Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

2015 Q2 10-Q

As filed with the Securities and Exchange Commission on August 10, 2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

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 August 3, 2015, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock and 9,508,091 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	14
	3. Farmer Mac Guaranteed Securities and USDA Securities	18
	4. Financial Derivatives	20
	5. Loans and Allowance for Losses	24
	6. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments	36
	7. Equity	37
	8. Fair Value Disclosures	38
	9. Business Segment Reporting	47
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	52
	Forward-Looking Statements	52
	Overview	53
	Results of Operations	55
	Outlook	71
	Balance Sheet Review	74
	Off-Balance Sheet Arrangements	74
	Risk Management	74
	Liquidity and Capital Resources	91
	Regulatory Matters	93
	Other Matters	94
	Supplemental Information	94
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	99
Item 4.	Controls and Procedures	99
PART II - Other Information		101
Item 1.	Legal Proceedings	100
Item 1A.	Risk Factors	100
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 3.	Defaults Upon Senior Securities	100
Item 4.	Mine Safety Disclosures	100
Item 5.	Other Information	101
Item 6.	Exhibits	102
Signatures		103

Table of Contents

PART I

Item 1. Financial Statements

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)



	As of
	June 30, 2015			December 31, 2014
	(in thousands)
Assets:
Cash and cash equivalents	$	1,683,156		$	1,363,387
Investment securities:
Available-for-sale, at fair value	1,851,899			1,938,499
Trading, at fair value	606			689
Total investment securities	1,852,505			1,939,188
Farmer Mac Guaranteed Securities:
Available-for-sale, at fair value	4,051,208			3,659,281
Held-to-maturity, at amortized cost	1,822,027			1,794,620
Total Farmer Mac Guaranteed Securities	5,873,235			5,453,901
USDA Securities:
Available-for-sale, at fair value	1,825,406			1,731,222
Trading, at fair value	33,770			40,310
Total USDA Securities	1,859,176			1,771,532
Loans:
Loans held for investment, at amortized cost	3,153,012			2,833,461
Loans held for investment in consolidated trusts, at amortized cost	512,559			692,478
Allowance for loan losses	(5,939		)	(5,864		)
Total loans, net of allowance	3,659,632			3,520,075
Real estate owned, at lower of cost or fair value	750			421
Financial derivatives, at fair value	7,455			4,177
Interest receivable (includes $6,338 and $9,509, respectively, related to consolidated trusts)	101,127			106,874
Guarantee and commitment fees receivable	37,847			39,462
Deferred tax asset, net	23,130			33,391
Prepaid expenses and other assets	46,584			55,413
Total Assets	$	15,144,597		$	14,287,821

Liabilities and Equity:
Liabilities:
Notes payable:
Due within one year	$	7,632,668		$	7,353,953
Due after one year	6,013,237			5,471,186
Total notes payable	13,645,905			12,825,139
Debt securities of consolidated trusts held by third parties	516,004			424,214
Financial derivatives, at fair value	69,373			84,844
Accrued interest payable (includes $5,302 and $5,145, respectively, related to consolidated trusts)	50,183			48,355
Guarantee and commitment obligation	36,417			37,925
Accounts payable and accrued expenses	245,785			81,252
Reserve for losses	4,637			4,263
Total Liabilities	14,568,304			13,505,992
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	73,044			73,044
Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding	73,382			73,382
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, 9,508,000 shares and 9,406,267 shares outstanding, respectively	9,508			9,406
Additional paid-in capital	116,098			113,559
Accumulated other comprehensive income, net of tax	22,733			15,533
Retained earnings	221,477			201,013
Total Stockholders' Equity	576,106			545,801
Non-controlling interest	187			236,028
Total Equity	576,293			781,829
Total Liabilities and Equity	$	15,144,597		$	14,287,821

