,527		-		87,527
U.S. Treasuries		808,665		-		-		808,665
Senior agency debt		-		9,999		-		9,999
Total available-for-sale		808,665		1,103,318		64,539		1,976,522
Trading:
Floating rate asset-backed securities		-		-		1,690		1,690
Fixed rate GSE preferred stock		-		86,356		-		86,356
Total trading		-		86,356		1,690		88,046
Total Investment Securities		808,665		1,189,674		66,229		2,064,568
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		-		-		1,429,318		1,429,318
Farmer Mac II		-		-		37,803		37,803
Rural Utilities		-		-		1,442,793		1,442,793
Total Farmer Mac Guaranteed Securities		-		-		2,909,914		2,909,914
USDA Guaranteed Securities:
Available-for-sale		-		-		1,063,540		1,063,540
Trading		-		-		274,561		274,561
Total USDA Guaranteed Securities		-		-		1,338,101		1,338,101
Financial derivatives		2		39,447		-		39,449
Total Assets at fair value	$	808,667	$	1,229,121	$	4,314,244	$	6,352,032
Liabilities:
Financial derivatives	$	-	$	96,149	$	1,671	$	97,820
Total Liabilities at fair value	$	-	$	96,149	$	1,671	$	97,820
Nonrecurring:
Assets:
Loans held for sale	$	-	$	-	$	406,168	$	406,168
Loans held for investment		-		-		12,399		12,399
REO		-		-		1,573		1,573
Total Nonrecurring Assets at fair value	$	-	$	-	$	420,140	$	420,140

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Assets and Liabilities Measured at Fair Value as of December 31, 2010

	Level 1		Level 2		Level 3		Total
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	-	$	-	$	64,335	$	64,335
Floating rate asset-backed securities		-		29,458		-		29,458
Floating rate corporate debt securities		-		163,188		-		163,188
Floating rate Government/GSE guaranteed mortgage-backed securities		-		576,780		-		576,780
Fixed rate GSE guaranteed mortgage-backed securities		-		4,821		-		4,821
Floating rate GSE subordinated debt		-		55,329		-		55,329
Fixed rate GSE preferred stock		-		84,828		-		84,828
U.S. Treasuries		692,994		-		-		692,994
Senior agency debt		-		5,500		-		5,500
Total available-for-sale		692,994		919,904		64,335		1,677,233
Trading:
Floating rate asset-backed securities		-		-		1,400		1,400
Fixed rate GSE preferred stock		-		84,696		-		84,696
Total trading		-		84,696		1,400		86,096
Total Investment Securities		692,994		1,004,600		65,735		1,763,329
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		-		-		942,809		942,809
Farmer Mac II		-		-		37,637		37,637
Rural Utilities		-		-		1,926,818		1,926,818
Total available-for-sale		-		-		2,907,264		2,907,264
Total Farmer Mac Guaranteed Securities		-		-		2,907,264		2,907,264
USDA Guaranteed Securities:
Available-for-sale		-		-		1,005,679		1,005,679
Trading		-		-		311,765		311,765
Total USDA Guaranteed Securities		-		-		1,317,444		1,317,444
Financial derivatives		-		41,492		-		41,492
Total Assets at fair value	$	692,994	$	1,046,092	$	4,290,443	$	6,029,529
Liabilities:
Financial derivatives	$	6	$	110,291	$	3,390	$	113,687
Total Liabilities at fair value	$	6	$	110,291	$	3,390	$	113,687
Nonrecurring:
Assets:
Loans held for sale	$	-	$	-	$	331,076	$	331,076
Loans held for investment		-		-		11,971		11,971
REO		-		-		1,925		1,925
Total Nonrecurring Assets at fair value	$	-	$	-	$	344,972	$	344,972

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The following tables present additional information about assets and liabilities measured at fair value on a recurring and nonrecurring basis classified as level 3 measurements. Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the quarterly reporting period.

Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2011
												Realized and			Unrealized
												Unrealized			Gains/(Losses)
												Gains/(Losses)			included in Other
	Beginning											included in			Comprehensive					Ending
	Balance			Purchases		Sales			Settlements			Income			Income			Trasnfers In		Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	64,335		$	-	$	-		$	-		$	-		$	204		$	-	$	64,539
Trading:
Floating rate asset-backed securities(1)		1,400			-		-			(382	)		672			-			-		1,690
Total Investment Securities		65,735			-		-			(382	)		672			204			-		66,229
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		942,809			500,000		-			(8	)		-			(13,483	)		-		1,429,318
Farmer Mac II		37,637			1,023		(964	)		(1,360	)		-			1,467			-		37,803
Rural Utilities		1,926,818			-		-			(476,401	)		-			(7,624	)		-		1,442,793
Total Farmer Mac Guaranteed Securities		2,907,264			501,023		(964	)		(477,769	)		-			(19,640	)		-		2,909,914
USDA Guaranteed Securities:
Available-for-sale		1,005,679			116,347		-			(60,835	)		-			2,349			-		1,063,540
Trading(2)		311,765			-		-			(35,973	)		(1,231	)		-			-		274,561
Total USDA Guaranteed Securities		1,317,444			116,347		-			(96,808	)		(1,231	)		2,349			-		1,338,101
Total Assets at fair value	$	4,290,443		$	617,370	$	(964	)	$	(574,959	)	$	(559	)	$	(17,087	)	$	-	$	4,314,244
Liabilities:
Financial derivatives(3)	$	(3,390	)	$	-	$	-		$	-		$	1,719		$	-		$	-	$	(1,671	)
Total Liabilities at fair value	$	(3,390	)	$	-	$	-		$	-		$	1,719		$	-		$	-	$	(1,671	)
Nonrecurring:
Assets:
Loans held for sale	$	331,076		$	-	$	-		$	(4,617	)	$	(808	)	$	-		$	80,517	$	406,168
Loans held for investment		11,971			-		-			-			(195	)		-			623		12,399
REO		1,925			-		-			(32	)		(320	)		-			-		1,573
Total Nonrecurring Assets at fair value	$	344,972		$	-	$	-		$	(4,649	)	$	(1,323	)	$	-		$	81,140	$	420,140

(1)	Unrealized gains are attributable to assets still held as of March 31, 2011 and are recorded in gains on trading assets.

(2)	Includes unrealized losses of $2.5 million attributable to assets still held as of March 31, 2011 that are recorded in gains on trading assets.

(3)	Unrealized gains are attributable to liabilities still held as of March 31, 2011 and are recorded in gains/(losses) on financial derivatives.

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Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2010

	Beginning Balance			Purchases, Sales, Issuances and Settlements, net			Realized and Unrealized Gains/(Losses) included in Income			Unrealized Gains/(Losses) included in Other Comprehensive Income			Net Transfers In and/or Out			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	72,884		$	-		$	-		$	(10,628	)	$	-		$	62,256
Floating rate GSE subordinated debt		47,562			-			-			-			(47,562	)		-
Fixed rate GSE preferred stock		89,211			-			-			-			(89,211	)		-
Total available-for-sale investment securities		209,657			-			-			(10,628	)		(136,773	)		62,256
Trading:
Floating rate asset-backed securities(1)		1,824			(236	)		(136	)		-			-			1,452
Fixed rate GSE preferred stock(2)		88,148			-						-			(88,148	)		-
Total trading investment securities		89,972			(236	)		(136	)		-			(88,148	)		1,452
Total investment securities		299,629			(236	)		(136	)		(10,628	)		(224,921	)		63,708
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I		56,864			(3,757	)		-			358			(5,385	)		48,080
Farmer Mac II		764,792			(305	)		-			(1,611	)		(723,184	)		39,692
Rural Utilities		1,703,211			-			-			2,944			-			1,706,155
Total available-for-sale		2,524,867			(4,062	)		-			1,691			(728,569	)		1,793,927
Trading:
Farmer Mac II(2)		422,681			-						-			(422,681	)		-
Rural Utilities		451,448			-			-			-			(451,448	)		-
Total trading		874,129			-			-			-			(874,129	)		-
Total Far6mer Mac Guaranteed Securities		3,398,996			(4,062	)		-			1,691			(1,602,698	)		1,793,927
USDA Guaranteed Securities:
Available-for-sale		-			52,897			-			5,742			723,184			781,823
Trading		-			(19,858	)		5,021			-			422,681			407,844
Total USDA Guaranteed Securities		-			33,039			5,021			5,742			1,145,865			1,189,667
Total Assets at fair value	$	3,698,625		$	28,741		$	4,885		$	(3,195	)	$	(681,754	)	$	3,047,302
Liabilities:
Financial derivatives(3)	$	(3,653	)	$	-		$	62		$	-		$	-		$	(3,591	)
Total Liabilities at fair value	$	(3,653	)	$	-		$	62		$	-		$	-		$	(3,591	)
Nonrecurring:
Assets:
Loans held for sale, at lower of cost or fair value	$	28,505		$	-		$	(2,274	)	$	-		$	59,017		$	85,248
Loans held for investment, at fair value		-			-			(84	)		-			10,606			10,522
Total Assets at fair value	$	28,505		$	-		$	(2,358	)	$	-		$	69,623		$	95,770

(1)	Unrealized losses are attributable to assets still held as of March 31, 2010 and are recorded in gains on trading assets.

(2)	Includes unrealized losses of $1.5 million attributable to assets still held as of March 31, 2010 that are recorded in gains on trading assets.

(3)	Unrealized gains are attributable to liabilities still held as of March 31, 2010 and are recorded in (losses)/gains on financial derivatives.

Fair Value Option

Accounting guidance on the fair value option for financial instruments permits entities to make a one-time irrevocable election to report financial instruments at fair value with changes in fair value recorded in earnings as the occur. This guidance provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

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Farmer Mac made no fair value option elections for the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011, Farmer Mac recorded net gains on trading assets of $0.6 million for changes in fair values of assets previously selected for the fair value option, compared to net gains of $3.5 million the same period ended March 31, 2010. These changes in fair value are presented as “Gains/(losses) on trading assets” in the condensed consolidated statements of operations.

Disclosures about Fair Value of Financial Instruments

The following table sets forth the estimated fair values and the carrying amounts for financial assets, liabilities and guarantees and commitments as of March 31, 2011 and December 31, 2010 in accordance with accounting guidance on disclosures about fair value of financial instruments.

	March 31, 2011				December 31, 2010
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	779,443	$	779,443	$	729,920	$	729,920
Investment securities		2,064,568		2,064,568		1,763,329		1,763,329
Farmer Mac Guaranteed Securities		2,909,914		2,909,914		2,907,264		2,907,264
USDA Guaranteed Securities		1,338,101		1,338,101		1,317,444		1,317,444
Loans		2,800,899		2,705,079		2,642,399		2,558,599
Financial derivatives		39,449		39,449		41,492		41,492
Interest receivable		65,576		65,576		90,295		90,295
Guarantee and commitment fees receivable:
LTSPCs		23,593		13,578		14,191		13,666
Farmer Mac Guaranteed Securities		20,738		18,338		19,058		21,086
Financial liabilities:
Notes payable:
Due within one year		4,628,760		4,626,382		4,510,758		4,509,419
Due after one year		3,881,768		3,806,727		3,530,656		3,430,656
Debt securities of consolidated trusts held by third parties		847,847		781,971		883,669		827,411
Financial derivatives		97,820		97,820		113,687		113,687
Accrued interest payable		42,855		42,855		57,131		57,131
Guarantee and commitment obligations:
LTSPCs		22,722		12,707		13,152		12,627
Farmer Mac Guaranteed Securities		18,362		15,961		15,653		17,681

The carrying amount of cash and cash equivalents, certain short-term investment securities, interest receivable and accrued interest payable is a reasonable estimate of their approximate fair value. Farmer Mac estimates the fair value of its loans, guarantee and commitment fees receivable/obligation and notes payable by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.

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Note 8.

Business Segment Reporting

Farmer Mac accomplishes its congressional mission of providing liquidity and lending capacity to rural lenders through three programs – Farmer Mac I, Farmer Mac II and Rural Utilities. Prior to first quarter 2010, Farmer Mac reported its financial results as a single segment using GAAP-basis income. Beginning in first quarter 2010, Farmer Mac revised its segment financial reporting, by using core earnings, a non-GAAP financial measure, to reflect the manner in which management has begun assessing the Corporation’s performance since the contribution of substantially all of the Farmer Mac II program business to a subsidiary, Farmer Mac II LLC. Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management’s view, core earnings more accurately reflects Farmer Mac’s economic performance, transaction economics and business trends. Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance, which are not expected to have a permanent effect on capital. Core earnings also differs from GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of the Corporation’s core business. This non-GAAP financial measure may not be similar to non-GAAP financial measures disclosed by other companies.

The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis. Accordingly, the core earnings for Farmer Mac’s reportable operating segments will differ from the stand-alone financial statements of Farmer Mac’s subsidiaries. These differences will be due to various factors, including the reversal of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the incurrence of indebtedness managed at the corporate level. The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences. The assets of Farmer Mac’s subsidiary Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. As of March 31, 2011, Farmer Mac II LLC held assets with a fair value of $1.4 billion, had debt outstanding of $132.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock outstanding all of which is held by Farmer Mac.

Management has determined that the Corporation’s operations consist of three reportable segments – Farmer Mac I, Farmer Mac II and Rural Utilities. Farmer Mac uses these three segments to generate revenue and manage business risk, and each segment is based on distinct products and distinct business activities. In addition to these three program operating segments, a corporate segment is presented. That segment represents activity in Farmer Mac’s liquidity investment portfolio and other corporate activities. The segment financial results include directly attributable revenues and expenses. Corporate charges for administrative expenses that are not directly attributable to an operating segment are allocated based on headcount.

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Each of the program operating segments generates revenue through purchasing loans or securities, committing to purchase loans, or guaranteeing securities backed by eligible loans. Purchases of both program assets and assets held in Farmer Mac’s liquidity investment portfolio are funded through debt issuance of various maturities. Management makes decisions about pricing, funding and guarantee and commitment fee levels based on inherent credit risks, resource allocation and target returns on equity separately for each segment.

Under the Farmer Mac I program, Farmer Mac purchases or commits to purchase eligible mortgage loans secured by first liens on agricultural real estate, including through the issuance of LTSPCs. Farmer Mac also guarantees securities representing interests in, or obligations secured by, pools of eligible agricultural real estate mortgage loans, and may purchase those securities.

Under the Farmer Mac II program, Farmer Mac II LLC purchases USDA-guaranteed portions of loans, which are presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets. Farmer Mac currently operates only that part of the Farmer Mac II program that involves the guarantee of Farmer Mac II Guaranteed Securities to investors other than Farmer Mac or Farmer Mac II LLC.

Under the Rural Utilities program, Farmer Mac’s business activities include loan purchases, guarantees and purchases of securities with respect to eligible rural utilities loans. To date, all of the business under the Rural Utilities program has been with one lender, CFC, a related party.

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The following tables present core earnings for Farmer Mac’s reportable operating segments and a reconciliation to GAAP net income for the three months ended March 31, 2011 and 2010.

Core Earnings by Business Segment

For the Three Months Ended March 31, 2011

													Reconciling			GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments			Amounts
	(in thousands)
Interest income (1)	$	32,079		$	13,665		$	13,662		$	7,187		$	(2,521	)	$	64,072
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income		(874	)		-			-			-			874			-
Interest expense (2)		(20,278	)		(10,998	)		(10,660	)		(4,140	)		9,023			(37,053	)
Net effective spread		10,927			2,667			3,002			3,047			7,376			27,019

Guarantee and commitment fees		5,765			53			1,443			-			(874	)		6,387
Other income/(expense) (3)		962			46			-			(94	)		7,746			8,660
Non-interest income/(loss)		6,727			99			1,443			(94	)		6,872			15,047

Provision for loan losses		(1,281	)		-			-			-			-			(1,281	)

Reserve for losses		1,934			-			-			-			-			1,934
Other non-interest expense		(4,768	)		(663	)		(1,132	)		(2,049	)		-			(8,612	)
Non-interest expense (4)		(2,834	)		(663	)		(1,132	)		(2,049	)		-			(6,678	)
Core earnings before income taxes		13,539			2,103			3,313			904			14,248	(5)		34,107
Income tax (expense)/benefit		(4,739	)		(736	)		(1,160	)		2,105			(4,987	)		(9,517	)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest		8,800			1,367			2,153			3,009			9,261	(5)		24,590
Preferred stock dividends		-			-			-			(720	)		-			(720	)
Non-controlling interest		-			-			-			(5,547	)		-			(5,547	)
Segment core earnings	$	8,800		$	1,367		$	2,153		$	(3,258	)	$	9,261	(5)	$	18,323

Total assets at carrying value	$	3,354,391		$	1,393,444		$	2,300,792		$	2,906,985		$	-		$	9,955,612
Total principal balance of on- and off-balance sheet program assets		8,197,947			1,402,831			2,235,522			-			-			11,836,300

(1)	Includes reconciling adjustments for yield maintenance income and discount amortization on certain prepaid loans, and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.

(2)	Based on effective funding cost determined for each operating segment, including the expense related to interest rate swaps, which is included in Gains/ (losses) on financial derivatives on the GAAP financial statements.

(3)

Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains on certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.

(4)	Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.

(5)

Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income available to common stockholders, respectively.

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Core Earnings by Business Segment

For the Three Months Ended March 31, 2010

													Reconciling			GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments			Amounts
	(in thousands)
Interest income (1)	$	28,234		$	12,605		$	14,401		$	6,483		$	(991	)	$	60,732
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income		(1,467	)		-			-			-			1,467			-
Interest expense (2)		(19,624	)		(10,458	)		(11,742	)		(3,626	)		8,335			(37,115	)
Net effective spread		7,143			2,147			2,659			2,857			8,811			23,617

Guarantee and commitment fees		5,550			301			1,535			-			(1,467	)		5,919
Other income/(expense) (3)		886			-			-			(448	)		(4,080	)		(3,642	)
Non-interest income/(loss)		6,436			301			1,535			(448	)		(5,547	)		2,277

Provision for loan losses		(2,850	)		-			-			-			-			(2,850	)

Reserve for losses		1,468			-			-			-			-			1,468
Other non-interest expense		(3,059	)		(796	)		(1,080	)		(1,652	)		-			(6,587	)
Non-interest expense (4)		(1,591	)		(796	)		(1,080	)		(1,652	)		-			(5,119	)
Core earnings before income taxes		9,138			1,652			3,114			757			3,264	(5)		17,925
Income tax (expense)/benefit		(3,282	)		(578	)		(1,090	)		1,757			(1,143	)		(4,336	)
Core earnings before preferred stock dividends, attribution of income to non-controlling interest, and loss on retirement of preferred stock		5,856			1,074			2,024			2,514			2,121	(5)		13,589
Preferred stock dividends		-			-			-			(1,970	)		-			(1,970	)
Non-controlling interest		-			-			-			(4,068	)		-			(4,068	)
Loss on retirement of preferred stock		-			-			-			-			(5,784	)		(5,784	)
Segment core earnings	$	5,856		$	1,074		$	2,024		$	(3,524	)	$	(3,663	) (5)	$	1,767

Total assets at carrying value	$	2,201,000		$	1,246,906		$	2,250,586		$	1,780,673		$	-		$	7,479,165
Total principal balance of on- and off-balance sheet program assets		7,293,825			1,237,539			2,183,576			-			-			10,714,940

(1)	Includes reconciling adjustments for yield maintenance income and discount amortization on certain prepaid loans, and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.

(2)	Based on effective funding cost determined for each operating segment, including the expense related to interest rate swaps, which is included in Gains/ (losses) on financial derivatives on the GAAP financial statements.

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

(4)	Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.

(5)

Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends, attribution of income to non-controlling interest, and loss on retirement of preferred stock; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income available to common stockholders, respectively.

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Item 2.

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

Financial information included in this report is consolidated to include the accounts of Farmer Mac and its subsidiaries, Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC. Farmer Mac II LLC was formed as a Delaware limited liability company in December 2009 to operate substantially all of the business related to the Farmer Mac II program – primarily the acquisition of USDA-guaranteed portions. The business operations of Farmer Mac II LLC began in January 2010. Since then, Farmer Mac operates only that part of the Farmer Mac II program that involves the issuance of Farmer Mac II Guaranteed Securities to investors other than Farmer Mac or Farmer Mac II LLC.

This discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 16, 2011.

On May 10, 2011, Farmer Mac filed with the SEC a report on Form 8-K advising that its 2010 and 2009 consolidated financial statements and its condensed consolidated financial statements for the nine months ended September 30, 2010 and 2009 and for the six months ended June 30, 2010 and 2009 should no longer be relied upon because of incorrect classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows. These misclassifications have no impact on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity and do not affect core earnings, core capital, minimum capital surplus, or total cash flow. See Note 1(a) to the condensed consolidated financial statements for further information.

The discussion below is not necessarily indicative of future results.

Forward-Looking Statements

Some statements made in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management’s current expectations about Farmer Mac’s future financial results, business prospects and business developments. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and typically are accompanied by, and identified with, such terms as “anticipates,” “believes,” “expects,” “intends,” “should” and similar phrases. The following management’s discussion and analysis includes forward-looking statements addressing Farmer Mac’s:

prospects for earnings;

prospects for growth in loan purchase, guarantee, securitization, and LTSPC volume;

trends in net interest income;

trends in portfolio credit quality, delinquencies, and provisions for losses;

trends in expenses;

trends in investment securities;

prospects for asset impairments and allowance for losses;

changes in capital position; and

other business and financial matters.

Management’s expectations for Farmer Mac’s future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac’s actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under “Risk Factors” in Part I, Item 1A of Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011, as well as uncertainties regarding:

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the availability to Farmer Mac and Farmer Mac II LLC of debt financing and, if available, the reasonableness of rates and terms;

legislative or regulatory developments that could affect Farmer Mac;

fluctuations in the fair value of assets held by Farmer Mac and Farmer Mac II LLC;

the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the Farmer Mac secondary market;

the general rate of growth in agricultural mortgage and rural utilities indebtedness;

the impact of economic conditions and real estate values on agricultural mortgage lending;

developments in the financial markets, including possible investor, analyst and rating agency reactions to events involving GSEs, including Farmer Mac; and

the future level of interest rates, commodity prices, and export demand for U.S. agricultural products.

In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report. Furthermore, Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements that may be made to reflect new information or any future events or circumstances, except as otherwise mandated by the SEC.

Overview

Following a successful 2010, Farmer Mac entered 2011 well positioned to continue to fulfill its congressional mission to provide capital and liquidity to rural America. First quarter results included the addition of $963.8 million of new program business volume and increased GAAP and core earnings compared to the prior year. Farmer Mac’s GAAP net income available to common stockholders for first quarter 2011 was $18.3 million ($1.72 per diluted common share), compared to $1.8 million ($0.17 per diluted common share) in first quarter 2010. In addition, Farmer Mac’s core earnings for first quarter 2011 were $9.1 million, up from $5.4 million in first quarter 2010. First quarter 2011 results benefited from increased outstanding business volume compared to a year earlier, increased net interest income of $27.0 million, compared to $23.6 million in first quarter 2010, and net releases from the allowance for losses of $0.7 million as opposed to provisions of $1.4 million in the prior year. As of March 31, 2011, Farmer Mac’s excess core capital above its statutory minimum capital requirement was $168.7 million.

