Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

2014 Q3 10-Q

As filed with the Securities and Exchange Commission on November 10, 2014

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

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)

1999 K Street, N.W., 4th Floor, Washington, D.C.		20006
(Address of principal executive offices)		(Zip code)

(202) 872-7700

(Registrant's telephone number, including area code)

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

Yes x No o

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

Yes x No o

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



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

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

Yes o No x

As of November 3, 2014, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock and 9,404,710 shares of Class C non-voting common stock.

Table of Contents



PART I - Financial Information		3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
	1. Accounting Policies	9
	2. Investment Securities	15
	3. Farmer Mac Guaranteed Securities and USDA Securities	19
	4. Financial Derivatives	21
	5. Loans and Allowance for Losses	24
	6. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments	37
	7. Equity	38
	8. Fair Value Disclosures	41
	9. Business Segment Reporting	50
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	55
	Forward-Looking Statements	55
	Critical Accounting Policies and Estimates	57
	Overview	57
	Cash Management and Liquidity Initiative	60
	Segment Reporting	63
	Results of Operations	63
	Outlook	80
	Balance Sheet Review	82
	Off-Balance Sheet Arrangements	83
	Risk Management	84
	Liquidity and Capital Resources	100
	Regulatory Matters	103
	Other Matters	103
	Supplemental Information	104
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	109
Item 4.	Controls and Procedures	109
PART II - Other Information		110
Item 1.	Legal Proceedings	110
Item 1A.	Risk Factors	110
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	110
Item 3.	Defaults Upon Senior Securities	110
Item 4.	Mine Safety Disclosures	110
Item 5.	Other Information	110
Item 6.	Exhibits	111
Signatures		112

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)



	As of
	September 30, 2014			December 31, 2013
	(in thousands)
Assets:
Cash and cash equivalents	$	627,670		$	749,313
Securities purchased under agreements to resell	1,630,427			—
Investment securities:
Available-for-sale, at fair value	1,984,983			2,483,147
Trading, at fair value	777			928
Total investment securities	1,985,760			2,484,075
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value	3,356,775			5,091,600
Held-to-maturity, at amortized cost	1,652,631			—
Total Farmer Mac Guaranteed Securities	5,009,406			5,091,600
USDA Securities:
Available-for-sale, at fair value	1,687,881			1,553,669
Trading, at fair value	42,964			58,344
Total USDA Securities	1,730,845			1,612,013
Loans:
Loans held for investment, at amortized cost	2,689,531			2,570,125
Loans held for investment in consolidated trusts, at amortized cost	670,140			629,989
Allowance for loan losses	(6,326		)	(6,866		)
Total loans, net of allowance	3,353,345			3,193,248
Real estate owned, at lower of cost or fair value	1,182			2,617
Financial derivatives, at fair value	5,743			19,718
Interest receivable (includes $4,256 and $9,276, respectively, related to consolidated trusts)	65,522			107,201
Guarantee and commitment fees receivable	42,078			43,904
Deferred tax asset, net	39,781			44,045
Prepaid expenses and other assets	33,938			14,046
Total Assets	$	14,525,697		$	13,361,780

Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year	$	6,332,887		$	7,338,781
Due after one year	5,186,393			5,001,169
Total notes payable	11,519,280			12,339,950
Securities sold, not yet purchased	1,657,901			—
Debt securities of consolidated trusts held by third parties	400,012			261,760
Financial derivatives, at fair value	69,995			75,708
Accrued interest payable (includes $2,731 and $2,823, respectively, related to consolidated trusts)	34,853			53,772
Guarantee and commitment obligation	38,957			39,667
Accounts payable and accrued expenses	18,019			9,986
Reserve for losses	4,280			6,468
Total Liabilities	13,743,297			12,787,311
Commitments and Contingencies (Note 6)
Equity:
Preferred stock:
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding	58,333			58,333
Series B, par value $25 per share, 3,000,000 shares authorized, issued and outstanding	73,061			—
Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding	73,379			—
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, 9,404,592 shares and 9,354,804 shares outstanding, respectively	9,405			9,355
Additional paid-in capital	112,861			110,722
Accumulated other comprehensive income/(loss), net of tax	21,080			(16,202		)
Retained earnings	196,897			168,877
Total Stockholders' Equity	546,547			332,616
Non-controlling interest - preferred stock	235,853			241,853
Total Equity	782,400			574,469
Total Liabilities and Equity	$	14,525,697		$	13,361,780