The accompanying notes are an integral part of these 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 Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
	(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents	$	3,094		$	5,101		$	5,959		$	10,338
Farmer Mac Guaranteed Securities and USDA Securities	34,484			32,957			67,606			65,803
Loans	28,814			26,417			56,778			40,786
Total interest income	66,392			64,475			130,343			116,927
Total interest expense	34,528			42,502			67,690			77,228
Net interest income	31,864			21,973			62,653			39,699
(Provision for)/release of allowance for loan losses	(110		)	1,583			(186		)	1,010
Net interest income after (provision for)/release of allowance for loan losses	31,754			23,556			62,467			40,709
Non-interest income:
Guarantee and commitment fees	3,388			3,703			6,765			7,487
Gains/(losses) on financial derivatives and hedging activities	14,389			(5,698		)	10,507			(13,276		)
Gains on trading securities	170			7,748			532			8,403
Gains on sale of available-for-sale investment securities	—			143			6			158
Gains/(losses) on sale of real estate owned	—			168			(1		)	165
Other income	260			200			873			292
Non-interest income	18,207			6,264			18,682			3,229
Non-interest expense:
Compensation and employee benefits	5,733			4,889			11,426			9,345
General and administrative	3,374			3,288			6,197			6,082
Regulatory fees	600			594			1,200			1,188
Real estate owned operating costs, net	—			59			(1		)	61
Provision for/(release of) reserve for losses	1,146			(974		)	374			(873		)
Non-interest expense	10,853			7,856			19,196			15,803
Income before income taxes	39,108			21,964			61,953			28,135
Income tax expense/(benefit)	13,769			(6,368		)	18,000			(7,509		)
Net income	25,339			28,332			43,953			35,644
Less: Net loss/(income) attributable to non-controlling interest	119			(5,819		)	(5,235		)	(11,366		)
Net income attributable to Farmer Mac	25,458			22,513			38,718			24,278
Preferred stock dividends	(3,296		)	(2,308		)	(6,591		)	(3,260		)
Loss on retirement of preferred stock	—			—			(8,147		)	—
Net income attributable to common stockholders	$	22,162		$	20,205		$	23,980		$	21,018

Earnings per common share and dividends:
Basic earnings per common share	$	2.01		$	1.85		$	2.19		$	1.93
Diluted earnings per common share	$	1.94		$	1.78		$	2.11		$	1.85
Common stock dividends per common share	$	0.16		$	0.14		$	0.32		$	0.28

The accompanying notes are an integral part of these 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 Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
	(in thousands)
Net income	$	25,339		$	28,332		$	43,953		$	35,644
Other comprehensive income, net of tax:
Unrealized holding (losses)/gains on available-for-sale securities⁽¹⁾	(26,114		)	10,301			13,056			44,542
Unrealized gains/(losses) on cash flow hedges⁽²⁾	930			(61		)	769			(129		)
Less reclassification adjustments included in:
Gains/(losses) on financial derivatives and hedging activities⁽³⁾	(3,219		)	(3,106		)	(6,379		)	(6,207		)
Gains on sale of available-for-sale investment securities⁽⁴⁾	—			(93		)	(4		)	(103		)
Other income⁽⁵⁾	(47		)	(72		)	(242		)	22
Other comprehensive (loss)/income	(28,450		)	6,969			7,200			38,125
Comprehensive (loss)/income	(3,111		)	35,301			51,153			73,769
Less: Comprehensive loss/(income) attributable to non-controlling interest	119			(5,819		)	(5,235		)	(11,366		)
Comprehensive (loss)/income attributable to Farmer Mac	$	(2,992	)	$	29,482		$	45,918		$	62,403


⁽¹⁾	Presented net of income tax benefit of $14.1 million and expense of $5.5 million, for the three months ended June 30, 2015 and 2014, respectively, and income tax expense of $7.0 million and $24.0 million for the six months ended June 30, 2015 and 2014, respectively.


⁽²⁾	Presented net of income tax expense of $0.5 million and benefit of $33,000 for the three months ended June 30, 2015 and 2014, respectively, and income tax expense of $0.4 million and benefit of $69,000 for the six months ended June 30, 2015 and 2014, respectively.