Although approximately $976.4 million of AgVantage Securities in both the Farmer Mac I and Rural Utilities business segments matured in first quarter 2011, Farmer Mac’s new business volume for first quarter 2011 totaled $963.8 million, compared to $306.4 million during first quarter 2010. The increase in new business included the issuance by Metropolitan Life Insurance Company (“MetLife”) of a $500.0 million AgVantage bond held by Farmer Mac on-balance sheet. This issuance coincided with the maturity of another $500.0 million AgVantage bond issued by MetLife that had been held by third party investors and accounted for as an off-balance sheet guarantee by Farmer Mac. Although the new MetLife transaction did not increase the overall level of outstanding program volume, it effectively extended the duration of the MetLife AgVantage security that had matured and provides increased future profitability due to the net interest margin earned by Farmer Mac on the new bond being greater than the guarantee fee earned on the prior off-balance sheet guarantee. Taking into account all the new business volume for the quarter along with the maturities of AgVantage securities and the regularly scheduled principal paydown of loans during the quarter, Farmer Mac’s total outstanding loans, guarantees and commitments was $11.8 billion as of March 31, 2011, compared to $12.2 billion as of December 31, 2010 and $10.7 billion as of March 31, 2010.

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As of the end of first quarter 2011, Farmer Mac’s 90-day delinquencies improved compared to both the previous quarter and the prior year. Historically, from quarter to quarter, Farmer Mac’s 90-day delinquencies have fluctuated, both in dollars and as a percentage of the outstanding portfolio, with higher levels likely at the end of the first and third quarters of each year corresponding to the annual (January 1 st ) and semi-annual (January 1 st and July 1 st ) payment characteristics of most Farmer Mac I loans. As of the end of first quarter 2011, 90-day delinquencies were $57.3 million (1.33 percent), uncharacteristically lower than the $70.2 million (1.63 percent) level as of December 31, 2010. Additionally, the March 31, 2011 90-day delinquencies were also down compared to the year earlier level of $70.4 million (1.64 percent). Notably, as of March 31, 2011, there were no 90-day delinquencies in Farmer Mac’s portfolio of ethanol facility loans, a segment of the portfolio that has included heightened levels of delinquencies for several years.

When analyzing delinquencies of its program business, Farmer Mac takes into account more than the Farmer Mac I agricultural loan delinquency percentages provided above. The total program business includes AgVantage securities and rural utilities loans, neither of which have any delinquencies, and the USDA Guaranteed Securities and USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities, which are backed by the full faith and credit of the United States. When these are included in the calculation, the overall level of 90-day delinquent loans in Farmer Mac’s programs is 0.48 percent.

Critical Accounting Policies and Estimates

The preparation of Farmer Mac’s condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented. Actual results could differ from those estimates. The critical accounting policies that are both important to the portrayal of Farmer Mac’s financial condition and results of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance for losses, (2) fair value measurement, and (3) other-than-temporary impairment.

For a discussion of Farmer Mac’s critical accounting policies related to the allowance for losses, fair value measurement and other-than-temporary impairment and the related use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

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Results of Operations

Farmer Mac’s net income available to common stockholders for first quarter 2011 was $18.3 million or $1.72 per diluted common share, compared to net income of $1.8 million or $0.17 per diluted common share for first quarter 2010. Farmer Mac’s core earnings were $9.1 million or $0.85 per diluted common share for first quarter 2011, compared to $5.4 million or $0.54 per diluted common share for first quarter 2010.

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management’s view, core earnings more accurately reflects Farmer Mac’s economic performance, transaction economics and business trends. Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance, which are not expected to have a permanent effect on capital. Core earnings also differs from GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of the Corporation’s core business. Farmer Mac’s disclosure of this non-GAAP measure is not intended to replace GAAP information but, rather, to supplement it. A reconciliation of Farmer Mac’s GAAP net income available to common stockholders to core earnings is presented in the following table, and the reconciling items are described in more detail below the table.

Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
	For the Three Months Ended
	March 31, 2011						March 31, 2010
				Per Diluted						Per Diluted
				Share						Share
	(in thousands, except per share amounts)
GAAP net income available to common stockholders	$	18,323		$	1.72		$	1,767		$	0.17
Less the net of tax effects of:
Unrealized gains on financial derivatives		8,980			0.84			1,887			0.19
Unrealized gains on trading assets		852			0.08			2,188			0.21
Amortization of premiums on assets consolidated at fair value		(1,703	)		(0.16	)		(682	)		(0.07	)
Recognition of deferred gains related to certain Farmer Mac II USDA Guaranteed Securities Guaranteed Securities and USDA Guaranteed Securities		2,003			0.19			-			-
Net effects of settlements on agency forward contracts		(346	)		(0.03	)		206			0.02
Lower of cost or fair value adjustment on loans held for sale		(525	)		(0.05	)		(1,478	)		(0.15	)
Issuance costs on the retirement of preferred stock		-			-			(5,784	)		(0.57	)
Core earnings	$	9,062		$	0.85		$	5,430		$	0.54

Farmer Mac excludes the after-tax effect of unrealized gains/(losses) resulting from changes in the fair values of financial derivatives and trading assets from core earnings. Changes in the fair values of financial derivatives and trading assets have historically contributed significant volatility to Farmer Mac’s periodic GAAP earnings. Consistent with that trend, Farmer Mac recorded unrealized gains of $13.8 million ($9.0 million after-tax) for fair value changes on its financial derivatives in first quarter 2011, compared to unrealized gains of $2.9 million ($1.9 million after-tax) in first quarter 2010. Fair value gains on trading assets totaled $1.3 million ($0.9 million after-tax) for first quarter 2011, compared to gains of $3.4 million ($2.2 million after-tax) for first quarter 2010. While these volatile changes in fair values of derivatives and trading assets may at times produce significant income, they may also produce significant losses. Future changes in those values cannot be reliably predicted; however, as of March 31, 2011, the cumulative fair value of after-tax losses recorded on financial derivatives was $37.9 million. Over time, Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap contracts, which may on its own produce either income or expense, but is expected to generate positive effective net spread when combined with the interest received and paid on the assets and liabilities Farmer Mac holds on its balance sheet. This positive effective net spread will continue to build retained earnings and capital over time. Although the unrealized fair value fluctuations experienced throughout the term of the financial derivatives will temporarily impact earnings and capital, those fluctuations are not expected to have any permanent effect if the financial derivatives are held to maturity, as is expected.

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Farmer Mac also excludes from core earnings amortization of premiums on assets consolidated at fair value. Upon the adoption of accounting guidance on consolidation on January 1, 2010, Farmer Mac determined itself to be the primary beneficiary of VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of rural utilities loans. Upon consolidation, Farmer Mac transferred these assets from “Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated trusts” on its condensed consolidated balance sheet. Farmer Mac transferred these assets at their fair value, which resulted in an unamortized premium of $42.7 million. This premium is being amortized over the contractual lives of the underlying loans.

In January 2010, Farmer Mac contributed substantially all of the assets, in excess of $1.1 billion, comprising the Farmer Mac II program to a subsidiary, Farmer Mac II LLC. Farmer Mac transferred these assets at their fair value, which resulted in an unamortized premium of $39.1 million being recorded by Farmer Mac II LLC. This premium is being amortized over the estimated remaining lives of the USDA-guaranteed portions. The after-tax effect of this premium, along with the premium described above, is excluded from Farmer Mac’s core earnings.

At the time of transfer of the assets to Farmer Mac II LLC, Farmer Mac had after-tax unrealized gains of $7.0 million recorded in accumulated other comprehensive income related to fair value changes of Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities designated as available-for-sale. In first quarter 2011, Farmer Mac reclassified $3.1 million of these gains ($2.0 million after-tax) into earnings as a result of actual maturities and prepayments experienced on the underlying USDA-guaranteed portions. These gains are presented as “Other income” on the condensed consolidated statements of operations. Going forward, Farmer Mac will recognize in earnings the remainder of these deferred gains over the estimated remaining lives of the USDA-guaranteed portions. These gains, along with the premium amortization described above, are excluded from Farmer Mac’s core earnings because they will have no economic effect on Farmer Mac’s financial performance if the assets are held to maturity, as is expected.

Farmer Mac routinely enters into forward sales contracts on the debt of other GSEs to reduce its interest rate exposure on forecasted future debt issuances. In its calculation of core earnings, Farmer Mac reverses the gains or losses resulting from the net settlement of these contracts in the period of settlement and amortizes them over the lives of the associated debt issuances. The after-tax net effect of these items is shown as a reconciling item in the table above.

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Unrealized gains and losses recorded to adjust the carrying value of loans held for sale to the lower of cost or fair value are also excluded from core earnings. Farmer Mac recorded losses of $0.8 million ($0.5 million after-tax) in first quarter 2011, compared to losses of $2.3 million ($1.5 million after-tax) in first quarter 2010. The after-tax net effect of these losses is omitted from Farmer Mac’s core earnings.

Farmer Mac repurchased and retired all of the outstanding shares of Series B preferred stock with proceeds from the $250.0 million Farmer Mac II LLC Preferred Stock issued in January 2010. As a result of the repurchase, Farmer Mac wrote off $5.8 million of deferred issuance costs related to the Series B preferred stock. This write-off is presented as “Loss on retirement of preferred stock” on the condensed consolidated statements of operations and is excluded from Farmer Mac’s core earnings.

The following sections provide more detail regarding specific components of Farmer Mac’s results of operations.

Net Interest Income . Net interest income for the three months ended March 31, 2011 was $27.0 million, compared to $23.6 million for the same period during 2010. Net interest income includes guarantee fees related to certain Farmer Mac Guaranteed Securities with beneficial interests owned by third party investors. For the three months ended March 31, 2011, these guarantee fees resulted in an increase in net interest income of $0.9 million and a decrease in the net interest yield of 7 basis points, compared to an increase of $1.5 million and a decrease in net interest yield of 22 basis points for the three months ended March 31, 2010. The decrease in the net interest yield is the result of the average rate earned on guarantee fees being lower than the net interest spread earned on assets Farmer Mac purchases and holds on-balance sheet. Excluding the impacts of these guarantee fees, the net interest yield was 125 basis points for the three months ended March 31, 2011, compared to 157 basis points for the three months ended March 31, 2010.

The following table provides information regarding interest-earning assets and funding for the three months ended March 31, 2011 and 2010. The balance of non-accruing loans is included in the average balance of interest-earning loans and Farmer Mac Guaranteed Securities and USDA Guaranteed Securities presented, though the related income is accounted for on the cash basis. Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly. The balance of consolidated loans with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities. The interest income and expense associated with these trusts are shown net in the net effect of consolidated trusts. The average rate earned on cash and investments reflects lower short-term market rates during the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The lower average rate on loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities during the three months ended March 31, 2011 reflects the decline in market rates reflected in the rates on loans acquired or reset during the past year. The lower average rate on Farmer Mac’s notes payable due within one year is consistent with general trends in average short-term rates during the periods presented. The downward trend in the average rate on notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower market rates.

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	For the Three Months Ended
	March 31, 2011							March 31, 2010
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Rate			Balance		Expense		Rate
	(dollars in thousands)
Interest-earning assets:
Cash and investments	$	2,309,187	$	7,187		1.24	%	$	1,498,805	$	6,483		1.73	%
Loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities (1)		6,044,221		46,964		3.11	%		4,147,754		35,851		3.46	%
Total interest-earning assets	$	8,353,408	$	54,151		2.59	%	$	5,646,559	$	42,334		3.00	%
Funding:
Notes payable due within one year	$	3,746,828	$	2,436		0.26	%	$	3,180,005	$	2,816		0.35	%
Notes payable due after one year (2)		4,205,213		25,570		2.43	%		2,105,604		17,368		3.30	%
Total interest-bearing liabilities (3)		7,952,041		28,006		1.41	%		5,285,609		20,184		1.53	%
Net non-interest-bearing funding		401,367		-					360,950		-
Total funding		8,353,408		28,006		1.34	%		5,646,559		20,184		1.43	%
Net interest income/yield prior to consolidation of certain trusts		8,353,408		26,145		1.25	%		5,646,559		22,150		1.57	%
Net effect of consolidated trusts (4)		791,313		874		0.44	%		1,367,723		1,467		0.43	%
Adjusted net interest income/yield	$	9,144,721	$	27,019		1.18	%	$	7,014,282	$	23,617		1.35	%

(1)	Excludes interest income of $9.9 million and $18.4 million in 2011 and 2010, respectively, related to consolidated trusts with beneficial interests owned by third parties.

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

(3)	Excludes interest expense of $9.0 million and $16.9 million in 2011 and 2010, respectively, related to consolidated trusts with beneficial interests owned by third parties.

(4)	Includes the effect of consolidated trusts with beneficial interests owned by third party investors.

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

	For the Three Months Ended March 31, 2011
	Compared to the Three Months Ended
	March 31, 2010
	Increase/(Decrease) Due to
	Rate			Volume		Total
	(in thousands)
Income from interest-earning assets:
Cash and investments	$	(38,089	)	$	38,793	$	704
Loans, Farmer Mac Guaranteed Securities and USDA Guaranteed Securities		(92,923	)		104,036		11,113
Total		(131,012	)		142,829		11,817
Expense from interest-bearing liabilities		(42,465	)		50,287		7,822
Change in net interest income prior to consolidation of certain trusts (1)	$	(88,547	)	$	92,542	$	3,995

(1)

Excludes the effect of consolidated trusts with beneficial interests owned by third parties.

In addition to the guarantee fees described above, the net interest yield includes yield maintenance payments received upon the early payoff of certain borrowers’ loans and the amortization of premiums on assets consolidated at fair value and excludes the accrual of income and expense related to the payments on financial derivatives. The following paragraphs describe the effects of these items on the net interest yield and the table below presents them as adjustments to reconcile to the net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net funding costs, including payments for income and expense related to financial derivatives.

Farmer Mac uses interest rate swap contracts to manage its interest rate risk exposure by modifying the interest rate reset or maturity characteristics of certain assets and liabilities. Farmer Mac accounts for its financial derivatives as undesignated financial derivatives. Accordingly, the Corporation records the income or expense related to financial derivatives as gains and losses on financial derivatives. For the three months ended March 31, 2011, this increased the net interest yield by $9.0 million (43 basis points), compared to $8.3 million (59 basis points) for the three months ended March 31, 2010.

Farmer Mac’s net interest income and net interest yields for the three months ended March 31, 2011 and 2010 included the benefits of yield maintenance payments of $0.1 million (less than 1 basis point) and $0.1 million (less than 1 basis point), respectively. Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans. Because the timing and size of these payments vary greatly, variations do not necessarily indicate positive or negative trends to gauge future financial results.

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Upon the adoption of accounting guidance on consolidation on January 1, 2010, Farmer Mac determined itself to be the primary beneficiary of certain VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of agricultural real estate mortgage loans or rural utilities loans. Upon consolidation, Farmer Mac reclassified these assets from “Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated trusts” on the condensed consolidated balance sheet. The reclassified assets on January 1, 2010 included Farmer Mac Guaranteed Securities – Rural Utilities with an unpaid principal balance of $412.9 million and a fair value of $455.6 million. Farmer Mac was reporting these assets at their fair values, with changes in fair value recorded in earnings, based on its election of the fair value option in 2008. Upon consolidation of the underlying rural utilities loans, Farmer Mac reclassified the unrealized gain of $42.7 million as of January 1, 2010 to unamortized premiums on loans held for investment. The related premium is being amortized over the contractual lives of the underlying rural utilities loans.

On January 25, 2010, Farmer Mac contributed substantially all of the assets, in excess of $1.1 billion, comprising the Farmer Mac II program to Farmer Mac’s subsidiary, Farmer Mac II LLC. Farmer Mac transferred these assets at their fair value which resulted in an unamortized premium of $39.1 million being recorded by Farmer Mac II LLC. This premium is being amortized over the estimated remaining lives of the USDA-guaranteed portions.

Farmer Mac’s net interest income and net interest yield for the three months ended March 31, 2011 include expenses of $2.6 million (13 basis points) and $1.0 million (7 basis points), respectively, related to the amortization of the premiums described above.

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The following table presents the net effective spread between Farmer Mac’s interest-earning assets and its net funding costs. This spread is measured by including income or expense related to financial derivatives and subtracting yield maintenance payments and the amortization of premiums on assets consolidated at fair value. For first quarter 2011, new on-balance sheet program volume added throughout 2010 and 2011 increased Farmer Mac’s net effective spread to $19.6 million, up from $14.8 million in first quarter 2010. However, the net yield was reduced to 0.94 percent from 1.05 percent. That entire 11 basis point decrease in yield is attributable to the addition of lower yielding assets in Farmer Mac’s liquidity investment portfolio, primarily U.S. Treasuries, which have a negative net yield but offer a source of contingent liquidity. See Note 8 to the condensed consolidated financial statements for more information regarding net effective spread for Farmer Mac’s individual business segments.

	For the Three Months Ended
	March 31, 2011						March 31, 2010
	Dollars			Yield			Dollars			Yield
	(dollars in thousands)
Net interest income/yield
prior to consolidation of certain trusts	$	26,145			1.25	%	$	22,150			1.57	%
Expense related to financial derivatives		(9,023	)		-0.43	%		(8,335	)		-0.59	%
Yield maintenance payments		(99	)		0.00	%		(57	)		0.00	%
Amortization of premiums on assets consolidated at fair value		2,620			0.12	%		1,048			0.07	%
Net effective spread	$	19,643			0.94	%	$	14,806			1.05	%

Provision for Loan Losses . During the three months ended March 31, 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.3 million, compared to provisions of $2.9 million for the three months ended March 31, 2010. In first quarter 2011, Farmer Mac purchased two defaulted loans pursuant to the terms of an LTSPC agreement. This resulted in the reclassification of $1.8 million of specific allowance, which had been recorded in fourth quarter 2010, from the reserve for losses to the allowance for loan losses. This provision was partially offset by a decline in Farmer Mac’s general loan loss allowance related to its exposure to the ethanol industry.

The provisions to the allowance for loan losses during the first three months of 2010 included the reclassification of $2.0 million from the reserve for losses as a result of the consolidation of certain VIEs with beneficial interests owned by third party investors. As of March 31, 2011, Farmer Mac’s total allowance for loan losses was $11.1 million, compared to $9.8 million as of December 31, 2010 and $9.1 million as of March 31, 2010. See “—Risk Management—Credit Risk – Loans.”

Provision for Losses . During the three months ended March 31, 2011, Farmer Mac recorded releases from its reserve for losses of $1.9 million, compared to releases of $1.5 million for the three months ended March 31, 2010. The releases from the reserve for losses in first quarter 2011 resulted primarily from the reclassification of the $1.8 million specific allowance described above.

The net releases recorded during the three months ended March 31, 2010 included the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses upon adoption of accounting guidance on consolidation in first quarter 2010. As of March 31, 2011, Farmer Mac’s reserve for losses was $8.4 million, compared to $10.3 million as of December 31, 2010 and $6.4 million as of March 31, 2010. See “—Risk Management—Credit Risk – Loans.”

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Guarantee and Commitment Fees . Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs, were $6.4 million for first quarter 2011, compared to $5.9 million for first quarter 2010. Guarantee and commitment fees for the three months ended March 31, 2011 and 2010 reflect the reclassification of $0.9 million and $1.5 million, respectively, to net interest income related to Farmer Mac Guaranteed Securities previously reported as off-balance sheet as a result of the adoption of accounting guidance on consolidation.

Gains and Losses on Financial Derivatives . Farmer Mac accounts for its financial derivatives as undesignated financial derivatives and does not apply hedge accounting. The net effect of gains and losses on financial derivatives for the three months ended March 31, 2011 was a net gain of $4.0 million, compared to a net loss of $5.8 million for the three months ended March 31, 2010. The components of gains and losses on financial derivatives for the three months ended March 31, 2011 and 2010 are summarized in the following table:

	For the Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands)
Realized:
Expense related to financial derivatives	$	(9,023	)	$	(8,335	)
Losses due to terminations or net settlements		(796	)		(329	)
Unrealized gains due to fair value changes		13,824			2,894
Amortization of financial derivatives transition adjustment		-			(34	)
Gains/(losses) on financial derivatives	$	4,005		$	(5,804	)

The accrual of periodic cash settlements for interest paid or received from Farmer Mac’s interest rate swap contracts is shown as expense related to financial derivatives in the table above. Payments or receipts to terminate derivative positions or net cash settle forward sales contracts on the debt of other GSEs and U.S. Treasury futures are included in losses due to terminations or net settlements. Changes in the fair value of Farmer Mac’s open derivative positions are captured in unrealized gains/(losses) due to fair value changes and are primarily the result of fluctuations in market interest rates. The amortization of the financial derivatives transition adjustment reflects the reclassification into earnings of the unrealized gains/(losses) on financial derivatives included in accumulated other comprehensive income as a result of the adoption of accounting guidance on derivatives. Farmer Mac reclassified the remaining derivatives transition adjustment into earnings during 2010.

For the three months ended March 31, 2011 and 2010, Farmer Mac was a party to interest rate swap contracts with one related party, Zions First National Bank. Farmer Mac realized expenses of $0.5 million and $0.8 million for three months ended March 31, 2011 and 2010, respectively, related to these interest rate swap contracts. Farmer Mac recognized unrealized gains of $1.7 million and $0.1 million, respectively, for first quarter 2011 and first quarter 2010 due to changes in the fair value of these interest rate swap contracts.

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Gains on Trading Assets . During the three months ended March 31, 2011 and 2010, Farmer Mac recognized gains on trading assets of $1.3 million and $3.4 million, respectively. During first quarter 2010, Farmer Mac changed its primary source of valuation for its investment in the preferred stock of AgFirst Farm Credit Bank. Taking into consideration its own recently executed trades during first quarter 2010, along with an increase in observable trading activity for this and similar securities, Farmer Mac determined that the best estimates of fair value for this security as of March 31, 2010, and continuing through March 31, 2011, were the fair values provided by an independent third party pricing service. For the three months ended March 31, 2011, Farmer Mac recorded $1.9 million of trading gains related to the change in the fair value of its investment in AgFirst Farm Credit Bank preferred stock.

During first quarter 2011, Farmer Mac also recorded trading losses of $1.2 million related to the change in the fair value of the USDA Guaranteed Securities contributed to its subsidiary, Farmer Mac II LLC, which had previously been selected for the fair value option. Of the total $1.3 million of unrealized gains recognized on trading assets during first quarter 2011, $0.6 million relate to assets selected for the fair value option.

Farmer Mac made no fair value option elections during the three months ended March 31, 2011 and 2010.

Gains on Sale of Available-for-Sale Investment Securities . Farmer Mac realized net gains of $0.2 million on sales of investment securities from its available-for-sale portfolio in both first quarter 2011 and first quarter 2010.

Lower of Cost or Fair Value Adjustment on Loans Held for Sale . During first quarter 2011 and first quarter 2010, Farmer Mac recorded unrealized losses of $0.8 million and $2.3 million, respectively, to adjust the carrying value of loans held for sale to their estimated fair value. The unrealized losses recorded during first quarter 2010 and continuing through first quarter 2011 were primarily the result of a larger portfolio of rural utilities loans held for sale.