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



	For the Three Months Ended						For the Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
	(in thousands except per share amounts)
Interest income:
Investments and cash equivalents	$	4,507		$	5,263		$	14,845		$	16,468
Farmer Mac Guaranteed Securities and USDA Securities	30,004			32,746			90,373			96,072
Loans	26,371			24,966			67,157			73,678
Total interest income	60,882			62,975			172,375			186,218
Total interest expense	48,886			34,787			126,114			101,499
Net interest income	11,996			28,188			46,261			84,719
(Provision for)/release of loan losses	(511		)	499			499			598
Net interest income after (provision for)/release of loan losses	11,485			28,687			46,760			85,317
Non-interest income:
Guarantee and commitment fees	6,172			6,819			19,093			20,190
Gains/(losses) on financial derivatives and hedging activities	808			3,024			(12,468		)	22,501
Gains/(losses) on trading securities	16,369			(626		)	24,772			(743		)
(Losses)/gains on sale of available-for-sale investment securities	(396		)	—			(238		)	3,073
Gains on sale of real estate owned	—			39			165			1,210
Other income	502			565			794			2,518
Non-interest income	23,455			9,821			32,118			48,749
Non-interest expense:
Compensation and employee benefits	4,693			4,523			14,038			13,792
General and administrative	3,123			2,827			9,205			8,459
Regulatory fees	593			593			1,781			1,781
Real estate owned operating costs, net	1			35			62			420
(Release of)/provision for reserve for losses	(1,315		)	463			(2,188		)	1,034
Non-interest expense	7,095			8,441			22,898			25,486
Income before income taxes	27,845			30,067			55,980			108,580
Income tax expense	7,564			8,226			55			29,978
Net income	20,281			21,841			55,925			78,602
Less: Net income attributable to non-controlling interest - preferred stock dividends	(5,412		)	(5,547		)	(16,778		)	(16,641		)
Net income attributable to Farmer Mac	14,869			16,294			39,147			61,961
Preferred stock dividends	(3,283		)	(881		)	(6,543		)	(2,613		)
Net income attributable to common stockholders	$	11,586		$	15,413		$	32,604		$	59,348

Earnings per common share and dividends:
Basic earnings per common share	$	1.06		$	1.42		$	2.99		$	5.50
Diluted earnings per common share	$	1.02		$	1.37		$	2.87		$	5.30
Common stock dividends per common share	$	0.14		$	0.12		$	0.42		$	0.36

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



	For the Three Months Ended						For the Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
	(in thousands)
Net income	$	20,281		$	21,841		$	55,925		$	78,602
Other comprehensive (loss)/income, net of tax:
Unrealized holding gains/(losses) on available-for-sale securities (1)	2,070			(8,675		)	46,612			(35,053		)
Unrealized gains/(losses) on cash flow hedges (2)	30			—			(99		)	—
Less reclassification adjustments included in:
Gains/(losses) on financial derivatives and hedging activities (3)	(3,131		)	(3,087		)	(9,338		)	(9,506		)
(Losses)/gains on sale of available-for-sale investment securities (4)	258			—			155			(1,997		)
Other income (5)	(70		)	(130		)	(48		)	(585		)
Other comprehensive (loss)/income	(843		)	(11,892		)	37,282			(47,141		)
Comprehensive income	19,438			9,949			93,207			31,461
Less: Comprehensive income attributable to noncontrolling interest - preferred stock dividends	(5,412		)	(5,547		)	(16,778		)	(16,641		)
Comprehensive income attributable to Farmer Mac	$	14,026		$	4,402		$	76,429		$	14,820


(1)	Presented net of income tax expense of $1.1 million and benefit of $4.7 million for the three months ended September 30, 2014 and 2013, respectively, and income tax expense of $25.1 million and benefit of $18.9 million for the nine months ended September 30, 2014 and 2013, respectively.


(2)	Presented net of income tax expense of $16,000 for the three months ended September 30, 2014 and tax benefit of $0.1 million for the nine months ended September 30, 2014.


(3)	Relates to the amortization of the unrealized gains on the hedged items prior to application of hedge accounting. Presented net of income tax benefit of $1.7 million for both the three months ended September 30, 2014 and 2013, and tax benefit of $5.0 million and $5.1 million for the nine months ended September 30, 2014 and 2013, respectively.