⁽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 June 30, 2015 and 2014, respectively, and tax benefit of $3.4 million and $3.3 million for the six months ended June 30, 2015 and 2014, respectively.


⁽⁴⁾	Represents realized gains on sales of available-for-sale investment securities. There were no sales of available-for-sale investment securities for the three months ended June 30, 2015. Presented net of income tax benefit of $50,000 for the three months ended June 30, 2014, and income tax benefit of $2,000 and $55,000 for the six months ended June 30, 2015 and 2014, respectively.


⁽⁵⁾	Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities. Presented net of income tax benefit of $25,000 and $39,000 for the three months ended June 30, 2015 and 2014, respectively, and income tax benefit of $0.1 million and expense of $12,000 for the six months ended June 30, 2015 and 2014, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)



	For the Six Months Ended
	June 30, 2015				June 30, 2014
	Shares	Amount			Shares	Amount
	(in thousands)
Preferred stock:
Balance, beginning of period	8,400	$	204,759		2,400	$	58,333
Issuance of Series B preferred stock	—	—			3,000	73,061
Issuance of Series C preferred stock	—	—			3,000	$	73,380
Balance, end of period	8,400	$	204,759		8,400	$	204,774
Common stock:
Balance, beginning of period	10,937	$	10,937		10,886	$	10,886
Issuance of Class C common stock	102	102			38	38
Balance, end of period	11,039	$	11,039		10,924	$	10,924
Additional paid-in capital:
Balance, beginning of period		$	113,559			$	110,722
Stock-based compensation expense		1,644				1,426
Issuance of Class C common stock		7				12
Tax effect of stock-based awards		888				(202		)
Balance, end of period		$	116,098			$	111,958
Retained earnings:
Balance, beginning of period		$	201,013			$	168,877
Net income attributable to Farmer Mac		38,718				24,278
Cash dividends:
Preferred stock, Series A ($0.7344 per share in 2015 and 2014)		(1,763		)		(1,762		)
Preferred stock, Series B ($0.8594 per share in 2015 and $0.5347 per share in 2014)		(2,578		)		(1,360		)
Preferred stock, Series C ($0.7500 per share in 2015 and $0.0458 per share in 2014)		(2,250		)		(138		)
Common stock ($0.32 per share in 2015 and $0.28 per share in 2014)		(3,516		)		(3,053		)
Loss on retirement of preferred stock, Farmer Mac II LLC		(8,147		)		—
Balance, end of period		$	221,477			$	186,842
Accumulated other comprehensive income:
Balance, beginning of period		$	15,533			$	(16,202	)
Other comprehensive income, net of tax		7,200				38,125
Balance, end of period		$	22,733			$	21,923
Total Stockholders' Equity		$	576,106			$	536,421
Non-controlling interest:
Balance, beginning of period		$	236,028			$	241,853
Redemption of Farmer Mac II LLC preferred stock		(235,853		)		(6,000		)
Investment in Contour - non-controlling interest		131				—
Net loss attributable to non-controlling interest		(119		)		—
Balance, end of period		$	187			$	235,853
Total Equity		$	576,293			$	772,274