Other Income . For first quarter 2011 and first quarter 2010, other income totaled $3.9 million and $0.8 million, respectively. The increase in first quarter 2011 was due to the recognition of $3.1 million of gains previously deferred in accumulated other comprehensive income related to fair value changes of certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities contributed to Farmer Mac II LLC in January 2010.

Compensation and Employee Benefits . Compensation and employee benefits were $4.5 million and $3.5 million for first quarter 2011 and first quarter 2010, respectively. The increase in 2011 compared to 2010 was due to increased employee headcount, increased costs for employee insurance and higher accruals for employee incentive compensation.

General and Administrative Expenses . General and administrative expenses, including legal, independent audit, and consulting fees, were $2.3 million for first quarter 2011, compared to $2.5 million first quarter 2010. The higher level of expenses in 2010 compared to 2011 was primarily attributable to legal and consulting fees related to the development of Farmer Mac programs and related transactions.

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Other Expense . During first quarter 2011, Farmer Mac recorded $0.9 million of expense related to the termination of an agreement with a third-party that previously provided services related to loan and security administration for certain Farmer Mac I assets. Farmer Mac incurred no comparable termination charge in prior periods. During 2010, Farmer Mac paid $0.5 million in fees to the third-party service provider. Farmer Mac is currently performing those services in-house and expects to continue to do so in the future.

Regulatory Fees . Regulatory fees for the three months ended March 31, 2011 and 2010 were $0.6 million. FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2011 will be $2.3 million, compared to $2.3 million for the federal fiscal year ended September 30, 2010. After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.

Income Tax Expense . Income tax expense totaled $9.5 million for first quarter 2011, compared to $4.3 million for first quarter 2010. Income tax expense increased primarily due to the increase in pre-tax book income. Farmer Mac’s effective tax rates for first quarter 2011 and 2010 were 27.9 percent and 24.2 percent, respectively. The effective tax rate varies from the statutory federal rate of 35% primarily due to the income attributed to the non-controlling interest in Farmer Mac II LLC, for which Farmer Mac does not accrue income tax expense and the tax benefit received from the Corporation’s dividend received deduction for both periods.

Business Volume . During first quarter 2011, Farmer Mac added $1.0 billion of new program volume in the form of:

purchases of $211.9 million of Farmer Mac I loans, including a $87.0 million portfolio of current seasoned loans from one seller;

purchases of $500.0 million of Farmer Mac I AgVantage securities;

the placement of $54.2 million of Farmer Mac I loans under LTSPCs;

purchases of $117.3 million of USDA-guaranteed portions of loans; and

purchases of $80.5 million of rural utilities loans.

Farmer Mac’s outstanding program volume was $11.8 billion as of March 31, 2011, a net decrease of $380.4 million from December 31, 2010. This decrease was primarily the result of $976.4 million of AgVantage bonds maturing in first quarter 2011, $500.0 million of which was replaced by a new series of on-balance sheet AgVantage securities issued by MetLife and scheduled to mature in 2016. Excluding AgVantage activity, new program volume outpaced principal paydowns on outstanding loans, USDA Guaranteed Securities, loans and USDA-guaranteed portions underlying Farmer Mac Guaranteed Securities, and loans underlying LTSPCs.

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The following table sets forth Farmer Mac I, Farmer Mac II and Rural Utilities loan purchase, LTSPC and guarantee activities for newly originated and current seasoned loans during the periods indicated:

Farmer Mac Loan Purchases, Guarantees and LTSPCs
	For the Three Months Ended
	March 31,		March 31,
	2011		2010
	(in thousands)
Farmer Mac I:
Loans	$	211,899	$	77,948
LTSPCs		54,152		77,143
Farmer Mac Guaranteed Securities - AgVantage		500,000		-
Farmer Mac II:
USDA Guaranteed Securities		116,230		92,288
Farmer Mac Guaranteed Securities		1,023		-
Rural Utilities:
Loans		80,517		59,018
Farmer Mac Guaranteed Securities - AgVantage		-		-
Total purchases, guarantees and commitments	$	963,821	$	306,397

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The outstanding principal balance of loans held, loans underlying LTSPCs and on- and off-balance sheet Farmer Mac Guaranteed Securities, and USDA Guaranteed Securities was $11.8 billion as of March 31, 2011 and $12.2 billion as of December 31, 2010. The following table sets forth information regarding those outstanding balances as of the dates indicated:

Outstanding Balance of Loans, Loans Underlying Farmer Mac
Guaranteed Securities and LTSPCs, and USDA Guaranteed Securities
	March 31,		December 31,
	2011		2010
	(in thousands)
On-balance sheet:
Farmer Mac I:
Loans	$	1,092,831	$	972,206
Loans held in trusts:
Beneficial interests owned by Farmer Mac		1,400		3,697
Beneficial interests owned by third party investors		779,543		821,411
Farmer Mac Guaranteed Securities - AgVantage		1,441,500		941,500
Farmer Mac II:
USDA Guaranteed Securities		1,319,033		1,297,439
Farmer Mac Guaranteed Securities		38,522		39,856
Rural Utilities:
Loans		415,863		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	$	6,893,064	$	6,703,500

Off-balance sheet:
Farmer Mac I:
Farmer Mac Guaranteed Securities - AgVantage	$	2,445,000	$	2,945,000
LTSPCs		1,712,791		1,754,597
Farmer Mac Guaranteed Securities		724,882		750,217
Farmer Mac II:
Farmer Mac Guaranteed Securities		45,276		48,103
Rural Utilities:
Farmer Mac Guaranteed Securities - AgVantage		15,287		15,292
Total off-balance sheet	$	4,943,236	$	5,513,209
Total	$	11,836,300	$	12,216,709

Of the $11.8 billion outstanding principal balance of volume included in Farmer Mac’s three programs as of March 31, 2011, $5.3 billion are Farmer Mac Guaranteed Securities structured as AgVantage securities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Unlike business volume in the form of purchased loans and loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, the Farmer Mac Guaranteed Securities structured as AgVantage securities do not pay down principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due.

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The following table summarizes by maturity date the outstanding principal amount of AgVantage securities as of March 31, 2011.

AgVantage Balances by Year of Maturity
	As of
	March 31, 2011
	(in thousands)
2011	$	1,477,000
2012		497,000
2013		207,250
2014		760,900
2015		550,250
Thereafter		1,820,187
Total	$	5,312,587

Of the AgVantage securities maturing during the remainder of 2011, $1.0 billion issued by MetLife matures in July 2011 and $475.0 million issued by M&I Bank matures in August 2011, both of which are off-balance sheet guarantees of Farmer Mac. If the issuer of a maturing AgVantage security does not issue a new series of AgVantage securities to replace the maturing securities, and Farmer Mac does not find alternate sources of business volume, the Corporation’s income could be adversely affected. However, the income effect of less AgVantage business, particularly off-balance sheet transactions, may not be material and will likely not be proportional to the amount of any decrease in business volume as a result of the maturity of AgVantage securities.

The weighted-average ages of the Farmer Mac I newly originated and current seasoned loans purchased during first quarter 2011 was 2.4 years and during first quarter 2010 was less than one month. Of the Farmer Mac I newly originated and current seasoned loans purchased during first quarter 2011 and first quarter 2010, 58 percent and 70 percent, respectively, had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 15.5 years and 15.6 years, respectively.

As part of fulfilling its guarantee obligations for Farmer Mac I Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90 days delinquent or in material non-monetary default at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet. The purchase price for defaulted loans purchased out of Farmer Mac I Guaranteed Securities is the current outstanding principal balance of the loan plus accrued and unpaid interest. The purchase price for defaulted loans purchased under an LTSPC is the then-current outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds as received. The purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors affect expected loss, if any, on loans so purchased. The weighted-average age of delinquent loans purchased out of securitized pools and LTSPCs during first quarter 2011 and first quarter 2010 was 4.1 years and 4.2 years, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

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The following table presents Farmer Mac’s loan purchases of newly originated and current seasoned loans and defaulted loans purchased underlying Farmer Mac I Guaranteed Securities and LTSPCs:

	For the Three Months Ended
	March 31,		March 31,
	2011		2010
	(in thousands)
Farmer Mac I newly originated and current seasoned loan purchases	$	211,899	$	77,948
Defaulted loans purchased underlying Farmer Mac I Guaranteed Securities owned by third party investors		1,369		2,323
Defaulted loans purchased underlying LTSPCs		15,556		167
Total loan purchases	$	228,824	$	80,438

Farmer Mac II LLC . In January 2010, Farmer Mac contributed substantially all of the assets comprising the Farmer Mac II program (in excess of $1.1 billion) to Farmer Mac’s subsidiary, Farmer Mac II LLC. The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA-guaranteed portions that had not been securitized by Farmer Mac but also included $35.0 million of Farmer Mac II Guaranteed Securities. Farmer Mac did not and will not guarantee the timely payment of principal and interest on the $1.1 billion of contributed USDA-guaranteed portions. The contributed USDA-guaranteed portions had previously been presented as Farmer Mac II Guaranteed Securities on the condensed consolidated financial statements of Farmer Mac and are now presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets. The financial information presented in this report reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis. Accordingly, Farmer Mac’s reportable operating segments presented in this report will differ from the stand-alone financial statements of Farmer Mac II LLC. Those separate financial statements are available on the website of Farmer Mac II LLC.

The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. As of March 31, 2011, Farmer Mac II LLC held assets with a fair value of $1.4 billion, had debt outstanding of $132.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock outstanding held by Farmer Mac. For more information about the formation and operations of Farmer Mac II LLC and the features of the preferred stock issued by Farmer Mac II LLC in January 2010, see Notes 3, 6 and 8 to the condensed consolidated financial statements.

Outlook . Farmer Mac foresees opportunities for continued business growth in both the agricultural and rural utilities segments, though the pace of growth will be dictated by the capital demands of the industries and the stability of the financial markets. With lenders in both the agricultural and rural utilities sectors continuing to face capital markets and economic challenges, Farmer Mac represents a potential source of liquidity, capital, and risk management to help lenders meet the borrowing needs of their customers.

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The agricultural sector is made up of diverse industries that respond in different ways to changes in economic conditions. Those industries often are affected differently, sometimes positively and sometimes negatively, by prevailing economic conditions, which results in cycles where one or more industries may be under stress at any one time. These industries are also affected by commodity inventories, largely as a result of weather patterns and harvest conditions. During 2010, for example, volatility increased for corn and soybean prices as the harvest occurred, which reflected a reduced crop from what the USDA and other sources had forecasted shortly before the harvest. The price increase of feed grains is positive for producers of these commodities, but also will put pressure on profit margins in the protein sector (including dairy). The significant operating losses experienced during 2009 and 2010 in the dairy sector have been reduced, but prevailing feed grain prices are expected to take a toll on the recovery, which could lead to higher delinquencies and additional provisions for losses in the Farmer Mac portfolio.

Farmer Mac’s support of the renewable energy sector is centered in ethanol production, an industry that has not yet become consistently profitable. Ethanol margins tightened during the first three quarters of 2010 with the last quarter providing improved profit opportunities that have continued through first quarter 2011. Federal support of this industry, in the form of an excise tax credit and an import tariff, were set to expire at the end of 2010 but were renewed by Congress for one additional year at their existing levels. Additionally, the Environmental Protection Agency approved the use of E15 (a blend of gasoline and ethanol) in vehicle model years 2001 and newer, but it is likely that the cost of implementing new fuel tanks and pumps will make adoption slow. Due to the high cost of corn and volatile oil prices, ethanol profits will remain highly variable and the support for the ethanol industry itself will continue to be debated.

Conditions in the agricultural sector during 2010 and first quarter 2011 were more stable than the national economy in general, but agriculture was not completely insulated from the effects of the economic downturn and remained subject to traditional commodity price cycles and national agricultural and energy policy reconsideration. In addition, producers that rely on non-farm sources of income as a significant percentage of overall income may experience stress if the weakness in the general economy persists. Farmer Mac will continue to closely monitor developments in industries and geographic areas experiencing stress. The cyclical credit issues related to the agricultural sector are expected to remain within Farmer Mac’s historical experience.

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With respect to the agricultural operating and lending markets, recent farmland sales have reflected the continued strong profits earned by the growers of feed grains (corn, soybeans and wheat), who are most typically located in the Midwest, with land values in that geographic area rapidly increasing. Land values outside the Midwest have also generally increased, though land that has traditionally had a value component tied to long term development uses other than agriculture has shown decline. While this is true of agricultural land values generally, the development value impact in Farmer Mac’s agricultural loan portfolio is not significant. Farmer Mac generally expects changes in regional farmland values to remain related to the landowner’s profitability from the commodities produced, with land values in the Midwest expected to continue on a strong upward trend in the near term. However, volatility in demand for commodities (including as a result of global economic cycles) can result in volatility in land values, as the value of land used to produce a particular commodity may increase or decrease in response to perceived increases or decreases in profitability in the industry for the commodity. A cycle of reduced demand for a particular commodity can negatively affect a producer’s profitability and ability to repay debt and also have a corresponding negative effect on land values. Farmer Mac continues to closely monitor land value trends and the underlying economic effects within the marketplace, and to tailor underwriting practices to these conditions. Although Farmer Mac underwrites loans with an emphasis on the borrower’s repayment capacity, it is noteworthy that the weighted average original LTV for loans in the Farmer Mac I program (excluding loans pledged to secure AgVantage bonds) was approximately 55 percent as of March 31, 2011. Farmer Mac also monitors the establishment and evolution of governmental policies and regulations that affect farmers, ranchers, and lenders, including agricultural polices contained in the current Farm Bill due to expire in 2012. The USDA has begun gathering input in preparation for the expiration of the current Farm Bill.

Farmer Mac believes that the rural utilities sector is a strong and growing industry with significant needs for future financing during the next five to ten years, as capital will be needed for industry growth, modernization, and compliance with environmental regulation. The rural utilities industry’s demand for loans tends to follow the state of the general economy. Recently, electric consumption has been reduced, which has slowed loan demand. Farmer Mac expects that loan demand will increase as the economy strengthens.

Additionally, much of the electrical power generated by and for rural electric cooperatives uses coal as a fuel. The industry is expected to require additional capital as it invests in clean energy projects and demand-side management and avoids new coal-fired generating projects in response to low natural gas fuel costs and to deal with future public policy requirements, such as carbon tax, cap and trade legislation, and clean energy incentives. As green energy sources continue to be developed, new power transmission lines will be needed to support the development and operation of new wind and solar power plants to transfer their power from remote locations to the ultimate consumer. These developments could lead to increased or decreased business volume for Farmer Mac in the rural utilities sector depending on how any new initiatives, legislation, or regulations are implemented and their effect on rural utilities cooperative borrowers.

In the near term, Farmer Mac expects that the majority of any new rural utilities business will be in the form of direct credit exposures to both electric distribution and generation and transmission (“G&T”) loans through purchases of those loans, rather than indirect credit exposures to those loans through AgVantage transactions. Farmer Mac’s ability to grow the rural utilities portion of its business will be limited by Farmer Mac’s limits on borrower exposures, its overall risk tolerance, and the ability of Farmer Mac to maintain its funding costs at levels conducive to appropriately price rural utilities loans.

Balance Sheet Review

During first quarter 2010, Farmer Mac adopted two new accounting standards that eliminated the concept of QSPEs and amended the accounting for transfers of financial assets and the consolidation model for VIEs. The impact upon adoption was an increase in consolidated assets and liabilities of $1.5 billion, which resulted in an incremental increase in Farmer Mac’s statutory minimum capital requirement of $30.4 million. Pursuant to this new guidance, Farmer Mac routinely assesses its securitization trusts to determine whether it is the primary beneficiary and thereby required to consolidate the assets and liabilities of the trust onto its balance sheet, or if determined not to be the primary beneficiary of a previously consolidated trust, deconsolidate the assets and liabilities from its balance sheet.

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As of January 1, 2010, Farmer Mac consolidated $1.1 billion of its outstanding securitization trusts created when loans subject to LTSPCs were converted to Farmer Mac I Guaranteed Securities at the request of program participants. Those securitization transactions contain provisions resulting in shared power over default mitigation decisions. For those transactions where the power is shared with a related party (as defined by applicable accounting guidance), Farmer Mac determined itself to be the primary beneficiary and thus is required to consolidate the assets and liabilities of the trust onto its balance sheet. For those transactions where the power was shared with an unrelated party, Farmer Mac was not determined to be the primary beneficiary and is not required to consolidate the assets and liabilities of the trust onto its balance sheet.

Determinations about which business partners of Farmer Mac are related parties often depend on whether an officer or director of that business partner is a member of Farmer Mac’s board of directors, ten of whom are elected on an annual basis by the holders of Farmer Mac’s outstanding voting common stock. Changes in the membership of the board of directors may result in Farmer Mac consolidating a trust previously disclosed as off-balance sheet, or deconsolidating a trust previously consolidated on balance sheet. Although this will have no net effect on Farmer Mac’s net income, it may, at times, produce volatility in the statutory minimum capital Farmer Mac is required to hold.

At Farmer Mac’s Annual Meeting of Stockholders on June 3, 2010, ten directors were elected to serve one-year terms, nine of whom were re-elected as directors of Farmer Mac and one of whom was new to Farmer Mac’s board. As a result of this change in membership of the board of directors, Farmer Mac deconsolidated $0.4 billion of securitization transactions with a business partner that was no longer a related party (as defined by applicable accounting guidance). For more information on Farmer Mac’s policy relating to the consolidation of VIEs, see Note 1(g) to the condensed consolidated financial statements. For a discussion of Farmer Mac’s related party transactions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions” and Note 3 in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011. On May 10, 2011, Farmer Mac filed with the SEC a report on Form 8-K advising that its 2010 and 2009 consolidated financial statements and its condensed consolidated financial statements for the nine months ended September 30, 2010 and 2009 and for the six months ended June 30, 2010 and 2009 should no longer be relied upon because of incorrect classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows. These misclassifications have no impact on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity and do not affect core earnings, core capital, minimum capital surplus, or total cash flow. See Note 1(a) to the condensed consolidated financial statements for further information.

Assets . Total assets were $10.0 billion as of March 31, 2011, compared to $9.5 billion as of December 31, 2010. The increase was attributable primarily to increases in loans and investment securities. As of March 31, 2011, Farmer Mac had $2.7 billion of loans, compared to $2.6 billion as of December 31, 2010. As of March 31, 2011, Farmer Mac had $2.1 billion of investment securities, compared to $1.8 billion as of December 31, 2010.

Liabilities and Total Equity . During the three months ended March 31, 2011, total liabilities increased $0.5 billion as a result of debt issued to support the growth in assets. Total equity increased $9.6 million during the same period primarily due to increased retained earnings.

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Regulatory Capital Compliance . Farmer Mac was in compliance with its statutory minimum capital requirement and its risk-based capital standard as of March 31, 2011. Farmer Mac is required to hold capital at the higher of its statutory minimum capital requirement and the amount required by its risk-based capital stress test. As of March 31, 2011, Farmer Mac’s core capital totaled $478.8 million and exceeded its statutory minimum capital requirement of $310.1 million by $168.7 million. As of December 31, 2010, Farmer Mac’s core capital totaled $460.6 million and exceeded its statutory minimum capital requirement of $301.0 million by $159.6 million. As of March 31, 2011, Farmer Mac’s risk-based capital stress test generated a risk-based capital requirement of $41.8 million. Farmer Mac’s regulatory capital of $498.3 million exceeded that amount by approximately $456.5 million. Accumulated other comprehensive income is not a component of Farmer Mac’s core capital or regulatory capital. On April 27, 2011, FCA published a final rule implementing changes to the method for calculating Farmer Mac’s risk-based capital requirement, which will be effective for Farmer Mac on July 1, 2011. For further discussion of this regulatory change and for more information, see “—Regulatory Matters.”

Off-Balance Sheet Program Activities

Risk Management

Credit Risk – Loans . Farmer Mac is exposed to credit risk resulting from the inability of borrowers to repay their loans in conjunction with a deficiency in the value of the collateral relative to the outstanding balance of the loan and the costs of liquidation. Farmer Mac is exposed to credit risk on:

loans held;

loans underlying Farmer Mac Guaranteed Securities; and

loans underlying LTSPCs.

Farmer Mac generally assumes 100 percent of the credit risk on loans held and loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities. Farmer Mac has direct credit exposure on loans in non-AgVantage transactions and indirect credit exposure on AgVantage transactions, which involve a general obligation of a lender secured by qualified loans. The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA-guaranteed portions is covered by the full faith and credit of the United States. Farmer Mac believes that the Corporation and Farmer Mac II LLC have little or no credit risk exposure to USDA-guaranteed portions because of the USDA guarantee. As of March 31, 2011, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the Farmer Mac II program and does not expect that the Corporation or Farmer Mac II LLC will incur any such losses in the future.

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Farmer Mac has established underwriting, collateral valuation and documentation standards (including interest rate shock tests for adjustable rate mortgages with initial reset periods of five years or less) for agricultural real estate mortgage loans and rural utilities loans to mitigate the risk of loss from borrower defaults and to provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating sellers and potential sellers in its programs. These standards were developed on the basis of industry norms for agricultural real estate mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower, as well as the value of the collateral securing the loan. Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions. Farmer Mac also requires sellers to make representations and warranties regarding the conformity of eligible mortgage loans to these standards, the accuracy of loan data provided to Farmer Mac and other requirements related to the loans. Sellers are responsible to Farmer Mac for breaches of those representations and warranties, and Farmer Mac has the ability to require a seller to cure, replace or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac’s decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac. Pursuant to contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central servicers service loans in accordance with Farmer Mac requirements. Central servicers are responsible to Farmer Mac for serious errors in the servicing of those mortgage loans. Detailed information regarding Farmer Mac’s underwriting and collateral valuation standards and seller eligibility requirements are presented in “Business—Farmer Mac Programs—Farmer Mac I—Underwriting and Collateral Valuation (Appraisal) Standards” and “Business—Farmer Mac Programs—Farmer Mac I—Sellers” and “Business—Farmer Mac Programs—Rural Utilities” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

Farmer Mac AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans. As such, all AgVantage securities are secured by current loans representing at least 100 percent of the outstanding amount of the security. As of March 31, 2011, Farmer Mac had not experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in the future. See “—Credit Risk – Institutional” for more information about Farmer Mac’s credit risk on AgVantage securities.

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Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative. As of March 31, 2011, there were no delinquencies or non-performing assets in Farmer Mac’s portfolio of rural utilities loans, which includes rural utilities loans held and rural utilities loans underlying or securing Farmer Mac Guaranteed Securities – Rural Utilities. Farmer Mac’s direct credit exposure to rural utilities loans as of March 31, 2011 was $809.4 million, of which $780.5 million were loans to electric distribution cooperatives and $28.9 million were loans to G&T cooperatives. Farmer Mac also had indirect credit exposure to the rural utilities loans securing Farmer Mac Guaranteed Securities – Rural Utilities structured as AgVantage securities, some of which were secured by loans to G&T cooperatives.

Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans underlying LTSPCs and Farmer Mac Guaranteed Securities. The methodology that Farmer Mac uses to determine the level of its allowance for losses is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Allowance for Losses” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011. Management believes that this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying Farmer Mac Guaranteed Securities and LTSPCs, in accordance with FASB standards on accounting for contingencies and on measuring impairment of individual loans.

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

	March 31,		December 31,
	2011		2010
	(in thousands)
Allowance for loan losses	$	11,084	$	9,803
Reserve for losses:
Off-balance sheet Farmer Mac I Guaranteed Securities		551		635
LTSPCs		7,827		9,677
Total allowance for losses	$	19,462	$	20,115

The following table summarizes the changes in the components of Farmer Mac’s allowance for losses for the three months ended March 31, 2011 and 2010:

	For the Three Months Ended
	March 31, 2011								March 31, 2010
	Allowance					Total			Allowance					Total
	for Loan		Reserve			Allowance			for Loan		Reserve			Allowance
	Losses		for Losses			for Losses			Losses		for Losses			for Losses
	(in thousands)

Beginning Balance	$	9,803	$	10,312		$	20,115		$	6,292	$	7,895		$	14,187
Provision for losses		1,281		(1,934	)		(653	)		2,850		(1,468	)		1,382
Charge-offs		-		-			-			-		-			-
Recoveries		-		-			-			-		-			-
Ending Balance	$	11,084	$	8,378		$	19,462		$	9,142	$	6,427		$	15,569

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During the three months ended March 31, 2011, Farmer Mac recorded a release to its allowance for losses of $0.7 million, compared to provisions of $1.4 million for first quarter 2010. Farmer Mac did not record any charge-offs or recoveries during either first quarter 2011 or first quarter 2010. There was no previously accrued or advanced interest on loans or Farmer Mac I Guaranteed Securities charged off in first quarter 2011 or 2010. As of March 31, 2011, Farmer Mac’s allowance for losses totaled $19.5 million, or 45 basis points of the outstanding principal balance of loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs, compared to $20.1 million or 47 basis points as of December 31, 2010.

As of March 31, 2011, Farmer Mac’s 90-day delinquencies were $57.3 million (1.33 percent), compared to $70.4 million (1.64 percent) as of March 31, 2010. As of March 31, 2011 there were no ethanol loans in the 90-day delinquencies, compared to $18.6 million as of March 31, 2010. As of March 31, 2011, Farmer Mac’s non-performing assets totaled $69.7 million (1.62 percent), compared to $84.0 million (1.95 percent) as of March 31, 2010. No ethanol loans were in the non-performing assets as of March 31, 2011, compared to $18.6 million as of March 31, 2010. Loans that have been restructured were insignificant and are included within the reported 90-day delinquency and non-performing asset disclosures. Historically, from quarter to quarter, Farmer Mac’s 90-day delinquencies and non-performing assets have fluctuated, both in dollars and as a percentage of the outstanding portfolio, with higher levels likely at the end of the first and third quarters of each year corresponding to the annual (January 1 st ) and semi-annual (January 1 st and July 1 st ) payment characteristics of most Farmer Mac I loans. As of the end of first quarter 2011, both 90-day delinquencies and non-performing assets were uncharacteristically lower than the levels as of December 31, 2010.

As of March 31, 2011, Farmer Mac’s ethanol exposure, which includes loans held and loans subject to LTSPCs, was $219.8 million on 29 different plants, with an additional $20.2 million of undisbursed commitments. Other than the undisbursed commitments and the servicing of troubled ethanol loans, Farmer Mac does not expect to add additional ethanol loans to its portfolio.

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The following table presents historical information regarding Farmer Mac’s non-performing assets and 90-day delinquencies in the Farmer Mac I program compared to the principal balance of all Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs:

	Outstanding
	Loans,							Less:
	Guarantees(1),		Non-					REO and
	LTSPCs		performing					Performing		90-day
	and REO		Assets		Percentage			Bankruptcies		Delinquencies		Percentage
	(dollars in thousands)
As of:
March 31, 2011	$	4,314,328	$	69,706		1.62	%	$	12,382	$	57,324		1.33	%
December 31, 2010		4,304,120		81,778		1.90	%		11,530		70,248		1.63	%
September 30, 2010		4,225,346		78,448		1.86	%		13,648		64,800		1.53	%
June 30, 2010		4,299,417		71,300		1.66	%		15,289		56,011		1.30	%
March 31, 2010		4,303,663		83,977		1.95	%		13,542		70,435		1.64	%
December 31, 2009		4,396,642		62,020		1.41	%		12,494		49,526		1.13	%
September 30, 2009		4,379,450		84,779		1.94	%		25,341		59,438		1.36	%
June 30, 2009		4,471,567		97,123		2.17	%		54,816		42,307		0.95	%
March 31, 2009		4,530,892		96,175		2.12	%		9,941		86,234		1.90	%
December 31, 2008		4,983,963		80,032		1.61	%		12,912		67,120		1.35	%

(1)

Excludes loans underlying AgVantage securities.

As of March 31, 2011, Farmer Mac individually analyzed $57.9 million of its $85.7 million of impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations or discounted values. Farmer Mac evaluated the remaining $27.8 million of impaired assets for which updated valuations were not available in the aggregate in consideration of their similar risk characteristics and historical statistics. As of March 31, 2011, Farmer Mac had recorded specific allowances of $7.5 million for under-collateralized assets. As of March 31, 2011, Farmer Mac’s non-specific or general allowances were $12.0 million.

As of March 31, 2011, the weighted-average original loan-to-value ratio (“LTV”) for Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) was 54.5 percent, and the weighted-average original LTV for all non-performing assets was 55.0 percent.

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The following table presents outstanding Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and non-performing assets as of March 31, 2011 by year of origination, geographic region and commodity/collateral type.

Farmer Mac I Non-performing Assets as of March 31, 2011
	Distribution of			Outstanding
	Outstanding			Loans,
	Loans,			Guarantees,		Non-		Non-
	Guarantees,			LTSPCs		performing		performing
	LTSPCs and REO			and REO (1)		Assets (2)		Asset Rate
	(dollars in thousands)
By year of origination:
Before 1997		5	%	$	231,667	$	5,946		2.57	%
1997		2	%		97,458		1,857		1.91	%
1998		3	%		146,888		4,406		3.00	%
1999		5	%		201,768		3,714		1.84	%
2000		2	%		106,068		1,209		1.14	%
2001		4	%		193,051		6,630		3.43	%
2002		6	%		257,462		3,450		1.34	%
2003		7	%		314,064		2,912		0.93	%
2004		7	%		296,205		1,703		0.57	%
2005		9	%		388,932		2,543		0.65	%
2006		10	%		434,362		7,474		1.72	%
2007		9	%		399,984		20,166		5.04	%
2008		10	%		410,443		7,237		1.76	%
2009		6	%		265,959		459		0.17	%
2010		12	%		457,422		-		0.00	%
2011		3	%		112,595		-		0.00	%
Total		100	%	$	4,314,328	$	69,706		1.62	%

By geographic region (1):
Northwest		17	%	$	728,679	$	13,597		1.87	%
Southwest		37	%		1,599,361		17,503		1.09	%
Mid-North		21	%		915,699		10,253		1.12	%
Mid-South		12	%		519,753		8,005		1.54	%
Northeast		7	%		308,956		3,737		1.21	%
Southeast		6	%		241,880		16,611		6.87	%
Total		100	%	$	4,314,328	$	69,706		1.62	%

By commodity/collateral type:
Crops		41	%	$	1,762,033	$	28,408		1.61	%
Permanent plantings		20	%		848,806		27,422		3.23	%
Livestock		27	%		1,166,594		8,354		0.72	%
Part-time farm		7	%		282,798		4,885		1.73	%
AgStorage and processing
(including ethanol facilities)		5	%		232,684		-		0.00	%
Other		0	%		21,413		637		2.97	%
Total		100	%	$	4,314,328	$	69,706		1.62	%

(1)	Excludes loans underlying AgVantage securities.

(2)	Includes loans 90 days or more past due, in foreclosure, restructured after delinquency, in bankruptcy (including loans performing under either their original loan terms or a court-approved bankruptcy plan) and real estate owned.

(3)	Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS, SC).

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The following table presents Farmer Mac’s cumulative net credit losses relative to the cumulative original balance for all Farmer Mac I loans purchased and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) as of March 31, 2011, by year of origination, geographic region and commodity/collateral type. The purpose of this information is to present information regarding losses relative to original Farmer Mac I purchases, guarantees and commitments.

Farmer Mac I Credit Losses Relative to all
Cumulative Original Loans, Guarantees and LTSPCs
As of March 31, 2011

	Cumulative
	Original Loans,		Cumulative			Cumulative
	Guarantees and		Net Credit			Loss
	LTSPCs		Losses			Rate
	(dollars in thousands)
By year of origination:
Before 1997	$	3,452,419	$	1,593			0.05	%
1997		774,002		2,256			0.29	%
1998		1,147,400		3,885			0.34	%
1999		1,168,800		1,291			0.11	%
2000		769,507		2,931			0.38	%
2001		1,132,440		177			0.02	%
2002		1,150,916		-			0.00	%
2003		963,931		58			0.01	%
2004		694,035		32			0.00	%
2005		805,488		34			0.00	%
2006		842,771		7,689			0.91	%
2007		609,517		1,265			0.21	%
2008		598,336		3,604			0.60	%
2009		358,856		1,193			0.33	%
2010		490,672		-			0.00	%
2011		110,541		-			0.00	%
Total	$	15,069,631	$	26,008			0.17	%
By geographic region (1):
Northwest	$	2,815,248	$	11,028			0.39	%
Southwest		5,753,093		7,792			0.14	%
Mid-North		2,581,730		6,709			0.26	%
Mid-South		1,401,875		(356	)		-0.03	%
Northeast		1,361,959		83			0.01	%
Southeast		1,155,726		752			0.07	%
Total	$	15,069,631	$	26,008			0.17	%
By commodity/collateral type:
Crops	$	6,091,967	$	3,045			0.05	%
Permanent plantings		3,358,856		9,703			0.29	%
Livestock		3,884,959		3,274			0.08	%
Part-time farm		1,032,225		484			0.05	%
AgStorage and processing
(including ethanol facilities) (2)		555,499		9,502			1.71	%
Other		146,125		-			0.00	%
Total	$	15,069,631	$	26,008			0.17	%

(1)	Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX);Northeast (CT,DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS, SC).

(2)	Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of March 31, 2011, approximately $20.2 million of the loans were not yet disbursed by the lender.

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Analysis of the performance of the Farmer Mac I portfolio by commodity distribution indicates that losses and collateral deficiencies have been less prevalent in the loans secured by real estate producing agricultural commodities that receive significant government support (such as cotton, soybeans, wheat and corn) and more prevalent in those that do not receive such support (such as the protein sector, permanent plantings and vegetables). However, the level of government support may vary and is not necessarily the primary factor to forecast future losses and collateral deficiencies. In Farmer Mac’s experience, another significant determinant of ultimate losses on loans is the degree to which the collateral is specialized or highly improved, such as permanent plantings and facilities.

As adverse economic conditions persist for the agricultural commodities or products related to those types of collateral, the prospective sale value of the collateral is likely to decrease and the related loans may become under-collateralized. This analysis is consistent with corresponding commodity analyses, which indicate that Farmer Mac has experienced higher loss and collateral deficiency rates in its loans classified as permanent plantings as well as storage and processing loans, which include Farmer Mac’s exposure to loans on ethanol plants. Most of the loans classified as permanent plantings do not receive significant government support, and are therefore more susceptible to adverse commodity-specific economic trends, and the collateral for storage and processing loans is typically highly improved and specialized. Farmer Mac anticipates that one or more particular commodity groups will be under economic pressure at any one time and actively manages its portfolio to mitigate concentration risks while preserving Farmer Mac’s ability to meet the financing needs of all commodity groups. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Outlook.”

Analysis of portfolio performance by geographic distribution indicates that, while commodities are the primary determinant of exposure to loss, within most commodity groups certain geographic areas allow greater economies of scale or proximity to markets than others and, consequently, result in more successful operators within the commodity group. Likewise, certain geographic areas offer better growing conditions than others and, consequently, result in more versatile and more successful operators within a given commodity group – and the ability to switch crops among commodity groups. As of March 31, 2011, the properties that secure Farmer Mac’s non-performing assets were not concentrated in any region of the country, and many of these borrowers have experienced reduced profit margins caused by rapidly rising operating expenses or expanding business segments followed by a decline in demand for their products.

Farmer Mac’s methodologies for pricing its guarantee and commitment fees, managing credit risks and providing adequate allowances for losses consider all of the foregoing factors and information.

Credit Risk – Institutional . Farmer Mac is also exposed to credit risk arising from its business relationships with other institutions, including:

issuers of AgVantage securities and other investments held or guaranteed by Farmer Mac;

sellers and servicers; and

interest rate swap contract counterparties.

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Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security, with some level of overcollateralization also required for Farmer Mac I AgVantage securities. The required collateralization level is established at the time of issuance and does not change during the life of the security. In AgVantage transactions, the corporate obligor is required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to substitute an eligible loan that is current in payment to maintain the minimum required collateralization level. In the event of a default on the general obligation, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing borrower payments of principal and interest. For a more detailed description of AgVantage securities, see “Business—Farmer Mac Programs—Farmer Mac I—AgVantage Securities” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

Outstanding AgVantage on-balance sheet Farmer Mac I Guaranteed Securities totaled $1.4 billion and $0.9 billion as of March 31, 2011 and December 31, 2010, respectively. Farmer Mac Guaranteed Securities – Rural Utilities structured as AgVantage transactions issued by CFC totaled $1.4 billion and $1.9 billion as of March 31, 2011 and December 31, 2010, respectively. In addition, outstanding off-balance sheet AgVantage transactions totaled $2.5 billion and $3.0 billion as of March 31, 2011 and December 31, 2010, respectively. The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of March 31, 2011 and December 31, 2010.

	March 31, 2011					December 31, 2010
			Credit	Required				Credit	Required
Counterparty	Balance		Rating	Collateralization		Balance		Rating	Collateralization
	(dollars in thousands)

MetLife (1)	$	2,750,000	AA-		103%	$	2,750,000	AA-	103%
CFC		1,426,087	A		100%		1,902,492	A	100%
M&I Bank (2)		475,000	BBB- *+		106%		475,000	BBB- *+	106%
Rabo Agrifinance, Inc.		600,000	N/A		106%		600,000	N/A	106%
Rabobank N.A.		50,000	N/A		106%		50,000	N/A	106%
Other (3)		11,500	N/A		111% to 120%		11,500	N/A	111% to 120%
Total outstanding	$	5,312,587				$	5,788,992

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

(2)	M&I Bank is on a credit watch positive (*+). In December 2010, BMO Financial Group of Canada agreed to purchase M&I Bank.

(3)	Consists of AgVantage securities issued by 4 different issuers as of March 31, 2011 and December 31, 2010.

Farmer Mac manages institutional credit risk related to sellers and servicers by requiring those institutions to meet Farmer Mac’s standards for creditworthiness. Farmer Mac monitors the financial condition of those institutions by evaluating financial statements and bank credit rating agency reports. For more information on Farmer Mac’s approval of sellers, see “Business—Farmer Mac Programs—Farmer Mac I—Sellers” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

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Credit Risk – Other Investments . As of March 31, 2011, Farmer Mac had $779.4 million of cash and cash equivalents and $2.1 billion of investment securities. The management of the credit risk inherent in these investments is governed by Farmer Mac’s own policies and regulations promulgated by FCA, including dollar amount, issuer concentration, and credit quality limitations. Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the “Liquidity and Investment Regulations”).

In general, FCA’s Liquidity and Investment Regulations and Farmer Mac’s policies require each investment or issuer of an investment to be highly rated by a nationally-recognized statistical rating organization (“NRSRO”). Investments in mortgage securities and asset-backed securities are required to have a rating in the highest NRSRO category. The maximum maturity for corporate debt securities is three years and the minimum rating is required to be in one of the three highest categories. There are investments for which a rating is not required, such as obligations of the United States or diversified investment funds regulated under the Investment Company Act of 1940. Investments in diversified investment funds are further limited to those funds that are holding only instruments approved for direct investment by Farmer Mac.

FCA’s Liquidity and Investment Regulations and Farmer Mac’s policies also establish concentration limits, which are intended to limit exposure to any one counterparty. FCA’s Liquidity and Investment Regulations limit Farmer Mac’s total credit exposure to any single issuer of securities and uncollateralized financial derivatives to 25 percent of the Corporation’s regulatory capital (as of March 31, 2011, 25 percent of Farmer Mac’s regulatory capital was $124.6 million). This limitation is not applied to the obligations of the United States or to qualified investment funds. The limitation applied to the obligations of any GSE is 100 percent of Farmer Mac’s regulatory capital. Since June 2010, Farmer Mac’s policies applicable to new investments limited the Corporation’s total exposure to any single issuer of securities (other than GSEs and government agencies) and uncollateralized financial derivatives to 5 percent of the Corporation’s regulatory capital.

Interest Rate Risk . Farmer Mac is subject to interest rate risk on all assets held for investment because of possible timing differences in the cash flows of the assets and related liabilities. This risk is primarily related to loans held and on-balance sheet Farmer Mac Guaranteed Securities due to the ability of borrowers to prepay their mortgages before the scheduled maturities, thereby increasing the risk of asset and liability cash flow mismatches. Cash flow mismatches in a changing interest rate environment can reduce the earnings of the Corporation if assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments when Farmer Mac’s funding costs cannot be correspondingly reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-cost debt.

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Yield maintenance provisions and other prepayment penalties contained in many agricultural mortgage and rural utilities loans reduce, but do not eliminate, prepayment risk, particularly in the case of a defaulted loan where yield maintenance may not be collected. Those provisions require borrowers to make an additional payment when they prepay their loans so that, when reinvested with the prepaid principal, yield maintenance payments generate substantially the same cash flows that would have been generated had the loan not prepaid. Those provisions create a disincentive to prepayment and compensate the Corporation for some of its interest rate risks. As of March 31, 2011, 12 percent of the total outstanding balance of loans in the Farmer Mac I program where Farmer Mac either owned the loan or the beneficial interest in the underlying loan had yield maintenance provisions and 6 percent had other forms of prepayment protection (together covering 31 percent of all loans with fixed interest rates). Of the Farmer Mac I newly originated and current seasoned loans purchased in first quarter 2011, none had yield maintenance or other forms of prepayment protection. As of March 31, 2011, none of the USDA-guaranteed portions held or underlying Farmer Mac II Guaranteed Securities had yield maintenance provisions; however, 9 percent contained prepayment penalties. Of the USDA-guaranteed portions purchased in the first three months of 2011, 4 percent contained various forms of prepayment penalties. As of March 31, 2011, 71 percent of the rural utilities loans owned by Farmer Mac had yield maintenance provisions. Of the rural utilities loans purchased in first quarter 2011, 25 percent had yield maintenance provisions. As of March 31, 2011, all of the rural utilities loans held in trusts where Farmer Mac owned the beneficial interest in the underlying loan had yield maintenance provisions.

Taking into consideration the prepayment provisions and the default probabilities associated with its mortgage assets, Farmer Mac uses prepayment models to project and value cash flows associated with these assets. Because borrowers’ behaviors in various interest rate environments may change over time, Farmer Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience and adjusts and refines the models as necessary to improve the precision of subsequent prepayment forecasts.

Farmer Mac’s $779.4 million of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities. As of March 31, 2011, $1.2 billion of the $2.1 billion of investment securities (56.4 percent) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. Such securities are funded with floating rate medium-term notes or discount notes that closely match the rate adjustment dates of the associated investments. As of March 31, 2011, Farmer Mac had outstanding discount notes of $3.8 billion, medium-term notes that mature within one year of $0.8 billion and medium-term notes that mature after one year of $3.8 billion.

The goal of interest rate risk management at Farmer Mac is to create and maintain a portfolio that generates stable earnings and value across a variety of interest rate environments. Farmer Mac’s primary strategy for managing interest rate risk is to fund asset purchases with liabilities that have similar durations and cash flows so that they will perform similarly as interest rates change. To achieve this match, Farmer Mac issues discount notes and both callable and non-callable medium-term notes across a spectrum of maturities. Farmer Mac issues callable debt to offset the prepayment risk associated with some loans. By using a blend of liabilities that includes callable debt, the interest rate sensitivities of the liabilities tend to increase or decrease as interest rates change in a manner similar to changes in the interest rate sensitivities of the assets. Farmer Mac also uses financial derivatives to better match the durations of the Corporation’s assets and liabilities, thereby reducing overall interest rate sensitivity.

An important “stress test” of Farmer Mac’s exposure to long-term interest rate risk is the measurement of the sensitivity of its market value of equity (“MVE”) to yield curve shocks. MVE represents management’s estimate of the present value of all future cash flows from on- and off-balance sheet assets, liabilities and financial derivatives, discounted at current interest rates and appropriate spreads.

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The following schedule summarizes the results of Farmer Mac’s MVE sensitivity analysis as of March 31, 2011 and December 31, 2010 to an immediate and instantaneous uniform or “parallel” shift in the yield curve.

	Percentage Change in MVE from Base Case
Interest Rate	March 31,			December 31,
Scenario	2011			2010

+ 300 bp		-6.0	%		-1.0	%
+ 200 bp		-2.1	%		1.9	%
+ 100 bp		-0.7	%		2.6	%
- 100 bp		*			*
- 200 bp		*			*
- 300 bp		*			*

As of the date indicated, a parallel shift of the U.S. Treasury yield curve by the number of basis points indicated produced negative interest rates for portions of this curve.

As of March 31, 2011, Farmer Mac’s effective duration gap, another standard measure of interest rate risk that measures the difference between the sensitivities of assets compared to that of liabilities, was minus 0.3 months, compared to minus 1.6 months as of December 31, 2010. This reduction in interest rate sensitivity is attributable primarily to the significant on-balance sheet program growth that occurred during the quarter. Duration matching of those program assets and the corresponding liabilities helps maintain the correlation of cash flows and stabilize portfolio earnings even when interest rates are not stable.

Farmer Mac also calculates sensitivity of net interest income (“NII”) to changes in interest rates which represents a shorter-term measure of interest rate risk. As of March 31, 2011, a parallel increase of 100 basis points would have decreased Farmer Mac’s NII by 5.3 percent, while a parallel decrease of 25 basis points would have decreased NII by 3.5 percent. Farmer Mac also measures the sensitivity of both MVE and NII to a variety of non-parallel interest rate shocks, including flattening and steepening yield curve scenarios. As of March 31, 2011, both MVE and NII showed similar or lesser sensitivity to non-parallel shocks than to the parallel shocks.

The economic effects of financial derivatives are included in the Corporation’s MVE, NII and duration gap analyses. Farmer Mac enters into the following financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of assets, future cash flows, credit exposure and debt issuance, not for trading or speculative purposes:

“pay-fixed” interest rate swaps, in which it pays fixed rates of interest to, and receives floating rates of interest from, counterparties;

“receive-fixed” interest rate swaps, in which it receives fixed rates of interest from, and pays floating rates of interest to, counterparties;

“basis swaps,” in which it pays variable rates of interest based on one index to, and receives variable rates of interest based on another index from, counterparties; and

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“credit default swaps,” in which it pays a periodic fee to a counterparty in exchange for the counterparty’s agreement to make payments in the event of an instrument’s default or other credit event.