(4)

Represents realized gains on sales of available-for-sale investment securities. Presented net of income tax expense of $0.1 million for the three months ended September 30, 2014. There were no sales of available-for-sale investment securities for the three months ended September 30, 2013. Presented net of income tax expense of $0.1 million and tax benefit of $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.


(5)	Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed Securities. Presented net of income tax benefit of $38,000 and $0.1 million for the three months ended September 30, 2014 and 2013, respectively, and income tax benefit of $26,000 and $0.3 million for the nine months ended September 30, 2014 and 2013, respectively.

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)



	For the Nine Months Ended
	September 30, 2014				September 30, 2013
	Shares	Amount			Shares		Amount
	(in thousands)
Preferred stock:
Balance, beginning of period	2,400	$	58,333		58		$	57,578
Issuance of Series A preferred stock	—	—			2,400		58,333
Issuance of Series B preferred stock	3,000	73,061			—		—
Issuance of Series C preferred stock	3,000	73,379			—		—
Redemption of retired Series C preferred stock (retired on January 17, 2013)	—	—			(58	)	(57,578		)
Balance, end of period	8,400	$	204,773		2,400		$	58,333
Common stock:
Balance, beginning of period	10,886	$	10,886		10,702		$	10,702
Issuance of Class C common stock	50	50			158		158
Balance, end of period	10,936	$	10,936		10,860		$	10,860
Additional paid-in capital:
Balance, beginning of period		$	110,722				$	106,617
Stock-based compensation expense		2,182					2,287
Issuance of Class C common stock		16					19
Tax effect of stock-based awards		(59		)			752
Balance, end of period		$	112,861				$	109,675
Retained earnings:
Balance, beginning of period		$	168,877				$	102,243
Net income attributable to Farmer Mac		39,147					61,961
Cash dividends:
Preferred stock, Series A ($1.1016 per share in 2014 and $1.0322 per share in 2013)		(2,644		)			(2,477		)
Preferred stock, Series B ($0.8330 per share)		(2,649		)			—
Preferred stock, Series C ($0.4167 per share)		(1,250		)			—
Preferred stock, retired Series C ($2.36 per share, retired on January 17, 2013)		—					(136		)
Common stock ($0.42 per share in 2014 and $0.36 per share in 2013)		(4,584		)			(3,892		)
Balance, end of period		$	196,897				$	157,699
Accumulated other comprehensive income:
Balance, beginning of period		$	(16,202	)			$	73,969
Other comprehensive income/(loss), net of tax		37,282					(47,141		)
Balance, end of period		$	21,080				$	26,828
Total Stockholders' Equity		$	546,547				$	363,395
Non-controlling interest - preferred stock:
Balance, beginning of period		$	241,853				$	241,853
Purchase of interest - Non-controlling interest - preferred stock		(6,000		)			—
Balance, end of period		$	235,853				$	241,853
Total Equity		$	782,400				$	605,248