The accompanying notes are an integral part of these consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	For the Six Months Ended
	June 30, 2015			June 30, 2014
	(in thousands)
Cash flows from operating activities:
Net income	$	43,953		$	35,644
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	1,604			15,029
Amortization of debt premiums, discounts and issuance costs	5,870			5,144
Net change in fair value of trading securities, hedged assets, and financial derivatives	(15,619		)	7,636
Gains on sale of available-for-sale investment securities	(6		)	(158		)
Losses/(gains) on sale of real estate owned	1			(165		)
Total provision for/(release of) losses	560			(1,883		)
Deferred income taxes	5,657			(17,496		)
Stock-based compensation expense	1,644			1,427
Proceeds from repayment of trading investment securities	437			414
Proceeds from repayment of loans purchased as held for sale	54,728			58,930
Net change in:
Interest receivable	5,747			13,125
Guarantee and commitment fees receivable	1,615			215
Other assets	9,182			(14,473		)
Securities sold, not yet purchased	—			1,673,532
Accrued interest payable	1,828			(4,185		)
Other liabilities	(3,838		)	(3,955		)
Net cash provided by operating activities	113,363			1,768,781
Cash flows from investing activities:
Net change in securities purchased under agreements to resell	—			(1,640,686		)
Purchases of available-for-sale investment securities	(915,614		)	(1,138,711		)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities	(559,162		)	(681,044		)
Purchases of loans held for investment	(323,401		)	(407,595		)
Purchases of defaulted loans	(1,981		)	(440		)
Proceeds from repayment of available-for-sale investment securities	914,988			575,393
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities	236,801			670,079
Proceeds from repayment of loans purchased as held for investment	143,804			199,774
Proceeds from sale of available-for-sale investment securities	74,998			730,527
Proceeds from sale of Farmer Mac Guaranteed Securities	99,477			126,857
(Payments)/proceeds from sale of real estate owned	(1		)	461
Net cash used in investing activities	(330,091		)	(1,565,385		)
Cash flows from financing activities:
Proceeds from issuance of discount notes	38,965,462			27,163,649
Proceeds from issuance of medium-term notes	2,690,604			1,759,012
Payments to redeem discount notes	(38,734,464		)	(28,161,623		)
Payments to redeem medium-term notes	(2,106,715		)	(1,440,000		)
Excess tax benefits related to stock-based awards	154			35
Payments to third parties on debt securities of consolidated trusts	(20,641		)	(13,615		)
Proceeds from common stock issuance	1,488			12
Proceeds from Series B Preferred stock issuance	—			73,061
Proceeds from Series C Preferred stock issuance	—			73,380
Investment in Contour	131			—
Redemption of Farmer Mac II LLC Preferred Stock	(244,000		)	(6,000		)
Dividends paid - Non-controlling interest - preferred stock	(5,415		)	(11,366		)
Dividends paid on common and preferred stock	(10,107		)	(5,131		)
Net cash provided by/(used in) financing activities	536,497			(568,586		)
Net increase/(decrease) in cash and cash equivalents	319,769			(365,190		)
Cash and cash equivalents at beginning of period	1,363,387			749,313
Cash and cash equivalents at end of period	$	1,683,156		$	384,123

The accompanying notes are an integral part of these 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 ("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, 2014 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2014 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 2014 consolidated financial statements of Farmer Mac and subsidiaries included in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 16, 2015. That Form 10-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; Transfers of Financial Assets and Liabilities; Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities; Loans; Securitization of Loans; Real Estate Owned; Financial Derivatives; Notes Payable; Allowance for Loan Losses and Reserve 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 six month periods ended June 30, 2015.

Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its three subsidiaries: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; (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; and (3) Contour Valuation Services, LLC, whose principal activity is to provide appraisal services related to agricultural real estate. All inter-company balances and transactions have been eliminated in consolidation. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.

Table of Contents

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

Table 1.1



	Consolidation of Variable Interest Entities
	As of June 30, 2015
	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	$	512,559	$	—	$	—	$	—	$	—	$	512,559
Debt securities of consolidated trusts held by third parties⁽¹⁾	516,004		—		—		—		—		516,004
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value⁽²⁾	—		35,008		—		32,065		—		67,073
Maximum exposure to loss⁽³⁾	—		33,822		—		30,000		—		63,822
Investment securities:
Carrying value⁽⁴⁾	—		—		—		—		455,251		455,251
Maximum exposure to loss⁽³⁾⁽⁴⁾	—		—		—		—		458,566		458,566
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss⁽³⁾⁽⁵⁾	575,811		10,888		—		970,000		—		1,556,699


(1)	Includes borrower remittances of $3.4 million. The borrower remittances have not been passed through to third party investors as of June 30, 2015.