As of March 31, 2011, Farmer Mac had $5.5 billion combined notional amount of interest rate and credit default swaps, with terms ranging from one to fifteen years, of which $1.7 billion were pay-fixed interest rate swaps, $3.3 billion were receive-fixed interest rate swaps, $0.4 billion were basis swaps and $30.0 million were credit default swaps.

Liquidity and Capital Resources

Farmer Mac depends on regular access to the capital markets for liquidity, and Farmer Mac maintained access to the capital markets at favorable rates throughout first quarter 2011. Assuming continuation of current market conditions, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to manage unanticipated disruptions in its access to the capital markets. That plan involves borrowing through repurchase agreement arrangements and the sale of liquid assets. In accordance with the calculation prescribed by FCA regulations, Farmer Mac maintains a minimum of 60 days of liquidity and a target of 90 days of liquidity. In accordance with the methodology prescribed by those regulations, Farmer Mac maintained an average of 196 days of liquidity during first quarter 2011 and had 197 days of liquidity as of March 31, 2011.

Debt Issuance . Farmer Mac funds its purchases of assets primarily by issuing debt obligations of various maturities in the public capital markets. Debt obligations issued by Farmer Mac include discount notes and fixed and floating rate medium-term notes, including callable notes. Farmer Mac also issues discount notes and medium-term notes to obtain funds to finance its investment activities, transaction costs, guarantee payments and LTSPC purchase obligations. See “Business—Financing—Debt Issuance” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011 for more information about Farmer Mac’s debt issuance.

Farmer Mac’s board of directors has authorized the issuance of up to $10.0 billion of discount notes and medium-term notes (of which $8.4 billion was outstanding as of March 31, 2011), subject to periodic review of the adequacy of that level relative to Farmer Mac’s borrowing requirements. Farmer Mac invests the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities, and liquidity investment assets in accordance with policies established by its board of directors and subject to regulations established by FCA.

Liquidity . The funding and liquidity needs of Farmer Mac’s business are driven by the purchase of loans, USDA-guaranteed portions and Farmer Mac Guaranteed Securities; the maturities of and interest payments on Farmer Mac’s discount notes and medium-term notes; and payment of principal and interest on Farmer Mac Guaranteed Securities. Farmer Mac’s primary sources of funds to meet these needs are:

principal and interest payments and ongoing guarantee and commitment fees received on loans, Farmer Mac Guaranteed Securities, and LTSPCs;

principal and interest payments received from investment securities; and

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the issuance of new discount notes and medium-term notes.

Farmer Mac’s short-term borrowing costs have remained at favorable levels despite continued market volatility. Prior to 2009, Farmer Mac routinely used pay-fixed interest rate swaps, combined with a planned series of discount note issuances, as an alternative source of effectively fixed rate funding. While the swap market may have provided favorable effectively fixed rates, interest rate swap transactions expose Farmer Mac to the risk of future widening of its own issuance spreads versus corresponding LIBOR rates. If the spreads on the Farmer Mac discount notes were to increase relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets. Conversely, if the rates on the Farmer Mac discount notes were to decrease relative to LIBOR, Farmer Mac would benefit from a commensurate increase on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets. Further, the widespread use of pay-fixed interest rate swaps subjected the Corporation’s regulatory capital surplus to the potential adverse effects of a reduction in the fair values of those interest rate swaps. Such a reduction occurred in the third and fourth quarters of 2008. After September 2008, Farmer Mac systematically entered into various offsetting interest rate swaps (receive-fixed swaps) to counteract the fair value movements of the previously-existing interest rate swaps. These transactions have reduced the susceptibility of Farmer Mac’s regulatory capital surplus to changes in the fair values of its financial derivatives. Currently, Farmer Mac uses a combination of pay-fixed interest rate swaps and receive-fixed interest rate swaps to mitigate its exposure to interest rate risk and monitors the effects of actual and potential fair value changes on its regulatory capital surplus.

Farmer Mac maintains cash and cash equivalents (including U.S. Treasury bills and other short-term money market instruments) and other investment securities that can be drawn upon for liquidity needs. The following table presents these assets as of March 31, 2011 and December 31, 2010.

	March 31,		December 31,
	2011		2010
	(in thousands)
Cash and cash equivalents	$	779,443	$	729,920
Investment securities:
Guaranteed by U.S. Government and its agencies		1,141,132		929,793
Guaranteed by GSEs		455,536		405,631
Preferred stock issued by GSEs		173,883		169,524
Corporate debt securities		194,687		163,188
Asset-backed securities principally backed by Government-guaranteed student loans		99,330		95,193
Total	$	2,844,011	$	2,493,249

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Farmer Mac’s asset-backed investment securities include callable, AAA-rated ARCs, the interest rates on which are reset through an auction process, most commonly at intervals of 28 days, or at formula-based floating rates as set forth in the related transaction documents in the event of a failed auction. These formula-based floating rates, which may at times reset to zero, are intended to preserve the underlying principal balance of the securities and avoid overall cash shortfalls. Accordingly, payments of accrued interest may also be delayed and are ultimately subject to cash availability. Beginning in mid-February 2008, there were widespread failures of the auction mechanism designed to provide regular liquidity to these types of securities. Consequently, Farmer Mac has not sold any of its ARCs into the auctions since that time. All ARCs held by Farmer Mac are collateralized entirely by pools of Federal Family Education Loan Program guaranteed student loans that are backed by the full faith and credit of the United States. Farmer Mac continues to believe that the credit quality of these securities is high, based on the underlying collateralization and the securities’ continued AAA ratings. To date, Farmer Mac has received all interest due on ARCs it holds and expects to continue to do so. Farmer Mac does not believe that the auction failures will affect the Corporation’s liquidity or its ability to fund its operations or make dividend payments. All ARCs held by Farmer Mac are callable by the issuers at par at any time.

Farmer Mac held $64.5 million of ARCs as of March 31, 2011, compared to $64.3 million as of December 31, 2010. As of March 31, 2011, Farmer Mac’s carrying value of its ARCs was 87 percent of par. The discounted carrying value reflects uncertainty regarding the ability to obtain par in the absence of any active market trading.

Capital . See “—Balance Sheet Review—Regulatory Capital Compliance” for more information about Farmer Mac’s capital position and “—Regulatory Matters” for more information about changes to the risk-based capital stress test applicable to Farmer Mac.

Other Matters

Common Stock Dividends . For first quarter 2011 and for each quarter in 2010 and 2009, Farmer Mac’s board of directors declared a quarterly dividend of $0.05 per share on the Corporation’s Class A, Class B and Class C common stock. Farmer Mac’s ability to pay dividends on its common stock is subject to the payment of dividends on its outstanding preferred stock. Farmer Mac’s ability to declare and pay dividends could be restricted if it were to fail to comply with the applicable regulatory capital requirements. See “Business—Government Regulation of Farmer Mac—Regulation—Capital Standards—Enforcement levels” in Farmer Mac’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 16, 2011.

Preferred Stock Dividends . For first quarter 2011, Farmer Mac’s board of directors declared a quarterly dividend of $12.50 per share on the Corporation’s Series C Preferred Stock. During first quarter 2010, on January 25, 2010, all of the outstanding shares of the Corporation’s Series B preferred stock was repurchased and retired. The price paid to repurchase the Series B Preferred Stock included accrued dividends of $8.33 per share through the purchase date.

Non-controlling Interest . For first quarter 2011, Farmer Mac II LLC’s board of directors declared a quarterly dividend of $22.1875 per share on the company’s preferred stock. For the first quarter of 2010, Farmer Mac II LLC’s board of directors declared a quarterly dividend of $16.02 per share on the company’s preferred stock. Farmer Mac’s net income attributable to non-controlling interest totaled $5.5 million and $4.1 million for the three months ended March 31, 2011 and 2010, respectively. These amounts represent the dividends paid on the Farmer Mac II LLC preferred stock held by third parties. Farmer Mac’s income tax expense is determined based on income before income taxes less the amount of these dividends.

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Regulatory Matters

In the April 27, 2011 issue of the Federal Register, FCA published a final rule (the “Final RBC 4.0 Rule”) that revises certain FCA regulations governing the risk-based capital stress test applicable to Farmer Mac. In its announcement of the Final RBC 4.0 Rule, FCA stated that the purpose of the changes is to update the risk-based capital model to address the addition of rural utilities loans to Farmer Mac’s program authorities, to revise the existing treatment of risk mitigations of general obligations in the AgVantage structure, and to revise the treatment of counterparty risk on Farmer Mac’s non-program investments. Farmer Mac expects that compliance with the Final RBC 4.0 Rule will be required of the Corporation beginning in third quarter 2011.

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

Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement and the amount required by the risk-based capital stress test. As of March 31, 2011, Farmer Mac’s minimum capital requirement was $310.1 million, and Farmer Mac’s core capital level was $478.8 million, $168.7 million above the minimum capital requirement. Based on the risk-based capital stress test in effect as of March 31, 2011, Farmer Mac’s risk-based capital requirement as of March 31, 2011 was $41.8 million, and Farmer Mac’s regulatory capital of $498.3 million exceeded that requirement by approximately $456.5 million. Had the Final RBC 4.0 Rule been in effect on March 31, 2011, Farmer Mac’s risk-based capital requirement as of that date would have been approximately $119.2 million, and Farmer Mac’s regulatory capital of $498.3 million would have exceeded that requirement by approximately $379.1 million. Farmer Mac has not completed its analysis of the Final RBC 4.0 Rule but expects to be able to remain in compliance with all applicable capital requirements even in the event that the risk-based capital requirement calculated under the Final RBC 4.0 Rule is higher than the statutory minimum capital requirement in the future.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contains a variety of provisions designed to regulate financial markets, including credit and derivatives transactions. Certain provisions of the Dodd-Frank Act, such as the requirement to retain a five percent credit risk in any securitized loan, do not apply to Farmer Mac or, with respect to any loan sold to Farmer Mac, the seller of such loan. In addition, Farmer Mac’s equity and debt securities are excluded from the Dodd-Frank Act’s prohibitions on proprietary trading by banking entities. However, certain provisions of the Dodd-Frank Act, such as those regarding derivatives regulation, corporate governance and executive compensation, do not contain specific exemptions for Farmer Mac. Until various studies are completed and all applicable final regulations are promulgated pursuant to the Dodd-Frank Act, the full effect of the legislation on the Corporation’s business activities and operations cannot be completely assessed, particularly how it will affect the Corporation’s hedging operations and costs. Farmer Mac does not expect that any of the final rules that have been passed under the Dodd-Frank Act to date will have a material impact on the Corporation’s business activities and operations or financial condition. Farmer Mac will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expects to be able to adapt successfully to any new applicable legislative and regulatory requirements.

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Supplemental Information

The following tables present quarterly and annual information regarding loan purchases, guarantees and LTSPCs and outstanding loans, guarantees and LTSPCs.

Farmer Mac Purchases, Guarantees and LTSPCs
	Farmer Mac I				Farmer Mac II		Rural Utilities
	Loans and				and USDA		Loans and
	Guaranteed				Guaranteed		Guaranteed
	Securities		LTSPCs (1)		Securities		Securities		Total
	(in thousands)
For the quarter ended:
March 31, 2011	$	711,899	$	54,152	$	117,253	$	80,517	$	963,821
December 31, 2010		474,216		128,752		102,858		543,966		1,249,792
September 30, 2010		632,270		25,416		139,667		285,242		1,082,595
June 30, 2010		98,235		32,430		123,062		77,726		331,453
March 31, 2010		77,948		77,143		92,288		59,018		306,397
December 31, 2009		86,872		108,646		94,936		16,009		306,463
September 30, 2009		40,732		37,083		76,119		553,644		707,578
June 30, 2009		37,900		22,717		96,322		900,000		1,056,939
March 31, 2009		29,814		65,720		79,055		270,000		444,589

For the year ended:
December 31, 2010		1,282,669		263,741		457,875		965,952		2,970,237
December 31, 2009		195,318		234,166		346,432		1,739,653		2,515,569

(1)	As of March 31, 2011, approximately $20.2 million of the loans underlying $555.5 million of AgStorage and processing LTSPCs (including ethanol facilities) were not yet disbursed by the lender.

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Outstanding Balance of Farmer Mac Loans,
Guarantees and LTSPCs and USDA Guarantees
	Farmer Mac I				Farmer Mac II		Rural Utilities
	Loans and				and USDA		Loans and
	Guaranteed				Guaranteed		Guaranteed
	Securities		LTSPCs		Securities		Securities		Total
	(in thousands)
As of:
March 31, 2011	$	6,485,156	$	1,712,791	$	1,402,831	$	2,235,522	$	11,836,300
December 31, 2010		6,434,031		1,754,597		1,385,398		2,642,683		12,216,709
September 30, 2010		6,059,184		1,697,578		1,365,993		2,353,453		11,476,208
June 30, 2010 (1)		5,544,091		1,739,979		1,300,945		2,173,660		10,758,675
March 31, 2010 (2)		5,444,448		1,846,244		1,237,539		2,183,576		10,711,807
December 31, 2009		5,224,768		2,165,706		1,199,798		2,130,832		10,721,104
September 30, 2009		5,227,939		2,135,445		1,141,570		2,266,592		10,771,546
June 30, 2009		5,241,145		2,181,712		1,115,025		1,819,033		10,356,915
March 31, 2009		5,313,680		2,216,564		1,082,215		1,319,033		9,931,492

(1)	The Loans and Guaranteed Securities and LTSPCs amounts reflect the conversion of $86.0 million of existing LTSPCs to Farmer Mac I Guaranteed Securities during second quarter 2010 at the request of a program participant.

(2)	The Loans and Guaranteed Securities and LTSPCs amounts reflect the conversion of $265.8 million of existing LTSPCs to Farmer Mac I Guaranteed Securities during first quarter 2010 at the request of a program participant.

Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
			5-to-10-Year				Total
			ARMs &		1-Month-to-		Held in
	Fixed Rate		Resets		3 Year ARMs		Portfolio
	(in thousands)
As of:
March 31, 2011	$	3,835,010	$	1,164,567	$	1,893,487	$	6,893,064
December 31, 2010		3,662,363		1,133,871		1,907,266		6,703,500
September 30, 2010		3,006,105		1,087,714		1,883,049		5,976,868
June 30, 2010		2,269,059		1,036,781		1,885,693		5,191,533
March 31, 2010		2,365,557		1,332,369		1,820,896		5,518,822
December 31, 2009		1,923,697		723,017		1,422,403		4,069,117
September 30, 2009		2,071,801		677,593		1,382,817		4,132,211
June 30, 2009		1,673,947		646,550		1,286,126		3,606,623
March 31, 2009		1,685,816		660,419		752,012		3,098,247

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Farmer Mac is exposed to market risk attributable to changes in interest rates. Farmer Mac manages this market risk by entering into various financial transactions, including financial derivatives, and by monitoring its exposure to changes in interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk” for more information about Farmer Mac’s exposure to interest rate risk and strategies to manage such risk. For information regarding Farmer Mac’s use of and accounting policies for financial derivatives, see Note 1(c) to the condensed consolidated financial statements contained in this report. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further information regarding Farmer Mac’s debt issuance and liquidity risks.

Item 4.

Controls and Procedures

(a) Management’s Evaluation of Disclosure Controls and Procedures . Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Corporation’s periodic filings under the Securities Exchange Act of 1934 (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Corporation’s management on a timely basis to allow decisions regarding required disclosure. Management, including Farmer Mac’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), has evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2011.

The Corporation carried out the evaluation of the effectiveness of Farmer Mac’s disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of management, including the CEO and CFO. Based upon this evaluation, the CEO and CFO concluded that the Corporation’s disclosure controls and procedures were not effective as of March 31, 2011 because of a material weakness in internal control over financial reporting that resulted in incorrect classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows.

Revised Management’s Report from 2010 Form 10-K . With the participation of the Corporation’s CEO and CFO, Farmer Mac’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2010. In making this assessment, the Corporation’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on its initial evaluation under the COSO criteria, management concluded that the Corporation’s internal control over financial reporting as of December 31, 2010 was effective. Subsequently, in second quarter 2011, management concluded that the Corporation did not maintain effective controls over the appropriate classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows. On May 10, 2011, the Corporation’s Board of Directors authorized management to restate the Corporation’s previously issued condensed consolidated statements of cash flows for the three, six and nine month periods ended March 31, 2010, June 30, and September 30, 2010 and 2009, respectively, and its consolidated statements of cash flows for the years ended December 31, 2010 and 2009. Accordingly, management has concluded that the control deficiency that resulted in incorrect classifications of proceeds from the repayments of certain loans between operating and investing activities on the consolidated statements of cash flows constituted a material weakness as of December 31, 2010. Solely as a result of this material weakness, management has revised its earlier assessment and now has concluded that Farmer Mac’s internal control over financial reporting was not effective as of December 31, 2010.

Remediation Plan . Beginning in second quarter 2011, Farmer Mac conducted a comprehensive evaluation of the classifications of cash flows within the Corporation’s consolidated statements of cash flows, established a new policy and developed a process to report cash flows based on management’s original intent upon purchase of a loan. Management expects these efforts to remediate the identified material weakness and strengthen internal control over financial reporting. As management continues to evaluate and work to enhance internal control over financial reporting, it may determine that additional measures are required to address control deficiencies, strengthen internal control over financial reporting, or it may determine to modify the remediation plan described above.

(b) Changes in Internal Control Over Financial Reporting . There were no changes in internal control over financial reporting during first quarter 2011 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. However, as described above, management did implement changes in internal control over financial reporting during second quarter 2011 designed to remediate a material weakness related to the classifications of cash flows from loans within the Corporation’s consolidated statements of cash flows.

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PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

There were no material changes from the risk factors previously disclosed in Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Farmer Mac is a federally chartered instrumentality of the United States and its debt and equity securities are exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933.

During first quarter 2011, one type of transaction occurred related to Farmer Mac common stock that was not registered under the Securities Act of 1933 and not otherwise reported on a Current Report on Form 8-K. On January 11, 2011, pursuant to Farmer Mac’s policy that permits directors of Farmer Mac to elect to receive shares of Class C Non-Voting Common Stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 449 shares of its Class C Non-Voting Common Stock to the four directors who elected to receive such stock in lieu of their cash retainers. The number of shares issued to the directors was calculated based on a price of $16.32 per share, which was the closing price of the Class C Non-Voting Common Stock on December 31, 2010 as reported by the New York Stock Exchange.

(b)

Not applicable.

(c)

None.

Item 3.

Defaults Upon Senior Securities

(a)

None.

(b)

None.

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Item 4.

(Removed and Reserved)

Item 5.

Other Information

(a)

None.

(b)

None.

Item 6.

Exhibits

*	3.1	-	Title VIII of the Farm Credit Act of 1971, as most recently amended by the Food, Conservation and Energy Act of 2008 (Form 10-Q filed August 12, 2008).

*	3.2	-	Amended and Restated By-Laws of the Registrant (Form 10-K filed March 16, 2011).

*	4.1	-	Specimen Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q filed May 15, 2003).

*	4.2	-	Specimen Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q filed May 15, 2003).

*	4.3	-	Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q filed May 15, 2003).

*	4.4	-	Amended and Restated Certificate of Designation of Terms and Conditions of Non-Voting Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.7 to Form 10-Q filed November 9, 2009).

†*	10.1	-	Amended and Restated 1997 Incentive Plan (Form 10-Q filed November 14, 2003).

†*	10.1.1	-	Form of stock option award agreement under 1997 Incentive Plan (Form 10-K filed March 16, 2005).

†*	10.1.2	-	2008 Omnibus Incentive Plan (Form 10-Q filed August 12, 2008).

*	Incorporated by reference to the indicated prior filing.

**	Filed with this report.

†	Management contract or compensatory plan.

#	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

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†*	10.1.3	-	Form of SAR Agreement under the 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10 to Form 8-K filed June 11, 2008).

†*	10.1.4	-	Form of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.1 to Form 8-K filed June 10, 2009).

†*	10.1.5	-	Form of Restricted Stock Agreement (Directors) under the 2008 Omnibus Incentive Plan (Previously filed as Exhibit 10.2 to Form 8-K filed June 10, 2009).

†**	10.2	-	Amended and Restated Employment Agreement dated as of April 1, 2011 between Michael A. Gerber and the Registrant.

†*	10.3	-	Compiled Amended and Restated Employment Contract dated as of June 5, 2008 between Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.4 to Form 10-Q filed August 12, 2008).

†*	10.4	-	Compiled Amended and Restated Employment Contract dated June 5, 2008 between Timothy L. Buzby and the Registrant (Previously filed as Exhibit 10.5 to Form 10-Q filed August 12, 2008).

†*	10.4.1	-	Amendment No. 6 to Employment Contract between Timothy L. Buzby and the Registrant, dated as of April 2, 2009 (Form 10-Q filed August 10, 2009).

	10.5	-	Exhibit number reserved for future use.

†*	10.6	-	Description of compensation agreement between the Registrant and its directors (Form 10-K filed March 16, 2011).

*	10.7	-	Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).

*	10.8	-	Medium-Term Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).

*	10.9	-	Discount Note Dealer Agreement dated as of September 18, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).

*	Incorporated by reference to the indicated prior filing.

**	Filed with this report.

†	Management contract or compensatory plan.

#	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

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*#	10.10	-	ISDA Master Agreement and Credit Support Annex dated as of June 26, 1997 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).

*#	10.11	-	Amended and Restated Master Central Servicing Agreement dated as of May 1, 2004 between Zions First National Bank and the Registrant (Previously filed as Exhibit 10.11.2 to Form 10-Q filed August 9, 2004).

*#	10.11.1	-	Amendment No. 1 to Amended and Restated Master Central Servicing Agreement between Zions First National Bank and the Registrant, dated as of June 1, 2009 (Form 10-Q filed August 10, 2009).

*#	10.11.2	-	Amendment No. 2. to Amended and Restated Master Central Servicing Agreement between Zions First National Bank and the Registrant, dated as of August 25, 2010 (Form 10-Q filed November 9, 2010).

*#	10.12	-	Loan Closing File Review Agreement dated as of August 2, 2005 between Zions First National Bank and the Registrant (Form 10-Q filed November 9, 2005).

*#	10.13	-	Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).

*#	10.13.1	-	Amendment No. 1 dated as of January 1, 2000 to Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).

*	10.13.2	-	Amendment No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).

*	10.14	-	Lease Agreement, dated June 28, 2001 between EOP – Two Lafayette, L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27, 2002).

*#	10.15	-	Long Term Standby Commitment to Purchase dated as of August 1, 2007 between Farm Credit Bank of Texas and the Registrant (Previously filed as Exhibit 10.20 to Form 10-Q filed November 8, 2007).

*	Incorporated by reference to the indicated prior filing.

**	Filed with this report.

†	Management contract or compensatory plan.

#	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

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*#	10.16	-	Long Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and the Registrant (Form 10-Q filed November 9, 2004).

*#	10.16.1	-	Amendment No. 1 dated as of December 8, 2006 to Long Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and the Registrant (Form 10-K filed March 15, 2007).

*#	10.17	-	Central Servicer Delinquent Loan Servicing Transfer Agreement dated as of July 1, 2004 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 9, 2004).