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	For the Nine Months Ended
	September 30, 2014			September 30, 2013
	(in thousands)
Cash flows from operating activities:
Net income	$	55,925		$	78,602
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of deferred gains, premiums, and discounts on loans, investments, Farmer Mac Guaranteed Securities, and USDA Securities	16,624			7,716
Amortization of debt premiums, discounts and issuance costs	7,384			9,119
Net change in fair value of trading securities, hedged assets, and financial derivatives	3,537			(32,126		)
Losses/(gains) on sale of available-for-sale investment securities	238			(3,073		)
Gains on sale of real estate owned	(165		)	(1,210		)
Total (release of)/provision for losses	(2,687		)	436
Deferred income taxes	(16,340		)	10,400
Stock-based compensation expense	2,183			2,287
Proceeds from repayment of trading investment securities	541			656
Proceeds from repayment of loans purchased as held for sale	95,194			149,675
Net change in:
Interest receivable	41,679			32,754
Guarantee and commitment fees receivable	1,826			(1,707		)
Other assets	(19,179		)	48,887
Securities sold not yet purchased	1,657,901			—
Accrued interest payable	(18,919		)	(14,319		)
Other liabilities	4,910			37
Net cash provided by operating activities	1,830,652			288,134
Cash flows from investing activities:
Net change in securities purchased under agreements to resell	(1,630,427		)	—
Purchases of available-for-sale investment securities	(1,171,063		)	(1,141,601		)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities	(1,074,019		)	(1,281,956		)
Purchases of loans held for investment	(567,774		)	(624,702		)
Purchases of defaulted loans	(440		)	(6,704		)
Proceeds from repayment of available-for-sale investment securities	894,475			1,026,745
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities	1,098,901			776,599
Proceeds from repayment of loans purchased as held for investment	303,905			216,506
Proceeds from sale of available-for-sale investment securities	770,149			170,614
Proceeds from sale of Farmer Mac Guaranteed Securities	169,820			64,609
Proceeds from sale of real estate owned	1,224			3,774
Net cash used in investing activities	(1,205,249		)	(796,116		)
Cash flows from financing activities:
Proceeds from issuance of discount notes	32,008,889			49,070,788
Proceeds from issuance of medium-term notes	2,644,707			2,273,350
Payments to redeem discount notes	(33,360,658		)	(49,534,649		)
Payments to redeem medium-term notes	(2,121,000		)	(1,362,000		)
Excess tax benefits related to stock-based awards	57			995
Payments to third parties on debt securities of consolidated trusts	(34,080		)	(54,154		)
Proceeds from common stock issuance	209			1,477
Proceeds from Series A Preferred stock issuance	—			58,333
Proceeds from Series B Preferred stock issuance	73,061			—
Proceeds from Series C Preferred stock issuance	73,379			—
Retirement of Series C Preferred stock	—			(57,578		)
Purchase of interest - Non-controlling interest - preferred stock	(6,000		)	—
Dividends paid - Non-controlling interest - preferred stock	(16,778		)	(16,641		)
Dividends paid on common and preferred stock	(8,832		)	(5,790		)
Net cash (used in)/provided by financing activities	(747,046		)	374,131
Net decrease in cash and cash equivalents	(121,643		)	(133,851		)
Cash and cash equivalents at beginning of period	749,313			785,564
Cash and cash equivalents at end of period	$	627,670		$	651,713

See accompanying notes to consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.	ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). These interim unaudited 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 omitted as permitted by SEC rules and regulations. The December 31, 2013 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2013 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2013 consolidated financial statements of Farmer Mac and subsidiaries included in Farmer Mac's Current Report on Form 8-K filed with the SEC on June 6, 2014 (the "Segment Recast 8-K"). The Segment Recast 8-K describes Farmer Mac's significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities; Loans; Securitization of Loans; Non-accrual Loans; Real Estate Owned; Financial Derivatives; Notes Payable; Allowance for Losses; Earnings Per Common Share; Income Taxes; Stock-Based Compensation; Comprehensive Income; Long-Term Standby Purchase Commitments; Fair Value Measurement; and Consolidation of Variable Interest Entities ("VIEs"). Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three and nine month periods ended September 30, 2014.

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Principles of Consolidation

The 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 securities guaranteed by Farmer Mac that represent interests in, or obligations secured by, pools of eligible loans ("Farmer Mac Guaranteed Securities") and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA Securities. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.

The following tables present, by line of business, details about the consolidation of VIEs:

Table 1.1



	Consolidation of Variable Interest Entities
	As of September 30, 2014
	Farm & Ranch		USDA Guarantees		Rural Utilities		Institutional Credit		Corporate		Total
	(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated trusts, at amortized cost (1)	$	398,992	$	—	$	271,148	$	—	$	—	$	670,140
Debt securities of consolidated trusts held by third parties (2)	400,012		—		—		—		—		400,012
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)	—		20,449		—		32,631		—		53,080
Maximum exposure to loss (4)	—		20,449		—		30,000		—		50,449
Investment securities:
Carrying value (5)	—		—		—		—		447,550		447,550
Maximum exposure to loss (4) (5)	—		—		—		—		450,505		450,505
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (6)	677,814		14,693		—		970,000		—		1,662,507

(1) Includes unamortized premiums related to the Rural Utilities line of business of $3.8 million.

(2) Includes borrower remittances of $1.0 million. The borrower remittances have not been passed through to third party investors as of September 30, 2014.

(3) Includes an immaterial amount of unamortized premiums and discounts related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $2.6 million.

(4) Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.

(5) Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.

(6) The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.