†*	10.18	-	Form of Indemnification Agreement for Directors (Previously filed as Exhibit 10.1 to Form 8-K filed April 9, 2008).

*	10.19		Master Trust, Sale and Servicing Agreement dated as of October 20, 2006 between CFC Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, U.S. Bank National Association, and the Registrant (Form 10-Q filed August 9, 2010).

*	10.20		Registration Rights Agreement Series 2007-1 dated as of February 15, 2007 between CFC Advantage, LLC, National Rural Utilities Cooperative Finance Corporation, and the Registrant (Form 10-Q filed August 9, 2010).

*	10.21		Registration Rights Agreement Series 2007-2 dated as of August 10, 2007 between CFC Advantage, LLC, National Rural Utilities Cooperative Finance Corporation and the Registrant (Form 10-Q filed August 9, 2010).

**	10.22		Amended and Restated Note Purchase Agreement dated as of March 24, 2011 between Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant.

**	10.23		Amended, Restated and Consolidated Pledge Agreement dated as of March 24, 2011 between Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, U.S. Bank National Association, and the Registrant.

**	10.24		Setoff Rights Letter Agreement dated as of March 24, 2011 between National Rural Utilities Cooperative Finance Corporation, Farmer Mac Mortgage Securities Corporation, and the Registrant.

*	Incorporated by reference to the indicated prior filing.

**	Filed with this report.

†	Management contract or compensatory plan.

#	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

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**	10.25		First Supplemental Note Purchase Agreement dated as of March 24, 2011 between Farmer Mac Mortgage Securities Corporation, National Rural Utilities Cooperative Finance Corporation, and the Registrant.

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

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

*#	10.27		Credit Support Agreement dated as of September 1, 2009 between National Rural Utilities Cooperative Finance Corporation and the Registrant (Previously filed as Exhibit 10.38 to Form 10-Q filed August 9, 2010).

*	10.28		Indenture dated as of September 1, 2009 between National Rural Utilities Cooperative Finance Corporation, U.S. Bank National Association and the Registrant (Previously filed as Exhibit 10.39 to Form 10-Q filed August 9, 2010).

*#	10.29		Sublease Agreement dated as of December 6, 2010 between Mayer Brown LLP and the Registrant (Previously filed as Exhibit 10.43 to Form 10-K filed March 16, 2011).

*	21	-	List of the Registrant’s subsidiaries (Form 10-K filed March 16, 2010).

**	31.1	-	Certification of Chief Executive Officer relating to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

**	31.2	-	Certification of Chief Financial Officer relating to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

**	32	-	Certification of Chief Executive Officer and Chief Financial Officer relating to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Incorporated by reference to the indicated prior filing.

**	Filed with this report.

†	Management contract or compensatory plan.

#	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

-99-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

May 10, 2011

	By:	/s/ Michael A. Gerber
		Michael A. Gerber
		President and Chief Executive Officer
		(Principal Executive Officer)

		/s/ Timothy L. Buzby
		Timothy L. Buzby
		Senior Vice President – Chief Financial Officer and Treasurer
		(Principal Financial Officer)

-100-

EXHIBIT 10.23

EXECUTION VERSION

FARMER MAC MORTGAGE

SECURITIES CORPORATION,

As Note Purchaser

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION,

As Borrower

U.S. BANK NATIONAL ASSOCIATION,

As Collateral Agent

FEDERAL AGRICULTURAL

MORTGAGE CORPORATION,

As Guarantor

AMENDED, RESTATED AND CONSOLIDATED

PLEDGE AGREEMENT

Dated as of March 24, 2011

ARTICLE I

Definitions

Section 1.01.	Definitions	3
Section 1.02.	Principles of Construction	9

ARTICLE II

Provisions as to Pledged Collateral

Section 2.01.	Holding of Pledged Securities	9
Section 2.02.	UCC Filings	10
Section 2.03.	Withdrawal and Substitution of Pledged Collateral	10
Section 2.04.	[Reserved]	11
Section 2.05.	Addition of Pledged Collateral	11
Section 2.06.	Accompanying Documentation	11
Section 2.07.	Renewal; Extension; Substitution	11
Section 2.08.	Voting Rights; Interest and Principal	11
Section 2.09.	Protection of Title; Payment of Taxes; Liens, etc	13
Section 2.10.	Maintenance of Pledged Collateral	13
Section 2.11.	Representations, Warranties and Covenants	13
Section 2.12.	Further Assurances	14

ARTICLE III

[Reserved]

ARTICLE IV

Remedies

Section 4.01.	Events of Default	15
Section 4.02.	Remedies upon Default	15
Section 4.03.	Application of Proceeds	17
Section 4.04.	Securities Act	18

ARTICLE V

The Collateral Agent

Section 5.01.	Certain Duties and Responsibilities	18
Section 5.02.	Certain Rights of Collateral Agent	19
Section 5.03.	Money Held by Collateral Agent	21
Section 5.04.	Compensation and Reimbursement	21

Section 5.05.	Corporate Collateral Agent Required; Eligibility	22
Section 5.06.	Resignation and Removal; Appointment of Successor	22
Section 5.07.	Acceptance of Appointment by Successor	23
Section 5.08.	Merger, Conversion, Consolidation or Succession to Business	23

ARTICLE VI

Miscellaneous

Section 6.01.	Notices	23
Section 6.02.	Waivers; Amendment	24
Section 6.03.	Successors and Assigns	24
Section 6.04.	Counterparts; Effectiveness	24
Section 6.05.	Severability	24
Section 6.06.	GOVERNING LAW	25
Section 6.07.	WAIVER OF JURY TRIAL	25
Section 6.08.	Headings	25
Section 6.09.	Security Interest Absolute	25
Section 6.10.	Termination or Release	26
Section 6.11.	Collateral Agent Appointed Attorney-in-Fact	26

Schedule I – Additional Criteria for Eligible Securities

Schedule II – Addresses for Notices

Annex A – Form of Certificate of Pledged Collateral

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AGREEMENT, dated as of March 24, 2011, among NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a District of Columbia cooperative association and its successors and assigns (hereinafter called “ National Rural ”), FARMER MAC MORTGAGE SECURITIES CORPORATION, (the “ Purchaser ”), a wholly owned subsidiary of FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally-chartered instrumentality of the United States and an institution of the Farm Credit System and its successors and assigns (“ Farmer Mac ”), U.S. BANK NATIONAL ASSOCIATION, a national banking association and its successors and assigns (hereinafter called the “ Collateral Agent ”), and Farmer Mac, as Guarantor.

RECITALS

WHEREAS, National Rural, the Purchaser and Farmer Mac, have entered into the Amended and Restated Note Purchase Agreement, dated as of March 24, 2011 (the “ Note Purchase Agreement ”), which amended, restated and consolidated the following note purchase agreements among National Rural, the Purchaser and Farmer Mac (collectively, the “ Original Note Purchase Agreements ”): (a) that certain Note Purchase Agreement dated as of December 15, 2008, as amended by that certain First Amendment to Note Purchase Agreement dated as of July 13, 2009 (the “ December 2008 NPA ”); (b) that certain Note Purchase Agreement dated as of February 5, 2009, as amended by that certain First Amendment to Note Purchase Agreement dated as of July 13, 2009 (the “ February 2009 NPA ”); (c) that certain Note Purchase Agreement dated as of March 23, 2009 (the “ March 2009 NPA ”),(d) that certain Note Purchase Agreement dated as of May 22, 2009 (the “ May 2009 NPA ”), and (e) that certain Note Purchase Agreement dated as of January 11, 2011 (the “ January 2011 NPA ”);

WHEREAS, National Rural issued notes to Purchaser pursuant to the Original Note Purchase Agreements, and may from time to time issue additional notes to Purchaser pursuant to the Note Purchase Agreement, all upon the terms and subject to the conditions set forth in the Note Purchase Agreement;

WHEREAS, the notes issued pursuant to the Original Note Purchase Agreements were secured by the following separate pledge agreements, each as in effect immediately prior to the date hereof (collectively, the “ Original Pledge Agreements ”): (a) that certain Pledge Agreement dated as of December 15, 2008, as amended by that certain First Amendment to Pledge Agreement dated as of September 23, 2009, securing the notes issued pursuant to the December 2008 NPA; (b) that certain Pledge Agreement dated as of February 5, 2009, as amended by that certain First Amendment to Pledge Agreement dated as of September 23, 2009, securing the notes issued pursuant to the February 2009 NPA; (c) that certain Pledge Agreement dated as of March 23, 2009, as amended by that certain First Amendment to Pledge Agreement dated as of September 23, 2009, securing the notes issued pursuant to the March 2009 NPA, (d) that certain Pledge Agreement dated as of May 22, 2009, securing the notes issued pursuant to the May 2009 NPA, and (e) that certain Pledge Agreement dated as of January 11, 2011, securing the notes issued pursuant to the January 2011 NPA;

WHEREAS, National Rural is required pursuant to the terms of the Note Purchase Agreement to pledge certain property and to consolidate the pledge of all property pledged pursuant to the Original Pledge Agreements, in each case to ratably secure National Rural’s obligations under the notes from time to time issued to Purchaser pursuant to the Note Purchase Agreement, including all such notes originally issued pursuant to one of the Original Note Purchase Agreements (collectively, the “ Notes ”); and

WHEREAS, in furtherance of the foregoing, National Rural, the Purchaser, Farmer Mac and the Collateral Agent have agreed to amend, restate and consolidate the Original Pledge Agreements and continue the liens created by the Original Pledge Agreements as set forth herein.

NOW, THEREFORE, THIS PLEDGE AGREEMENT WITNESSETH that, to secure the performance of the certain Obligations contained in the Notes, the Note Purchase Agreement and herein, National Rural hereby assigns and pledges to the Collateral Agent, its successors and assigns, for the benefit of the Control Party, and grants to the Collateral Agent, its successors and assigns, for the benefit of the Control Party, a security interest in the following (collectively referred to as the “ Pledged Collateral ”) as provided in Article II: (i) the Pledged Securities and the certificates representing the Pledged Securities; (ii) subject to Section 2.08, all payments of principal or interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of, in exchange for, and all other Proceeds received in respect of, the Pledged Securities pledged hereunder; (iii) subject to Section 2.08, all rights and privileges of National Rural with respect to the Pledged Securities; (iv) all Proceeds of any of the foregoing above; that may, on the date hereof or from time to time hereafter, be subjected to the Lien hereof by National Rural by delivery, assignment or pledge thereof to the Collateral Agent hereunder and the Collateral Agent is authorized to receive the same as additional security hereunder (subject to any reservations, limitations or conditions agreed to in writing by National Rural and the Control Party respecting the scope or priority of such security or the use and disposition of such property or the Proceeds thereof).

TO HAVE AND TO HOLD the Pledged Collateral, together with all right, title, interest, powers, privileges and preferences pertaining or incidental thereto, unto the Collateral Agent, its successors and assigns, for the benefit of the Control Party, forever; subject , however , to the terms, covenants and conditions hereinafter set forth.

ARTICLE I

Definitions

SECTION 1.01. Definitions. As used in this Pledge Agreement, the following terms shall have the following meanings:

“ Accounting Requirements ” shall mean any system of accounts prescribed by a federal regulatory authority having jurisdiction over the Member or, in the absence thereof, the requirements of GAAP applicable to businesses similar to that of the Member.

“ Allowable Amount ” on any date, means with respect to Eligible Securities, the aggregate principal amount of such Eligible Securities theretofore advanced thereon which remains unpaid on such date, subject to the Maximum Debtor Principal Amount.

“ Certificate of Pledged Collateral ” means each (i) Certificate of Pledged Collateral (as defined in the Original Pledge Agreements) previously delivered to the Collateral Agent and the Control Party pursuant to the Original Pledge Agreements, and (ii) certificate delivered from and after the date hereof to the Collateral Agent and the Control Party substantially in the form of Annex A attached hereto.

“ Class A Member ” means any Class A Member of National Rural as described in National Rural’s Bylaws as of the date hereof.

“ Class B Member ” means any Class B Member of National Rural as described in National Rural’s Bylaws as of the date hereof.

“ Collateral Agent ” means the Person named as the “ Collateral Agent ” in the introductory paragraph hereof.

“ Completed Calendar Year ” of a Member means a calendar year ended more than one hundred twenty (120) days prior to any date of determination, unless financial statements of such Member for a later calendar year shall have been furnished to National Rural.

“ Control Party ” means (i) the Guarantor, so long as no Guarantor Default has occurred and is continuing, or (ii) the holders of the Notes for so long as a Guarantor Default has occurred and is continuing.

“ Control Party Notice ” and “ Control Party Order ” mean, respectively, a written notice or order signed by any Vice President of the Control Party and delivered to the Collateral Agent and National Rural.

“ Control Party Notice of Default ” has the meaning given to that term in Section 4.02.

“ December 2008 NPA ” has the meaning set forth in the recitals hereto.

“ Depreciation and Amortization Expense ” shall mean an amount constituting the depreciation and amortization of the Member computed pursuant to Accounting Requirements.

“ Eligible Member ” means any Class A Member or Class B Member of National Rural as described in National Rural’s Bylaws currently in effect.

“ Eligible Security ” means a Secured or Unsecured note or bond of any Eligible Member payable or registered to, or to the order of, National Rural, (A) in respect of which (i) the Total Exposure Amount does not exceed the Maximum Debtor Principal Amount; provided, however, if the Total Exposure Amount does exceed the Maximum Debtor Principal Amount, such note or bond may be pledged hereunder but only to the extent it does not exceed the Maximum Debtor Principal Amount and the Allowable Amount of such Eligible Security shall only include the principal amount which does not exceed the Maximum Debtor Principal Amount, (ii) no default has occurred in the payment of principal or interest in accordance with the terms of such note or bond that is continuing beyond the contractual grace period (if any) provided in such note or bond for such payment and (iii) no “event of default” as defined in such note or bond (or in any instrument creating a security interest in favor of National Rural in respect of such note or bond), shall exist that has resulted in the exercise of any right or remedy described in such note or bond (or in any such instrument); (B) which is not classified by National Rural as a non-performing loan under generally accepted accounting principles in the United States; and (C) which otherwise satisfies the criteria set forth on Schedule I hereto, as such Schedule I may be amended from time to time as mutually agreed upon in writing by Farmer Mac and National Rural, with notice of any such amendment to the Collateral Agent prior to the pledge of such Eligible Security.

“ Equity ” means the aggregate of the Member’s total margins and equity computed pursuant to Accounting Requirements.

“ Equity to Total Assets Ratio ” means the ratio expressed as a percentage of a Member’s Equity to Total Assets, determined in accordance with Accounting Requirements.

“ Equity to Total Capitalization Ratio ” means (A) the sum of all Equity of all members of a Class B Member, divided by (B) the sum of (i) Equity of such members and (ii) Long-Term Debt for such members, all calculated in accordance with the requirements of the U.S. Department of Agriculture RUS Form 7, or, if such form is unavailable with respect to such member, the National Rural Form 7.

“ Event of Default ” has the meaning set forth in Section 4.01.

“ Facility Rating ” means the facility rating assigned by National Rural to an Eligible Security from time to time in accordance with National Rural's internal risk rating system.

“ Farmer Mac ” has the meaning set forth in the introductory paragraph hereof.

“ February 2009 NPA ” has the meaning set forth in the recitals hereto.

“ GAAP ” means generally accepted accounting principles in the United States as in effect from time to time.

“ Guarantor Default ” means a default by the Guarantor under its obligations pursuant to Article IX of the Note Purchase Agreement which is existing and continuing.

“ Interest Expense ” means an amount constituting the interest expense with respect to Long-Term Debt of the Member computed pursuant to Accounting Requirements.

“ Lien ” means any lien, pledge, charge, mortgage, encumbrance, debenture, hypothecation or other similar security interest attaching to any part of the Pledged Collateral.

“ Lien of this Pledge Agreement ” or “ Lien hereof ” means the Lien created by these presents.

“ Long-Term Debt ” is determined in accordance with the Uniform System of Accounts prescribed at the time by RUS or, if such Member is not required to maintain its accounts in accordance with said Uniform System of Accounts, otherwise determined in accordance with GAAP.

“ Long-Term Debt to Net Utility Plant Ratio ” means for any Member, the ratio obtained by dividing the amount of such Member’s Long-Term Debt by its Net Utility Plant, and expressing the quotient as a percentage.

“ March 2009 NPA ” has the meaning set forth in the recitals hereto.

“ Maximum Debtor Principal Amount ” means $50 million, or such higher amount permitted by Farmer Mac and communicated to National Rural in writing. In calculating the Maximum Debtor Principal Amount, any amounts of any Whole Loan Sales insured by a party other than Farmer Mac or its affiliates shall be excluded.

“ May 2009 NPA ” has the meaning set forth in the recitals hereto.

“ Member ” shall mean any Person who is a member of National Rural.

“ Modified Debt Service Coverage Ratio—Distribution ” of any Member, for any Completed Calendar Year of such Member, means the ratio determined by adding such Member’s Operating Margins, Non-Operating Margins—Interest, Interest Expense, and Depreciation and Amortization Expense for such year, and dividing the sum so obtained by the sum of all payments of principal and interest required to be made during such year on account of such Member’s Long-Term Debt (but in the event any portion of such Member’s Long-Term Debt is refinanced during such year the payments of principal and interest required to be made during such year in respect thereof shall be based (in lieu of actual payments thereon) upon the larger of (x) an annualization of such payments required to be made with respect to the refinancing debt during the portion of such year such refinancing debt is outstanding, and (y) the payments of principal and interest required to be made during the following year on account of such refinancing debt). For purposes of this definition of “Modified Debt Service Coverage Ratio—Distribution” and only for such purposes, (i) in computing Interest Expense, and payments of interest required to be made on account of Long-Term Debt, there shall be added, to the extent not otherwise included, an amount equal to thirty-three and one-third percent (33-1/3%) of the excess of the Restricted Rentals paid by such Member for such year over two percent (2%) of such Member’s Equity for such year, and (ii) in computing such Member’s Operating Margins, all cash received in respect of generation and transmission and other capital credits shall be included.

“ Modified Debt Service Coverage Ratio—G&T ” of any Member, for any Completed Calendar Year of such Member, means the ratio determined as follows: add (i) Operating Margins, (ii) Non-Operating Margins—Interest, (iii) Interest Expense, (iv) Depreciation and Amortization Expense, and (v) cash received in respect of generation and transmission and other capital credits, and divide the sum so obtained by the sum of all payments of Principal and Interest Expense required to be made during such calendar year; provided , however , that in the event that any amount of Long-Term Debt has been refinanced during such year, the payments of Principal and Interest Expense required to be made during such year on account of such refinanced amount of Long-Term Debt shall be based (in lieu of actual payments required to be made on such refinanced amount of Long-Term Debt) upon the larger of (i) an annualization of the payments required to be made with respect to the refinancing debt during the portion of such year such refinancing debt is outstanding or (ii) the payment of Principal and Interest Expense required to be made during the following year on account of such refinancing debt.

“ National Rural ” has the meaning set forth in the introductory paragraph hereof.

“ National Rural Notice ” and “ National Rural Order ” mean, respectively, a written notice or order signed in the name of National Rural by either its Chief Executive Officer or its Chief Financial Officer, and by any Vice President of National Rural, and delivered to the Collateral Agent and the Control Party.

“ Net Utility Plant ” means the amount constituting the total utility plant of the Member, less depreciation computed in accordance with Accounting Requirements.

“ Non-Operating Margins—Interest ” means the amount representing the interest component of non-operating margins of the Member computed pursuant to Accounting Requirements.

“ Note Purchase Agreement ” has the meaning set forth in the recitals hereto.

“ Notes ” has the meaning set forth in the recitals hereto.

“ Obligations ” means the due and punctual performance of the obligations of National Rural to make payments of principal, and interest on the Notes.

“ Officers’ Certificate ” means a certificate signed by any Vice President of National Rural, and delivered to the Control Party and/or the Collateral Agent, as applicable.

“ Operating Margins ” means the amount of patronage capital and operating margins of the Member computed pursuant to Accounting Requirements.

“ Original Note Purchase Agreements ” has the meaning set forth in the recitals hereto.

“ Original Notes ” has the meaning set forth in the recitals hereto.

“ Original Pledge Agreement ” has the meaning set forth in the recitals hereto.

“ Person ” means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“ Pledge Agreement ” means this Amended, Restated and Consolidated Pledge Agreement, as originally executed and as it may from time to time be amended, supplemented or otherwise modified from time to time pursuant to the applicable provisions hereof.

“ Pledged Amount ” on any date, means with respect to Eligible Securities, the aggregate principal amount of such Eligible Securities theretofore advanced thereon which remains unpaid on such date and pledged hereunder.

“ Pledged Collateral ” has the meaning set forth in the Granting Clause set forth prior to Article I of this Pledge Agreement.

“ Pledged Securities ” means at any time the Eligible Securities listed on Schedule A and/or Schedule B to the Certificate of Pledged Collateral most recently delivered. As of the date hereof, the Pledged Securities shall include all of the Eligible Securities listed on the Certificate of Pledged Collateral most recently delivered pursuant to each of the Original Pledge Agreements.

“ Principal ” means the amount of principal billed on account of Long-Term Debt of the Member computed pursuant to Accounting Requirements.

“ Proceeds ” has the meaning specified in Section 9-102 of the Uniform Commercial Code.

“ Purchaser ” has the meaning set forth in the introductory paragraph hereof.

“ Restricted Rentals ” means all rentals required to be paid under finance leases and charged to income, exclusive of any amounts paid under any such lease (whether or not designated therein as rental or additional rental) for maintenance or repairs, insurance, taxes, assessments, water rates or similar charges. For the purpose of this definition the term “finance lease” shall mean any lease having a rental term (including the term for which such lease may be renewed or extended at the option of the lessee) in excess of three (3) years and covering property having an initial cost in excess of $250,000 other than automobiles, trucks, trailers, tractors, other vehicles (including without limitation aircraft and ships), office, garage and warehouse space and office equipment (including without limitation computers).

“ RUS ” means the Rural Utilities Service of the United States Department of Agriculture, acting by and through the Administrator of the Rural Utilities Service, and including any successor agencies or departments.

“ Secured ” means the debt evidenced by the note or bond is secured by a valid lien in favor of National Rural on substantially all of the Eligible Member’s real and personal property, subject to standard permitted exceptions consistent with National Rural’s standard lending practices from time to time, which lien may be shared pari passu with the other lender or lenders identified in the applicable security documents.

“ Total Assets ” means an amount constituting the total assets of the Member computed pursuant to Accounting Requirements.

“ Total Exposure Amount ” on any date, means with respect to Eligible Securities, the aggregate principal amount of all notes or bonds of such Eligible Member (A) pledged hereunder, (B) pledged to secure any other notes or bonds issued by National Rural to Farmer Mac or any affiliate, or (C) sold by National Rural or any affiliate to Farmer Mac, any affiliate of Farmer Mac, or any trust whose beneficial ownership is owned or controlled by Farmer Mac or an affiliate or that issues pass-through securities guaranteed by Farmer Mac. In calculating the Total Exposure Amount, any amounts of any Whole Loan Sales insured by a party other than Farmer Mac or its affiliates shall be excluded.

“ Uniform Commercial Code ” means the Uniform Commercial Code as from time to time in effect in the District of Columbia.

“ Unsecured ” means the debt evidenced by the note or bond is not secured by a lien in favor of National Rural on substantially all of the Eligible Member’s real and personal property.

“ Vice President ” means any vice president of National Rural or Farmer Mac or the Purchaser, as applicable, whether or not designated by a number or a word or words added before or after the title “vice president”.

“ Whole Loan Sale ” means a loan by National Rural to an Eligible Member evidenced by a note payable to the order of National Rural, the outstanding principal amount of which has been sold by National Rural or any affiliate to Farmer Mac, any affiliate of Farmer Mac, or any trust whose beneficial ownership is owned or controlled by Farmer Mac or an affiliate or that issues pass-through securities guaranteed by Farmer Mac.

SECTION 1.02. Other Defined Terms; Principles of Construction . Capitalized terms used but not defined in this Pledge Agreement shall have the meanings given to them in the Note Purchase Agreement. Unless the context shall otherwise indicate, the terms defined in Section 1.01 hereof include the plural as well as the singular and the singular as well as the plural. The words “hereafter”, “herein”, “hereof”, “hereto” and “hereunder”, and words of similar import, refer to this Pledge Agreement as a whole. The descriptive headings of the various articles and sections of this Pledge Agreement were formulated and inserted for convenience only and shall not be deemed to affect the meaning or construction of the provisions hereof.

ARTICLE II

Provisions as to Pledged Collateral

SECTION 2.01. Holding of Pledged Securities.

(a) National Rural shall make available to the Control Party, within forty-five (45) days of a pledge of the Pledged Securities in connection with an advance (or for a longer period as National Rural and the Control Party agree), such back-up information as is reasonably necessary in order to allow the Control Party to confirm compliance of such Pledged Securities to the requisite criteria as outlined herein. Upon receipt of the back-up information, the Control Party shall have ninety (90) days to object in writing to the inclusion of any item of the Pledged Securities as part of the Pledged Collateral. If the Control Party reasonably determines that any of the Pledged Securities do not meet the criteria for Eligible Securities, then National Rural shall have forty-five (45) days in which to provide substitute collateral, and the timeline specified above for National Rural to make available back-up material and confirmation shall also apply as to the substituted collateral. Nothing in this Section 2.01(a) shall limit or otherwise affect the representations, warranties or covenants by National Rural in this Agreement or the Note Purchase Agreement.

(b) The Collateral Agent, on behalf of the Control Party, shall hold the Pledged Securities in the name of National Rural (or its nominee), endorsed or assigned in blank or in favor of the Collateral Agent. Upon occurrence of an Event of Default, the Collateral Agent, on behalf of the Control Party, shall have the right (in its sole and absolute discretion), to the extent a register is maintained therefor, to register the Pledged Securities in the Collateral Agent’s own name as pledgee, or in the name of the Collateral Agent’s nominee (as pledgee or as sub-agent) or to continue to hold the Pledged Securities in the name of National Rural, endorsed or assigned in blank or in favor of the Collateral Agent. Upon cessation of such Event of Default, the Collateral Agent shall take such action as is necessary to again cause the Pledged Securities to be registered in the name of National Rural (or its nominee).

SECTION 2.02. UCC Filings. National Rural shall prepare and file in the proper Uniform Commercial Code filing office in the District of Columbia (i) a financing statement recording the Collateral Agent’s interest in the Pledged Collateral and (ii) from time to time after the date hereof continuation statements or such other filings as are necessary to maintain the perfection of the Lien hereof on the Pledged Collateral.

SECTION 2.03. Withdrawal and Substitution of Pledged Collateral.

(a) Any part of the Pledged Collateral may be withdrawn by National Rural or substituted for other Eligible Securities by National Rural and shall be delivered to National Rural by the Collateral Agent upon National Rural Order at any time and from time to time, together with any other documents or instruments of transfer or assignment necessary to reassign to National Rural said Pledged Collateral and the interest of National Rural, provided the aggregate Allowable Amount of Pledged Collateral remaining after such withdrawal or substitution shall at least equal the aggregate principal amount of the Notes outstanding after such withdrawal or substitution, as shown by the Certificate of Pledged Collateral furnished to the Collateral Agent pursuant to Subsection (b)(i) of this Section.

(b) Prior to any such withdrawal or substitution, the Collateral Agent shall be furnished with the following instruments (with a copy to the Control Party):

(i) a Certificate of Pledged Collateral, dated as of the last day of the calendar month most recently ended at least ten (10) Business Days prior to such withdrawal or substitution (or a more recent date, at National Rural’s option), showing that immediately after such withdrawal or substitution the requirements of Subsection (a) of this Section will be satisfied; and

(ii) an Officers’ Certificate certifying that no Event of Default has occurred which has not been remedied.

Upon any such withdrawal or substitution, National Rural shall deliver any Eligible Securities to be substituted and the Collateral Agent shall execute any instruments of transfer or assignment specified in a National Rural Order as necessary to vest in National Rural any part of the Pledged Collateral withdrawn.

In case an Event of Default shall have occurred and be continuing, National Rural shall not withdraw or substitute any part of the Pledged Collateral.

SECTION 2.04. [Reserved.]

SECTION 2.05. Addition of Pledged Collateral. At any time, National Rural may pledge additional Eligible Securities under this Pledge Agreement by delivering such Pledged Collateral to the Collateral Agent, accompanied by a Certificate of Pledged Collateral specifying such additional collateral and dated as of the last day of the calendar month most recently ended at least ten (10) Business Days prior thereto (or a more recent date at National Rural’s option).

SECTION 2.06. Accompanying Documentation. Where Eligible Securities are delivered to the Collateral Agent under Section 2.01, 2.03 or Section 2.05, such securities shall be accompanied by the appropriate instruments of transfer executed in blank and in a form satisfactory to the Collateral Agent and by such other instruments and documents as the Collateral Agent may reasonably request. All other property delivered to the Collateral Agent under Section 2.01, 2.03 or Section 2.05 and comprising part of the Pledged Collateral shall be accompanied by proper instruments of assignment duly executed by National Rural and such other instruments or documents as the Collateral Agent may reasonably request.

SECTION 2.07. Renewal; Extension; Substitution. Unless and until an Event of Default shall have occurred and be continuing, National Rural may at any time renew or extend, subject to the Lien of this Pledge Agreement, any Pledged Security upon any terms or may accept in place of and in substitution for any such Pledged Security, another Eligible Security or Securities of the same issuer or of any successor thereto for at least the same unpaid principal amount, all as evidenced by a National Rural Order delivered to the Collateral Agent; provided , however , that in case of any substitution, Eligible Securities substituted as aforesaid shall be subject to the Lien of this Pledge Agreement as part of the Pledged Collateral and be held in the same manner as those for which they shall be substituted, and in the case of each substituted Eligible Security, National Rural shall provide an Officers’ Certificate certifying to the Collateral Agent that such substituted security satisfies the requirements of this Section. So long as no Event of Default shall have occurred and be continuing, the Collateral Agent, upon National Rural Order stating that no Event of Default shall have occurred and be continuing, shall execute any consent to any such renewal, extension or substitution as shall be specified in such National Rural Order.

SECTION 2.08. Voting Rights; Interest and Principal .

(a) Unless and until an Event of Default has occurred and is continuing, and the Control Party delivers to the Collateral Agent a Control Party Notice of Default suspending National Rural’s rights under this clause:

(i) National Rural shall be entitled to exercise any and all voting and/or other consensual rights and powers inuring to an owner of Pledged Securities or any part thereof provided that such rights and powers shall not be exercised in any manner inconsistent with the terms of the Note Purchase Agreement or this Pledge Agreement.

(ii) The Collateral Agent shall execute and deliver to National Rural, or cause to be executed and delivered to National Rural, all such proxies, powers of attorney and other instruments as National Rural may reasonably request for the purpose of enabling National Rural to exercise the voting and/or consensual rights and powers it is entitled to exercise pursuant to subparagraph (i) above.

(iii) National Rural shall be entitled to receive and retain any and all interest, principal and other distributions paid on or distributed in respect of the Pledged Securities; provided that any non-cash interest, principal or other distributions that would constitute Pledged Securities if pledged hereunder, and received in exchange for Pledged Securities or any part thereof pledged hereunder, or in redemption thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which such issuer of Pledged Securities may be a party or otherwise, shall be and become part of the Pledged Collateral, and, if received by National Rural, shall not be commingled by National Rural with any of its other funds or property but shall be held separate and apart therefrom, shall be held in trust for the benefit of the Collateral Agent and shall be forthwith delivered to the Collateral Agent in the same form as so received (with any necessary endorsement).

(b) If an Event of Default shall have occurred and be continuing, then, to the extent such rights are suspended by the applicable Control Party Notice of Default, all rights of National Rural to interest, principal or other distributions that National Rural is authorized to receive pursuant to paragraph (a)(iii) of this Section 2.08 shall cease, and all such suspended rights shall thereupon become vested in the Collateral Agent, which shall have the sole and exclusive right and authority to receive and retain such interest, principal or other distributions. All interest, principal or other distributions received by National Rural contrary to the provisions of this Section 2.08 shall be held in trust for the benefit of the Collateral Agent, shall be segregated from other property or funds of National Rural and shall be forthwith delivered to the Collateral Agent in the same form as so received (with any necessary endorsement). Any and all money and other property paid over to or received by the Collateral Agent pursuant to the provisions of this paragraph (b) shall be retained by the Collateral Agent in an account to be established by the Collateral Agent upon receipt of such money or other property and shall be applied in accordance with the provisions of Section 4.03 to the fullest extent permitted by applicable law. After all Events of Default have ceased, the Collateral Agent shall promptly repay to National Rural (without interest) all interest, principal or other distributions that National Rural would otherwise be permitted to retain pursuant to the terms of paragraph (a)(iii) of this Section 2.08 and that remain in such account.

(c) If an Event of Default shall have occurred and be continuing, then, to the extent such rights are suspended by the applicable Control Party Notice of Default, all rights of National Rural to exercise the voting and consensual rights and powers it is entitled to exercise pursuant to paragraph (a)(i) of this Section 2.08, and the obligations of the Collateral Agent under paragraph (a)(ii) of this Section 2.08, shall cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall have the sole and exclusive right and authority to exercise such voting and consensual rights and powers; provided that the Collateral Agent shall have the right from time to time during the existence of such Event of Default to permit National Rural to exercise such rights and powers.

SECTION 2.09. Protection of Title; Payment of Taxes; Liens, etc. National Rural will:

(a) duly and promptly pay and discharge, or cause to be paid and discharged, before they become delinquent, all taxes, assessments, governmental and other charges lawfully levied, assessed or imposed upon or against any of the Pledged Collateral, including the income or profits therefrom and the interests of the Collateral Agent in such Pledged Collateral;

(b) duly observe and conform to all valid requirements of any governmental authority imposed upon National Rural relative to any of the Pledged Collateral, and all covenants, terms and conditions under or upon which any part thereof is held;

(c) cause to be paid and discharged all lawful claims (including, without limitation, income taxes) which, if unpaid, might become a lien or charge upon Pledged Collateral; and

(d) do all things and take all actions necessary to keep the Lien of this Pledge Agreement a first and prior lien upon the Pledged Collateral and protect its title to the Pledged Collateral against loss by reason of any foreclosure or other proceeding to enforce any lien prior to or pari passu with the Lien of this Pledge Agreement.

Nothing contained in this Section shall require the payment of any such tax, assessment, claim, lien or charge or the compliance with any such requirement so long as the validity, application or amount thereof shall be contested in good faith; provided , however , that National Rural shall have set aside on its books such reserves (segregated to the extent required by generally accepted accounting principles) as shall be deemed adequate with respect thereto as determined by the Board of Directors of National Rural (or a committee thereof).

SECTION 2.10. Maintenance of Pledged Collateral. National Rural shall cause the Allowable Amount of Pledged Collateral held by the Collateral Agent at all times to be not less than 100% of the aggregate principal amount of the Notes outstanding.

SECTION 2.11. Representations, Warranties and Covenants. National Rural represents, warrants and covenants to the Collateral Agent, for the benefit of the Control Party, that from the time that Pledged Collateral is pledged hereunder, and for so long as such Pledged Collateral is required to remain pledged:

(a) except for the Lien hereof and any Lien consented to in writing by Farmer Mac or the Control Party, National Rural (i) is and will continue to be the direct owner, beneficially and of record, of the Pledged Securities from time to time pledged hereunder, (ii) holds and will continue to hold the same free and clear of all Liens, other than Liens created by this Pledge Agreement, (iii) will make no assignment, pledge, hypothecation or transfer of, or create or permit to exist any security interest in or other Lien on, the Pledged Collateral, other than Liens created by this Pledge Agreement and (iv) will defend its title or interest thereto or therein against any and all Liens (other than the Lien created by this Pledge Agreement), however arising, of all Persons whomsoever;

(b) except for restrictions and limitations imposed by the Note Purchase Agreement or securities laws generally, the Pledged Securities are and will continue to be freely transferable and assignable, and none of the Pledged Securities are or will be subject to any restriction of any nature that might prohibit, impair, delay or otherwise affect the pledge of such Pledged Securities hereunder, the sale or disposition thereof pursuant hereto or the exercise by the Collateral Agent of rights and remedies hereunder;

(c) National Rural has the power and authority to pledge the Pledged Collateral pledged by it hereunder in the manner hereby done or contemplated;

(d) no consent or approval of any governmental authority, any securities exchange or any other Person was or is necessary to the validity of the pledge effected hereby (other than such as have been obtained and are in full force and effect);

(e) by virtue of the execution and delivery by National Rural of this Pledge Agreement, when any Pledged Securities are delivered to the Collateral Agent in accordance with this Pledge Agreement, the Collateral Agent will obtain a legal and valid Lien upon and security interest in such Pledged Securities as security for the payment and performance of the Obligations;

(f) the Allowable Amount of Pledged Collateral from Class B Members does not exceed $1 billion; and

(g) the Allowable Amount of all Pledged Collateral that is Unsecured does not exceed twenty percent (20%) of the Allowable Amount of all Pledged Collateral.

SECTION 2.12. Further Assurances. National Rural will execute and deliver, or cause to be executed and delivered, all such additional instruments and do, or cause to be done, all such additional acts as (a) may be necessary or proper, consistent with the Granting Clause hereof to carry out the purposes of this Pledge Agreement and to make subject to the Lien hereof any property intended so to be subject or (b) may be necessary or proper to transfer to any successor the estate, powers, instruments and funds held hereunder and to confirm the Lien of this Pledge Agreement. National Rural will also cause to be filed, registered or recorded any instruments of conveyance, transfer, assignment or further assurance in all offices in which such filing, registering or recording is necessary to the validity thereof or to give notice thereof.

ARTICLE III

[Reserved]

ARTICLE IV

Remedies

SECTION 4.01. Events of Default. “ Event of Default ”, wherever used herein, means any “Event of Default” as defined in Section 7.01(a) of the Note Purchase Agreement, provided that, for the purposes of this Pledge Agreement:

(a) the Collateral Agent shall not be required to recognize that an Event of Default exists before such time as the Collateral Agent receives a Control Party Notice or National Rural Notice stating that an Event of Default exists and specifying the particulars of such default in reasonable detail; and

(b) the Collateral Agent shall not be required to recognize that an Event of Default has ceased until (i) such time as the Collateral Agent receives a Control Party Notice stipulating that such event has ceased to exist; or (ii) 30 days after receipt by the Collateral Agent of a National Rural Notice stipulating that such event has ceased to exist, provided that the Collateral Agent does not receive a Control Party Notice within such timeframe disputing the cessation of such Event of Default, and further provided that no additional Control Party Notice of Default shall have been received in respect of any other subsisting Event(s) of Default. Upon receipt of any National Rural Notice under subparagraph (ii) of this Subsection, the Collateral Agent shall provide a copy of such National Rural Notice to the Control Party.

SECTION 4.02. Remedies upon Default. If an Event of Default shall have occurred and be continuing, the Control Party may issue a notice (a “ Control Party Notice of Default ”), which may be combined with the notice provided under Section 4.01(b), suspending the rights of National Rural under Section 2.08 in part without suspending all such rights (as specified by the Control Party in its sole and absolute discretion) without waiving or otherwise affecting the Control Party’s rights to give additional Control Party Notices of Default from time to time suspending other rights under Section 2.08 so long as an Event of Default has occurred and is continuing. Subject to paragraph (b) of this Section 4.02, upon cessation of an Event of Default, all rights of National Rural suspended under the applicable Control Party Notice of Default shall revest in National Rural.

(a) Upon the occurrence of an Event of Default, the Collateral Agent shall, for the benefit and at the direction of the Control Party, have the right to exercise any and all rights afforded to a secured party under the Uniform Commercial Code or other applicable law. Without limiting the generality of the foregoing, National Rural agrees that the Collateral Agent shall have the right, but only if so instructed by a Control Party Order and subject to the requirements of applicable law and the Collateral Agent’s right (in its sole and absolute discretion) to receive indemnification or other reasonable assurances that its costs and expenses in connection therewith will be paid, to sell or otherwise dispose of all or any part of the Pledged Collateral at a public or private sale or at any broker’s board or on any securities exchange, for cash, upon credit or for future delivery as the Collateral Agent shall deem appropriate. The Collateral Agent shall be authorized at any such sale of securities (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Pledged Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Collateral Agent shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Pledged Collateral so sold. Each such purchaser at any sale of Pledged Collateral shall hold the property sold absolutely, free from any claim or right on the part of National Rural, and National Rural hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which National Rural now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.

(b) The Collateral Agent shall give National Rural ten (10) days’ written notice (which National Rural agrees is reasonable notice within the meaning of Section 9-611 of the Uniform Commercial Code or its equivalent in other jurisdictions) of the Collateral Agent’s intention to make any sale of Pledged Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker’s board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix and state in the notice (if any) of such sale. At any such sale, the Pledged Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may (in its sole and absolute discretion) determine. The Collateral Agent shall not be obligated to make any sale of any Pledged Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Pledged Collateral shall have been given. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Pledged Collateral is made on credit or for future delivery, the Pledged Collateral so sold may be retained by the Collateral Agent until the sale price is paid by the purchaser or purchasers thereof, but the Collateral Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Collateral so sold and, in case of any such failure, such Pledged Collateral may be sold again upon like notice. At any public (or, to the extent permitted by law, private) sale made pursuant to this Pledge Agreement, the Control Party may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay, valuation or appraisal on the part of National Rural (all said rights being also hereby waived and released to the extent permitted by law), the Pledged Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to the Control Party from National Rural as a credit against the purchase price, and the Control Party may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to Pledged Collateral therefor. For purposes hereof, a written agreement to purchase the Pledged Collateral or any portion thereof shall be treated as a sale thereof; the Collateral Agent shall be free to carry out such sale pursuant to such agreement and National Rural shall not be entitled to the return of the Pledged Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Collateral Agent shall have entered into such an agreement all Events of Default shall have been remedied and the Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose this Pledge Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. Any sale pursuant to the provisions of this Section 4.02 shall be deemed to conform to the commercially reasonable standards as provided in Section 9-610(b) of the Uniform Commercial Code or its equivalent in other jurisdictions.

SECTION 4.03. Application of Proceeds. The Collateral Agent shall apply the proceeds of any collection or sale of Pledged Collateral, including any Pledged Collateral consisting of cash, as follows to the fullest extent permitted by applicable law:

FIRST, to the payment of all reasonable costs and expenses incurred by the Collateral Agent in connection with or reasonably related or reasonably incidental to such collection or sale or otherwise in connection with or related or incidental to this Pledge Agreement or any of the Obligations, including all court costs and the reasonable fees and expenses of its agents and legal counsel, the repayment of all advances made by the Collateral Agent (in its sole discretion) hereunder on behalf of National Rural and any other reasonable costs or expenses incurred in connection with the exercise of any right or remedy hereunder;

SECOND, to the payment to the Control Party in full of the Obligations; such payment to be for an amount certified in a Control Party Notice delivered to the Collateral Agent as being the amount due and owing to the Control Party under the Obligations; and

THIRD, to National Rural, its successors or assigns, or as a court of competent jurisdiction may otherwise direct.

Upon any sale of the Pledged Collateral by the Collateral Agent (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the Collateral Agent or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Pledged Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication thereof.

SECTION 4.04. Securities Act . In view of the position of National Rural in relation to the Pledged Collateral, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being called the “ Federal Securities Laws ”) with respect to any disposition of the Pledged Collateral permitted hereunder. National Rural understands that compliance with the Federal Securities Laws might very strictly limit the course of conduct of the Collateral Agent if the Collateral Agent were to attempt to dispose of all or any part of the Pledged Collateral, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Collateral could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Collateral Agent in any attempt to dispose of all or part of the Pledged Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. National Rural recognizes that in light of such restrictions and limitations the Collateral Agent may, with respect to any sale of the Pledged Collateral, limit the purchasers to those who will agree, among other things, to acquire such Pledged Collateral for their own account, for investment, and not with a view to the distribution or resale thereof. National Rural acknowledges and agrees that in light of such restrictions and limitations, the Collateral Agent, in its sole and absolute discretion (a) may proceed to make such a sale whether or not a registration statement for the purpose of registering such Pledged Collateral or part thereof shall have been filed under the Federal Securities Laws and (b) may approach and negotiate with a single potential purchaser to effect such sale. National Rural acknowledges and agrees that any such sale might result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions. In the event of any such sale, the Collateral Agent shall incur no responsibility or liability for selling all or any part of the Pledged Collateral at a price that the Collateral Agent, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more than a single purchaser were approached. The provisions of this Section 4.04 will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Collateral Agent sells.

ARTICLE V

The Collateral Agent

SECTION 5.01. Certain Duties and Responsibilities.

(a) At all times under this Pledge Agreement:

(i) the Collateral Agent undertakes to perform such duties and only such duties as are specifically set forth in this Pledge Agreement, and no implied covenants or obligations shall be read into this Pledge Agreement against the Collateral Agent; and

(ii) in the absence of bad faith on its part, the Collateral Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Collateral Agent and substantially conforming to the requirements of this Pledge Agreement; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Collateral Agent the Collateral Agent shall be under a duty to examine the same to determine whether or not they substantially conform to the requirements of this Pledge Agreement.

(b) No provision of this Pledge Agreement shall be construed to relieve the Collateral Agent from liability for its own grossly negligent action, its own grossly negligent failure to act, or its own willful misconduct, except that:

(i) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section;

(ii) the Collateral Agent shall not be liable for any error of judgment made in good faith, unless it shall be proved that the Collateral Agent was grossly negligent in ascertaining the pertinent facts; and

(iii) no provision of this Pledge Agreement shall require the Collateral Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

(c) Whether or not therein expressly so provided, every provision of this Pledge Agreement relating to the conduct or affecting the liability of or affording protection to the Collateral Agent shall be subject to the provisions of this Section.