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	Consolidation of Variable Interest Entities
	As of December 31, 2013
	Farm & Ranch		USDA Guarantees		Rural Utilities		Institutional Credit		Corporate		Total
	(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated trusts, at amortized cost (1)	$	259,509	$	—	$	370,480	$	—	$	—	$	629,989
Debt securities of consolidated trusts held by third parties (2)	261,760		—		—		—		—		261,760
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value (3)	—		21,234		—		33,248		—		54,482
Maximum exposure to loss (4)	—		21,088		—		30,000		—		51,088
Investment securities:
Carrying value (5)	—		—		—		—		533,688		533,688
Maximum exposure to loss (4) (5)	—		—		—		—		540,726		540,726
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss (4) (6)	765,751		20,222		—		970,000		—		1,755,973

(1) Includes unamortized premiums related to the Rural Utilities line of business of $16.2 million.

(2) Includes borrower remittances of $2.3 million, which have not been passed through to third party investors as of December 31, 2013.

(3) Includes unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees and Institutional Credit lines of business of $0.1 million and $3.2 million, respectively.

(4) Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.

(5) Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.

(6) The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.

A guarantee by Farmer Mac 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 held in Farmer Mac'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 consolidated statements of operations. These guarantee fees totaled $2.4 million and $7.7 million for the three and nine months ended September 30, 2014, respectively, compared to $2.8 million and $8.2 million for the same periods in 2013. 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.

Transfers of Financial Assets and Liabilities

Securities purchased under agreements to resell are treated as collateralized lending transactions. Farmer Mac's counterparties are required to pledge collateral for transactions involving securities purchased under agreements to resell. Farmer Mac considers the types of securities being pledged as collateral when determining how much to lend in these transactions. Additionally, on a daily basis, Farmer Mac reviews the fair values of these securities compared to amounts loaned and derivative counterparty collateral

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posting thresholds in an effort to minimize exposure to losses. These transactions are reported as securities purchased under agreements to resell in the consolidated balance sheets except for securities purchased under agreements to resell on an overnight basis, which are included in cash and cash equivalents in the consolidated balance sheets. Farmer Mac records securities purchased under agreements to resell at the amount loaned in the consolidated balance sheets. The resulting fees for these transactions are included in interest income in the consolidated statements of operations. As of September 30, 2014, the fair value of non-cash collateral accepted for securities purchased under agreements to resell or similar arrangements was $1.6 billion, all of which could be sold or repledged; $1.6 billion of the underlying collateral was sold or repledged as of September 30, 2014. There were no securities purchased under agreements to resell as of December 31, 2013.

Securities sold, not yet purchased, represent obligations of Farmer Mac to deliver specified securities at contracted prices, which would thereby require Farmer Mac to purchase the securities in the market at prevailing prices. Securities sold, not yet purchased consist of fixed rate U.S. Treasury securities. Farmer Mac records securities sold, not yet purchased in the consolidated balance sheets at fair value with changes in fair value recognized in "Gains/(losses) on trading securities" in the consolidated statements of operations. The resulting interest expense for these transactions is included in interest expense in the consolidated statements of operations.


(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. Farmer Mac does not consider securities purchased under agreements to resell to be cash equivalents if it intends to reinvest the funds from maturing repurchase agreements into new repurchase agreements and the aggregate term of the repurchase agreements exceeds three months. The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value. Changes in the balance of cash and cash equivalents are reported in the consolidated statements of cash flows.

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The following table sets forth information regarding certain cash and non-cash transactions for the nine months ended September 30, 2014 and 2013:

Table 1.2



	For the Nine Months Ended
	September 30, 2014		September 30, 2013
	(in thousands)
Cash paid during the period for:
Interest	$	113,680	$	90,052
Income taxes	12,750		17,000
Non-cash activity:
Real estate owned acquired through loan liquidation	—		1,443
Loans acquired and securitized as Farmer Mac Guaranteed Securities	169,820		64,609
Purchases of investment securities traded, not yet settled	—		57,001
Consolidation of Farm & Ranch Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties	172,268		64,609
Transfers of loans held for sale to loans held for investment	—		673,991
Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity	1,589,775		—

On January 1, 2014, Farmer Mac transferred $1.6 billion of Farmer Mac Guaranteed Securities from available-for-sale to held-to-maturity because Farmer Mac determined it has the ability and intent to hold these securities until maturity or payoff. Farmer Mac transferred these securities at fair value which reflected an unrealized holding gain of $22.3 million. Farmer Mac accounts for held-to-maturity securities at amortized cost. The unrealized holding gain is being amortized out of accumulated other comprehensive income over the remaining life of the transferred securities.

On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held for sale to held for investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or (2) securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance sheet and reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac transferred these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac recorded a $5.9 million unamortized discount for loans transferred at fair value. 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. Cash receipts from the repayment of loans are classified within the statements of cash flows based on management's intent upon purchase of the loan.

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(b)	Earnings Per Common Share

Basic earnings per common share ("EPS") 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 non-vested restricted stock awards. The following schedule reconciles basic and diluted EPS for the three and nine months ended September 30, 2014 and 2013:

Table 1.3



	For the Three Months Ended
	September 30, 2014						September 30, 2013
	Net Income		Weighted-Average Shares	$ per Share			Net Income		Weighted-Average Shares	$ per Share
	(in thousands, except per share amounts)
Basic EPS
Net income attributable to common stockholders	$	11,586	10,930	$	1.06		$	15,413	10,843	$	1.42
Effect of dilutive securities (1):
Stock options, SARs and restricted stock	—		442	(0.04		)	—		370	(0.05		)
Diluted EPS	$	11,586	11,372	$	1.02		$	15,413	11,213	$	1.37

(1)

For the three months ended September 30, 2014 and 2013, stock options and SARs of 118,583 and 36,983, 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 September 30, 2014 and 2013, contingent shares of non-vested restricted stock of 42,514 and 44,894, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions were not met.



	For the Nine Months Ended
	September 30, 2014						September 30, 2013
	Net Income		Weighted-Average Shares	$ per Share			Net Income		Weighted-Average Shares	$ per Share
	(in thousands, except per share amounts)
Basic EPS
Net income attributable to common stockholders	$	32,604	10,914	$	2.99		$	59,348	10,799	$	5.50
Effect of dilutive securities (1):
Stock options, SARs and restricted stock	—		446	(0.12		)	—		392	(0.20		)
Diluted EPS	$	32,604	11,360	$	2.87		$	59,348	11,191	$	5.30

(1)

For the nine months ended September 30, 2014 and 2013, stock options and SARs of 91,011 and 43,640, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the nine months ended September 30, 2014 and 2013, contingent shares of non-vested restricted stock of 38,874 and 38,363, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions were not met.


(c)	Reclassifications

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

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2.	INVESTMENT SECURITIES

The following tables present the amount outstanding, amortized cost, and fair values of Farmer Mac's investment securities as of September 30, 2014 and December 31, 2013:

Table 2.1



	As of September 30, 2014
	Amount Outstanding		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	46,600	$	—		$	46,600	$	—	$	(5,826	)	$	40,774
Floating rate asset-backed securities	108,276		(108		)	108,168		181		(24		)	108,325
Floating rate corporate debt securities	10,000		—			10,000		126		—			10,126
Fixed rate corporate debt securities	30,000		(16		)	29,984		97		—			30,081
Floating rate Government/GSE guaranteed mortgage-backed securities	627,432		3,631			631,063		5,054		(279		)	635,838
Fixed rate GSE guaranteed mortgage-backed securities (1)	892		3,648			4,540		3,731		—			8,271
Floating rate GSE subordinated debt	70,000		—			70,000		—		(6,615		)	63,385
Fixed rate GSE preferred stock	78,500		17			78,517		—		(17		)	78,500
Fixed rate taxable municipal bonds	3,960		2			3,962		1		—			3,963
Floating rate U.S. Treasuries	75,000		(12		)	74,988		27		—			75,015
Fixed rate U.S. Treasuries	930,000		555			930,555		154		(4		)	930,705
Total available-for-sale	1,980,660		7,717			1,988,377		9,371		(12,765		)	1,984,983
Trading:
Floating rate asset-backed securities	3,012		—			3,012		—		(2,235		)	777
Total investment securities	$	1,983,672	$	7,717		$	1,991,389	$	9,371	$	(15,000	)	$	1,985,760


(1)	Fair value includes $7.3 million of an interest-only security with a notional amount of $152.4 million.