SECTION 5.02. Certain Rights of Collateral Agent. Except as otherwise provided in Section 5.01:

(a) the Collateral Agent may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b) any request or direction of National Rural mentioned herein shall be sufficiently evidenced by a National Rural Notice or National Rural Order;

(c) any request or direction of the Control Party mentioned herein shall be sufficiently evidenced by a Control Party Notice or Control Party Order;

(d) whenever in the administration of this Pledge Agreement the Collateral Agent shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Collateral Agent (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate in the case of National Rural, and a certificate signed by any Vice President of the Control Party in the case of the Control Party;

(e) the Collateral Agent may consult with counsel and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(f) the Collateral Agent shall be under no obligation to exercise any of the rights or powers vested in it by this Pledge Agreement at the request or direction of either National Rural or the Control Party pursuant to this Pledge Agreement, unless such party shall have offered to the Collateral Agent reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(g) the Collateral Agent shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, or to recompute, verify, reclassify or recalculate any information contained therein, but the Collateral Agent, in its sole and absolute discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Collateral Agent shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of National Rural, personally or by agent or attorney;

(h) the Collateral Agent may execute any of the powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Collateral Agent shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder;

(i) unless explicitly stated herein to the contrary, the Collateral Agent shall have no duty to inquire as to the performance of National Rural’s covenants herein. In addition, the Collateral Agent shall not be deemed to have knowledge of any Event of Default unless the Collateral Agent has received a Control Party Notice in accordance with Section 4.01(a), and shall not be deemed to have knowledge of the cessation of the same until such time as it receives a National Rural Notice in accordance with Section 4.01(b); and

(j) unless explicitly stated herein to the contrary, the Collateral Agent shall have no obligation to take any action with respect to any Event of Default until it has received a Control Party Notice applicable to such event in accordance with Section 4.01(a), and the Collateral Agent shall have no liability for any action or inaction taken, suffered or omitted in respect of any such event by it prior to such time as the applicable Control Party Notice is delivered. Similarly, the Collateral Agent shall have no obligation to take any action with respect to the cessation of an Event of Default until it has received a National Rural Notice applicable to such event in accordance in accordance with Section 4.01(b), and the Collateral Agent shall have no liability for any action or inaction taken, suffered or omitted in respect of any such event by it prior to such time as the applicable National Rural Notice is delivered.

SECTION 5.03. Money Held by Collateral Agent. Money held by the Collateral Agent hereunder need not be segregated from other funds except to the extent required by law. The Collateral Agent shall have no liability to pay interest on or (except as expressly provided herein) invest any such moneys.

SECTION 5.04. Compensation and Reimbursement.

(a) National Rural agrees:

(i) to pay to the Collateral Agent from time to time such reasonable compensation for all services rendered by it hereunder as shall have been set forth in an agreement signed by National Rural;

(ii) except as otherwise expressly provided herein, to reimburse the Collateral Agent upon its request for all reasonable expenses, out-of-pocket costs, disbursements and advances incurred or made by the Collateral Agent in accordance with any provision of this Pledge Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except to the extent any such expense, disbursement or advance may be attributable to its gross negligence or bad faith; and

(iii) to indemnify the Collateral Agent for, and to defend and hold it harmless against, any loss, liability or expense incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Pledge Agreement or the performance of its duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent such loss, liability or expense may be attributable to its gross negligence or bad faith; provided , however , that National Rural shall have no liability under this clause for any settlement of any litigation or other dispute effected without the prior written consent of National Rural (such consent not to be unreasonably withheld).

(b) Any such amounts payable as provided hereunder shall be additional Obligations secured by the Lien hereof. The provisions of this Section 5.04 shall remain operative and in full force and effect regardless of the termination of this Pledge Agreement or the Note Purchase Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Obligations, the invalidity or unenforceability of any term or provision of this Pledge Agreement or the Note Purchase Agreement, or any investigation made by or on behalf of the Collateral Agent or the Control Party. All amounts due under this Section 5.04 shall be payable on written demand therefor.

SECTION 5.05. Corporate Collateral Agent Required; Eligibility. There shall at all times be a Collateral Agent hereunder which shall be a corporation or association organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Neither National Rural nor any Person directly or indirectly controlling, controlled by or under common control with National Rural shall serve as Collateral Agent hereunder. If at any time the Collateral Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

SECTION 5.06. Resignation and Removal; Appointment of Successor.

(a) No resignation or removal of the Collateral Agent and no appointment of a successor Collateral Agent pursuant to this Article shall become effective until the acceptance of appointment by the successor Collateral Agent under Section 5.07.

(b) The Collateral Agent may resign at any time by giving written notice thereof to National Rural. If an instrument of acceptance by a successor Collateral Agent shall not have been delivered to the Collateral Agent within 30 days after the giving of such notice of resignation, the resigning Collateral Agent may petition any court of competent jurisdiction for the appointment of a successor Collateral Agent.

(i) except if an Event of Default has occurred and is continuing, National Rural, in its sole and absolute discretion, elects to remove the Collateral Agent; or

(ii) the Collateral Agent shall cease to be eligible under Section 5.05 or shall become incapable of acting or shall be adjudged bankrupt or insolvent or a receiver of the Collateral Agent or of its property shall be appointed or any public officer shall take charge or control of the Collateral Agent or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, National Rural may remove the Collateral Agent by delivery of a National Rural Order to that effect.

(d) If the Collateral Agent shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Collateral Agent for any cause, National Rural shall promptly appoint a successor Collateral Agent by delivering a National Rural Notice to the retiring Collateral Agent, the successor Collateral Agent and the Control Party to such effect.

SECTION 5.07. Acceptance of Appointment by Successor. Every successor Collateral Agent appointed hereunder shall execute, acknowledge and deliver to National Rural, the Control Party and to the retiring Collateral Agent an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Collateral Agent shall become effective and such successor Collateral Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Collateral Agent; but, on request of National Rural, the Control Party or the successor Collateral Agent, such retiring Collateral Agent shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Collateral Agent all the rights, powers and trusts of the retiring Collateral Agent, and shall duly assign, transfer and deliver to such successor Collateral Agent all property and money held by such retiring Collateral Agent hereunder, subject nevertheless to its Lien, if any, provided for in Section 5.04. Upon request of any such successor Collateral Agent, National Rural shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Collateral Agent all such rights, powers and trusts.

No successor Collateral Agent shall accept its appointment unless at the time of such acceptance such successor Collateral Agent shall be eligible under Section 5.05 hereof.

SECTION 5.08. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Collateral Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Collateral Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Collateral Agent, shall be the successor of the Collateral Agent hereunder, provided such corporation shall be eligible under Section 5.05 hereof without the execution or filing of any paper or any further act on the part of any of the parties hereto.

ARTICLE VI

Miscellaneous

SECTION 6.01. Notices. All notices and other communications hereunder to be made to any party shall be in writing and shall be addressed as specified in Schedule II attached hereto as appropriate. The address, telephone number, or facsimile number for any party may be changed at any time and from time to time upon written notice given by such changing party to the other parties hereto. A properly addressed notice or other communication shall be deemed to have been delivered at the time it is sent by facsimile (fax) transmission to the party or parties to which it is given. Certain notices or other communications may be sent via electronic mail to one or more email addresses provided specifically for receiving such notice or other communication, provided that the receiving party (i) has provided such email address or addresses in writing to the sending party in advance of such notice or communication and (ii) has indicated to the sending party the type or nature of notice or communication which may be appropriately sent in such manner.

All National Rural Notices and National Rural Orders delivered to the Collateral Agent shall be contemporaneously copied to the Control Party by National Rural; all Control Party Notices and Control Party Orders delivered to the Collateral Agent shall be contemporaneously copied by Farmer Mac to National Rural; and all Collateral Agent notices delivered to either National Rural or Farmer Mac shall be contemporaneously copied to the other such party by the Collateral Agent.

SECTION 6.02. Waivers; Amendment.

(a) No failure or delay by a party in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of each party hereunder are cumulative and are not exclusive of any rights or remedies that such party would otherwise have. No waiver of any provision of this Pledge Agreement or consent to any departure by any party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section 6.02, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any party in any case shall entitle any party to any other or further notice or demand in similar or other circumstances.

(b) Neither this Pledge Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by National Rural, the Collateral Agent, the Purchaser and Farmer Mac.

SECTION 6.03. Successors and Assigns. Whenever in this Pledge Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of National Rural, the Collateral Agent, the Purchaser, the Control Party or Farmer Mac that are contained in this Pledge Agreement shall bind and inure to the benefit of their respective successors and assigns.

SECTION 6.04. Counterparts; Effectiveness. This Pledge Agreement may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute a single contract. Delivery of an executed signature page to this Pledge Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Pledge Agreement.

SECTION 6.05. Severability. Any provision of this Pledge Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 6.06. GOVERNING LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE UNITED STATES OF AMERICA, TO THE EXTENT APPLICABLE, AND OTHERWISE THE LAWS OF THE STATE OF NEW YORK.

SECTION 6.07. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS PLEDGE AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.07.

SECTION 6.08. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Pledge Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Pledge Agreement.

SECTION 6.09. Security Interest Absolute. All rights of the Collateral Agent and/or the Control Party hereunder, the grant of a security interest in the Pledged Collateral and all obligations of National Rural hereunder shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Note Purchase Agreement, any Note, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Note Purchase Agreement, any Note or any other agreement or instrument, (c) any exchange, release or non-perfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from any guarantee, securing or guaranteeing all or any of the Obligations, or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, National Rural in respect of the Obligations or this Pledge Agreement.

SECTION 6.10. Termination or Release.

(a) This Pledge Agreement shall terminate on the date when the Obligations have been indefeasibly paid in full, and at such time the Lien hereof shall be released.

(b) Upon any withdrawal, substitution or other disposal by National Rural of any Pledged Collateral that is permitted by the terms of this Pledge Agreement, or upon the effectiveness of any written consent to the release of the security interest granted hereby in any Pledged Collateral, the Lien hereof securing such Pledged Collateral shall be automatically released.

(c) In connection with any termination or release pursuant to paragraph (a) or (b) the Collateral Agent shall deliver to National Rural the Pledged Collateral and shall execute and deliver to National Rural, at National Rural’s expense, all documents that National Rural shall reasonably request to evidence such termination or release. Any execution and delivery of documents pursuant to this Section 6.10 shall be without recourse to or warranty by the Collateral Agent.

SECTION 6.11. Collateral Agent Appointed Attorney-in-Fact. National Rural hereby appoints the Collateral Agent the attorney-in-fact of National Rural for the purpose of, upon the occurrence and during the continuance of an Event of Default, carrying out the provisions of this Pledge Agreement with respect to the Pledged Collateral and taking any action and executing any instrument that the Collateral Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest but is subject nevertheless to the terms and conditions of this Pledge Agreement. Without limiting the generality of the foregoing, the Collateral Agent shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in the Collateral Agent’s name or in the name of National Rural (a) to receive, endorse, assign and/or deliver any and all notes, acceptances, checks, drafts, money orders or other evidences of payment relating to the Pledged Collateral or any part thereof; (b) to demand, collect, receive payment of, give receipt for and give discharges and releases of all or any of the Pledged Collateral; (c) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect or otherwise realize on all or any of the Pledged Collateral or to enforce any rights in respect of any Pledged Collateral; (d) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating to all or any of the Pledged Collateral; (e) to notify, or to require National Rural to notify, obligors under Pledged Securities to make payment directly to the Collateral Agent; and (f) subject to the second sentence of Section 4.02(a), to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Pledged Collateral, and to do all other acts and things necessary to carry out the purposes of this Pledge Agreement, as fully and completely as though the Collateral Agent were the absolute owner of the Pledged Collateral for all purposes; provided that nothing herein contained shall be construed as requiring or obligating the Collateral Agent to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent, or to present or file any claim or notice, or to take any action with respect to the Pledged Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby. The Collateral Agent and the Control Party shall be accountable only for amounts actually received as a result of the exercise of the powers granted to them herein, and neither they nor their officers, directors, employees or agents shall be responsible to National Rural for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed, all as of the day and year first above written.

FARMER MAC MORTGAGE SECURITIES CORPORATION

By	/s/ Jerome G. Oslick
	Name: Jerome G. Oslick
	Title: Vice President

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

By	/s/ Timothy L. Buzby
	Name: Timothy L. Buzby
	Title: Senior Vice President – Chief Financial Officer

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

By	/s/ Richard Larochelle
	Name: Richard Larochelle
	Title: SVP, Corporate Relations

U.S. BANK NATIONAL ASSOCIATION, as Collateral Agent

By	/s/ Diane L. Reynolds
	Name: Diane L. Reynolds
	Title: Vice President

SCHEDULE I

PLEDGE AGREEMENT

ADDITIONAL CRITERIA FOR ELIGIBLE SECURITIES 1

Criteria for Eligible Security of Class A Eligible Member : Each Class A Eligible Member must satisfy the following criteria only on the date of the pledge of such Eligible Security:

Long-Term Debt to Net Utility Plant Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, does not exceed 90%.

Modified Debt Service Coverage Ratio—Distribution, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 1.35.

Equity to Total Assets Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 20%.

The Eligible Security that is Secured has a Facility Rating by National Rural of “4.9” or lower (or, for an Eligible Security that is Unsecured, a Facility Rating by National Rural of “4.4” or lower).

Criteria for Eligible Security of Class B Eligible Member : Each Class B Eligible Member must satisfy the following criteria only on the date of the pledge of such Eligible Security:

Equity to Total Capitalization Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 25%.

Modified Debt Service Coverage Ratio—G&T, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 1.10.

Equity to Total Assets Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 10%.

1 Upon notice to the Collateral Agent, the criteria set forth on this Schedule 1 may be modified as mutually agreed upon in writing by Farmer Mac and National Rural. The criteria set forth on this Schedule I shall be required to be satisfied only as of the date of pledge of (1) any Pledged Securities that is being pledged for a new advance or (2) any Pledged Securities that is being pledged for an existing advance which is in substitution of, or in addition to, existing collateral, and such criteria shall not be required to be satisfied with respect to Eligible Securities after such date.

SCHEDULE I

PLEDGE AGREEMENT

SCHEDULE II

PLEDGE AGREEMENT

Addresses for Notices

The addresses referred to in Section 6.01 hereof, for purposes of delivering communications and notices, are as follows:

If to the Purchaser prior to October 1, 2011:

Farmer Mac Mortgage Securities Corporation

1133 21 st Street N.W., Suite 600

Washington, DC 20036

Fax: 202-872-7713

Attn: Jerome G. Oslick, Vice President

If to the Purchaser on or after October 1, 2011:

Farmer Mac Mortgage Securities Corporation

1999 K Street, N.W., 4 th Floor

Washington, DC 20006

Fax: 202-872-7713

Attn: Jerome G. Oslick, Vice President

If to Farmer Mac prior to October 1, 2011:

Federal Agricultural Mortgage Corporation

1133 21st Street, N.W., Suite 600

Washington, DC 20036

Fax: 202-872-7713

Attn: Philip J. Leigh, Manager – Rural Utilities Lending

With a copy to:

Federal Agricultural Mortgage Corporation

1133 21st Street, N.W., Suite 600

Washington, DC 20036

Fax: 202-872-7713

Attn: Stephen P. Mullery, Deputy General Counsel

SCHEDULE II

PLEDGE AGREEMENT

If to Farmer Mac on or after October 1, 2011:

Federal Agricultural Mortgage Corporation

1999 K Street, N.W., 4 th Floor

Washington, DC 20006

Fax: 202-872-7713

Attn: Philip J. Leigh, Manager – Rural Utilities Lending

With a copy to:

Federal Agricultural Mortgage Corporation

1999 K Street, N.W., 4 th Floor

Washington, DC 20006

Fax: 202-872-7713

Attn: Stephen P. Mullery, Deputy General Counsel

If to National Rural:

National Rural Utilities Cooperative Finance Corporation

2201 Cooperative Way

Herndon, VA 20171-3025

Telephone: 703-709-6718

Fax: 703-709-6779

Attn: Andrew Don, Senior Vice President & Treasurer

With a copy to:

National Rural Utilities Cooperative Finance Corporation

2201 Cooperative Way

Herndon, VA 20171-3025

Telephone: 703-709-6712

Fax: 703-709-6811

Attn: John J. List, Esq., Senior Vice President & General Counsel

SCHEDULE II

PLEDGE AGREEMENT

If to the Collateral Agent:

U.S. Bank National Association

100 Wall Street

Suite 1600

New York, NY 10005-3701

Telephone: (212) 361-2893

Fax: (212) 509-3384

Attn: Beverly A. Freeney

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AGREEMENT

DATED AS OF MARCH 24, 2011

CERTIFICATE OF PLEDGED COLLATERAL FILED WITH

U.S. BANK NATIONAL ASSOCIATION, Collateral Agent

________________, Chief Executive Officer (or Chief Financial Officer, or Treasurer, or Controller) and ____________________, Vice-President, respectively, of National Rural Utilities Cooperative Finance Corporation, hereby certify to the Control Party and the Collateral Agent under the above-mentioned Amended, Restated and Consolidated Pledge Agreement as amended to the date hereof (herein called the “Pledge Agreement”) as follows:

1.	The Pledged Amount of Pledged Collateral certified hereby, remaining on deposit with the Collateral Agent, as shown on Schedule A hereto, is	$

2.	The Pledged Amount of Pledged Collateral certified hereby, being deposited as shown on Schedule B hereto, is	$

3.	The cumulative amount excluded from the Pledged Amount on Schedule A and Schedule B based on the Maximum Debtor Principal Amount is	$

4.	The Allowable Amount of Pledged Collateral (the sum of items 1 and 2 minus 3) is	$

5.	The aggregate principal amount of the Note(s) outstanding at the date hereof is	$

6.	The aggregate amount, if any, of the Note(s) to be issued on the basis of this Certificate is	$

7.	The sum of amounts in items 5 and 6 is	$

8.	The aggregate amount by which the Allowable Amount of Pledged Collateral exceeds the aggregate principal amount of the Note(s) outstanding (item 4 minus item 7) is	$

ANNEX A

PLEDGE AGREEMENT

9.	(a) The Allowable Amount of Pledged Collateral which is included in item 4 above from Class B Members does not exceed $1 billion.

	(b) The Allowable Amount of Pledged Collateral that is Unsecured does not exceed 20% of the Allowable Amount of Pledged Collateral which is included in item 4 above.

10.	To the knowledge of the undersigned, each Eligible Security from a Class A Member, the Pledged Amount of which is included in item 2, satisfies the following criteria on the date of this Certificate: (1) Long-Term Debt to Net Utility Plant Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, does not exceed 90%; (2) Modified Debt Service Coverage Ratio—Distribution, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 1.35; (3) Equity to Total Assets Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 20%; and (4) the Eligible Security that is Secured has a Facility Rating by National Rural of “4.9” or lower (or, for an Eligible Security that is Unsecured, a Facility Rating by National Rural of “4.4” or lower).

ANNEX A

PLEDGE AGREEMENT

11.	To the knowledge of the undersigned, each Eligible Security from a Class B Member, the Pledged Amount of which is included in item 2, satisfies the following criteria on the date of this Certificate: (1) Equity to Total Capitalization Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 25%; (2) Modified Debt Service Coverage Ratio—G&T, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 1.10; (3) Equity to Total Assets Ratio, as the average ratio of the most recent three full calendar years for which financial information is available, is greater than or equal to 10%; and (4) the Eligible Security that is Secured has a Facility Rating by National Rural of “4.9” or lower (or, for an Eligible Security that is Unsecured, a Facility Rating by National Rural of “4.4” or lower).

12.	So far as is known to the undersigned, no Event of Default exists.

13.	To the extent an Eligible Security listed on Schedule A or Schedule B has an outstanding principal amount of more than the Maximum Debtor Principal Amount, the Allowable Amount of Pledged Collateral set forth in item 4 above reflects only the Maximum Debtor Principal Amount with respect to such Eligible Security, with any excess above the Maximum Debtor Principal Amount reflected in item 3 above.

14.	Each Eligible Member whose notes are Pledged Securities has received or is eligible to receive a loan or commitment for a loan from RUS or any successor agency.

All initially capitalized terms used but not defined herein shall have the meanings given such terms in the Pledge Agreement.

Dated: _____________________

OF NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION

ANNEX A

PLEDGE AGREEMENT

PLEDGED SECURITIES ON DEPOSIT

SCHEDULE A TO CERTIFICATE OF PLEDGED COLLATERAL

DATED

Eligible Securities		Name of Issuer		Pledged Amount (Item 1)
Pledged Securities (Here List Securities)

ANNEX A

PLEDGE AGREEMENT

PLEDGED SECURITIES BEING DEPOSITED

SCHEDULE B TO CERTIFICATE OF PLEDGED COLLATERAL

DATED

Eligible Securities		Name of Issuer		Pledged Amount (Item 2)
Pledged Securities (Here List Securities)

Federal Agricultural Mortgage Corporation		Employee

By:	/s/ Lowell Junkins	/s/ Michael A. Gerber
	Chairman	Michael A. Gerber

			Page
RECITALS			1

ARTICLE I DEFINITIONS			2
	Section 1.01	Definitions	2
	Section 1.02	Principles of Construction	4

ARTICLE II PURCHASE OF NOTES			5
	Section 2.01	Issuance of Notes	5
	Section 2.02	Interest Rates and Payment	5
	Section 2.03	Maturity	6

ARTICLE III CONDITIONS PRECEDENT			7
	Section 3.01	Conditions Precedent to the Purchase of Each Note	7
	Section 3.02	Certificate of Pledged Collateral	8

ARTICLE IV REPORTING REQUIREMENTS			8
	Section 4.01	Annual Reporting Requirements	8
	Section 4.02	Additional Reporting Requirements	8
	Section 4.03	Default Notices; Material Change to Risk Rating Methodology	9

ARTICLE V REPRESENTATIONS OF THE PARTIES			9
	Section 5.01	Representations of Farmer Mac and the Purchaser	9
	Section 5.02	Representations of National Rural	10

ARTICLE VI SECURITY AND COLLATERAL			11
	Section 6.01	Security and Collateral	11

ARTICLE VII EVENTS OF DEFAULT			12
	Section 7.01	Events Of Default	12
	Section 7.02	Acceleration	12
	Section 7.03	Remedies Not Exclusive	13

ARTICLE VIII MISCELLANEOUS			13
	Section 8.01	GOVERNING LAW	13
	Section 8.02	WAIVER OF JURY TRIAL	13
	Section 8.03	Notices	13
	Section 8.04	Benefit Of Agreement	13
	Section 8.05	Entire Agreement	14
	Section 8.06	Amendments And Waivers	14
	Section 8.07	Counterparts	14
	Section 8.08	Termination Of Agreement	14
	Section 8.09	Survival	14
	Section 8.10	Severability	14

ARTICLE IX GUARANTEE			15
	Section 9.01	Guarantee	15
	Section 9.02	Control By The Guarantor	15

FARMER MAC MORTGAGE SECURITIES CORPORATION

By:	/s/ Jerome G. Oslick
Name:	Jerome G. Oslick
Title:	Vice President

Very truly yours,

FARMER MAC MORTGAGE SECURITIES CORPORATION

By:	/s/ Jerome G. Oslick
Name: Jerome G. Oslick
Title: Vice President

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

By:	/s/ Timothy L. Buzby
Name: Timothy L. Buzby
Title: Senior Vice President – Chief Financial Officer

ACKNOWLEDGED AND AGREED:

NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION

By:	/s/ Richard Larochelle
Name: Richard Larochelle
Title: SVP, Corporate Relations