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	As of December 31, 2013
	Amount Outstanding		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	74,100	$	—		$	74,100	$	—	$	(8,815	)	$	65,285
Floating rate asset-backed securities	166,185		(217		)	165,968		195		(59		)	166,104
Floating rate corporate debt securities	109,345		(3		)	109,342		445		(18		)	109,769
Fixed rate corporate debt securities	55,000		48			55,048		97		(4		)	55,141
Floating rate Government/GSE guaranteed mortgage-backed securities	612,413		4,336			616,749		4,955		(435		)	621,269
Fixed rate GSE guaranteed mortgage-backed securities (1)	1,173		3,966			5,139		3,518		—			8,657
Floating rate GSE subordinated debt	70,000		—			70,000		—		(6,615		)	63,385
Fixed rate GSE preferred stock	78,500		365			78,865		4,296		—			83,161
Fixed rate taxable municipal bonds	30,595		84			30,679		5		(3		)	30,681
Fixed rate senior agency debt	523,691		294			523,985		107		(30		)	524,062
Fixed rate U.S. Treasuries	754,405		1,141			755,546		95		(8		)	755,633
Total available-for-sale	2,475,407		10,014			2,485,421		13,713		(15,987		)	2,483,147
Trading:
Floating rate asset-backed securities	3,553		—			3,553		—		(2,625		)	928
Total investment securities	$	2,478,960	$	10,014		$	2,488,974	$	13,713	$	(18,612	)	$	2,484,075


(1)	Fair value includes $7.4 million of an interest-only security with a notional amount of $152.4 million.

During the three months ended September 30, 2014, Farmer Mac received proceeds of $39.7 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized losses of $0.5 million and gross realized gains of $0.1 million. Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the three months ended September 30, 2013. During the nine months ended September 30, 2014, Farmer Mac received proceeds of $770.1 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized losses of $0.8 million and gross realized gains of $0.6 million, compared to proceeds of $170.6 million for the nine months ended September 30, 2013, resulting in gross realized gains of $3.1 million.

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As of September 30, 2014 and December 31, 2013, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2



	As of September 30, 2014
	Available-for-Sale Securities
	Unrealized loss position for less than 12 months					Unrealized loss position for more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—		$	40,773	$	(5,827	)
Floating rate asset-backed securities	25,703		(23		)	1,988		(1		)
Floating rate Government/GSE guaranteed mortgage-backed securities	149,196		(269		)	6,275		(9		)
Floating rate GSE subordinated debt	—		—			63,385		(6,615		)
Fixed rate GSE preferred stock	78,500		(17		)	—		—
Fixed rate U.S. Treasuries	296,083		(4		)	—		—
Total	$	549,482	$	(313	)	$	112,421	$	(12,452	)



	As of December 31, 2013
	Available-for-Sale Securities
	Unrealized loss position for less than 12 months					Unrealized loss position for more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—		$	65,285	$	(8,815	)
Floating rate asset-backed securities	50,129		(59		)	—		—
Floating rate corporate debt securities	19,982		(18		)	—		—
Fixed rate corporate debt securities	10,058		(4		)	—		—
Floating rate Government/GSE guaranteed mortgage-backed securities	161,960		(435		)	—		—
Floating rate GSE subordinated debt	—		—			63,385		(6,615		)
Fixed rate taxable municipal bonds	8,041		(3		)	—		—
Fixed rate senior agency debt	316,273		(30		)	—		—
Fixed rate U.S. Treasuries	118,056		(8		)	—		—
Total	$	684,499	$	(557	)	$	128,670	$	(15,430	)

The unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to September 30, 2014 and December 31, 2013, as applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial markets related to those securities. As of September 30, 2014, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+," except two that were rated "A-" and one that was rated "BBB+." As of December 31, 2013, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+," except two that were rated "A-" and one that was rated "BBB+." The unrealized losses were on 37 and 64 individual investment securities as of September 30, 2014 and December 31, 2013, respectively.

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As of September 30, 2014, 9 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $12.5 million. As of December 31, 2013, 7 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $15.4 million. Securities in unrealized loss positions for 12 months or longer have a fair value as of September 30, 2014 that is, on average, approximately 90.0 percent of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of changes in credit spreads or maturity. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represents other-than-temporary impairment as of September 30, 2014 and December 31, 2013. 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 investment securities as of September 30, 2014 and December 31, 2013. As of September 30, 2014, Farmer Mac owned trading investment securities with an amortized cost of $3.0 million, a fair value of $0.8 million, and a weighted average yield of 4.24 percent. As of December 31, 2013, Farmer Mac owned trading investment securities with an amortized cost of $3.6 million, a fair value of $0.9 million, and a weighted average yield of 4.25 percent.

The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by remaining contractual maturity as of September 30, 2014 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.

Table 2.3



	As of September 30, 2014
	Available-for-Sale Securities
	Amortized Cost		Fair Value		Weighted- Average Yield
	(dollars in thousands)
Due within one year	$	954,530	$	954,742	0.28%
Due after one year through five years	158,655		159,441		0.92%
Due after five years through ten years	288,764		286,868		0.78%
Due after ten years	586,428		583,932		2.38%
Total	$	1,988,377	$	1,984,983	1.02%

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.	FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of September 30, 2014 and December 31, 2013:

Table 3.1



	As of September 30, 2014
	Unpaid Principal Balance		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Held-to-maturity:
AgVantage	$	1,640,150	$	12,481		$	1,652,631	$	4,236	$	(604	)	$	1,656,263

Available-for-sale:
AgVantage	$	3,323,463	$	—		$	3,323,463	$	36,779	$	(23,916	)	$	3,336,326
Farmer Mac Guaranteed USDA Securities	20,449		(441		)	20,008		445		(4		)	20,449
Total Farmer Mac Guaranteed Securities	3,343,912		(441		)	3,343,471		37,224		(23,920		)	3,356,775
USDA Securities	1,683,973		4,172			1,688,145		4,326		(4,590		)	1,687,881
Total available-for-sale	$	5,027,885	$	3,731		$	5,031,616	$	41,550	$	(28,510	)	$	5,044,656
Trading:
USDA Securities	$	40,833	$	3,969		$	44,802	$	130	$	(1,968	)	$	42,964



	As of December 31, 2013
	Unpaid Principal Balance		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Available-for-sale:
AgVantage	$	5,066,855	$	125		$	5,066,980	$	64,051	$	(60,665	)	$	5,070,366
Farmer Mac Guaranteed USDA Securities	21,089		(518		)	20,571		669		(6		)	21,234
Total Farmer Mac Guaranteed Securities	5,087,944		(393		)	5,087,551		64,720		(60,671		)	5,091,600
USDA Securities	1,590,433		4,585			1,595,018		2,753		(44,102		)	1,553,669
Total available-for-sale	$	6,678,377	$	4,192		$	6,682,569	$	67,473	$	(104,773	)	$	6,645,269
Trading:
USDA Securities	$	55,373	$	4,972		$	60,345	$	193	$	(2,194	)	$	58,344

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to September 30, 2014 and December 31, 2013, as applicable. The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States. As of September 30, 2014, 17 AgVantage securities in loss positions that are secured by Farm & Ranch loans had been in a loss position for more than 12 months with a total unrealized loss of $15.2 million. AgVantage^® is a registered trademark of Farmer Mac used to designate Farmer Mac Guaranteed Securities that are general obligations of lenders secured by pools of eligible loans, with such Farmer Mac Guaranteed Securities referred to herein as AgVantage securities. Each AgVantage security backed by agricultural mortgages requires some level of overcollateralization, or, in the case of rural utilities loans, 100 percent collateralization, and is secured by eligible loans of the issuing institution with

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a requirement that delinquent loans be removed from the collateral pool and then replaced with current eligible loans. Thus, Farmer Mac does not believe it will realize any of the losses presented above. Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities and USDA Securities are other-than-temporary impairment as of September 30, 2014 and December 31, 2013. 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.

During the three and nine months ended September 30, 2014 and 2013, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Securities.

The amortized cost, fair value, and weighted average yield of available-for-sale and held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of September 30, 2014 are set forth below. The balances presented are based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 3.2



	As of September 30, 2014
	Available-for-Sale Securities
	Amortized Cost		Fair Value		Weighted- Average Yield
	(dollars in thousands)
Due within one year	$	108,230	$	103,969	0.91	%
Due after one year through five years	1,606,307		1,631,275		1.87	%
Due after five years through ten years	1,291,284		1,294,016		1.89	%
Due after ten years	2,025,795		2,015,396		2.61	%
Total	$	5,031,616	$	5,044,656	2.15	%



	As of September 30, 2014
	Held-to-Maturity Securities
	Amortized Cost		Fair Value		Weighted- Average Yield
	(dollars in thousands)
Due within one year	$	558,291	$	558,749