(2)	Includes $1.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $2.1 million.


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


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


(5)	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, 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⁾	$	421,355	$	—	$	271,123	$	—	$	—	$	692,478
Debt securities of consolidated trusts held by third parties⁽²⁾	424,214		—		—		—		—		424,214
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Carrying value⁽³⁾	—		27,620		—		32,415		—		60,035
Maximum exposure to loss⁽⁴⁾	—		27,832		—		30,000		—		57,832
Investment securities:
Carrying value⁽⁵⁾	—		—		—		—		409,657		409,657
Maximum exposure to loss⁽⁴⁾⁽⁵⁾	—		—		—		—		412,690		412,690
Off-Balance Sheet:
Unconsolidated VIEs:
Farmer Mac Guaranteed Securities:
Maximum exposure to loss⁽⁴⁾⁽⁶⁾	636,086		13,978		—		970,000		—		1,620,064


(1)	Includes unamortized premiums related to the Rural Utilities line of business of $3.7 million.


(2)	Includes borrower remittances of $2.9 million, which have not been passed through to third party investors as of December 31, 2014.


(3)	Includes $0.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $2.4 million.


(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 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.


(a)	Statements of Cash Flows

The following table sets forth information regarding certain non-cash transactions for the six months ended June 30, 2015 and 2014:

Table 1.2



	For the Six Months Ended
	June 30, 2015		June 30, 2014
	(in thousands)
Non-cash activity:
Loans acquired and securitized as Farmer Mac Guaranteed Securities	$	99,477	$	126,857
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	112,440		129,305
Purchases of securities - traded, not yet settled	236,600		—
Issuance costs on the retirement of Farmer Mac II LLC Preferred Stock	8,147		—
Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity	—		1,612,086

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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.


(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 six months ended June 30, 2015 and 2014:

Table 1.3



	For the Three Months Ended
	June 30, 2015						June 30, 2014
	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	$	22,162	11,010	$	2.01		$	20,205	10,924	$	1.85
Effect of dilutive securities⁽¹⁾:
Stock options, SARs and restricted stock	—		428	(0.07		)	—		437	(0.07		)
Diluted EPS	$	22,162	11,438	$	1.94		$	20,205	11,361	$	1.78

(1)

For the three months ended June 30, 2015 and 2014, stock options and SARs of 229,693 and 121,468, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended June 30, 2015 and 2014, contingent shares of non-vested restricted stock of 45,034 and 42,514, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions have not yet been met.



	For the Six Months Ended
	June 30, 2015						June 30, 2014
	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	$	23,980	10,974	$	2.19		$	21,018	10,906	$	1.93
Effect of dilutive securities(1):
Stock options, SARs and restricted stock	—		411	(0.08		)	—		448	(0.08		)
Diluted EPS	$	23,980	11,385	$	2.11		$	21,018	11,354	$	1.85

(1)

For the six months ended June 30, 2015 and 2014, stock options and SARs of 215,547 and 77,226, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the six months ended June 30, 2015 and 2014, contingent shares of non-vested restricted stock of 37,774 and 37,054, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions have not yet been met.

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In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis." This update modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. It also affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015. The adoption of the new guidance will not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.


(d)	Reclassifications

Beginning January 1, 2015, Farmer Mac classified all of the income from Farmer Mac Guaranteed Securities that it holds in its portfolio as interest income. Prior to January 1, 2015, Farmer Mac classified a portion of the income from those securities, $2.7 million and $5.4 million for the three and six months ended June 30, 2014, respectively, as guarantee and commitment fees. This change in classification does not affect the timing or amount of income recognized from these securities. The corresponding guarantee and commitment fee receivable balance as of December 31, 2014 also was reclassified to accrued interest receivable. Certain reclassifications of prior period information, including the aforementioned change, were made to conform to the current period presentation.

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2.	INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of June 30, 2015 and December 31, 2014:

Table 2.1



	As of June 30, 2015
	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	$	—	$	(6,418	)	$	40,182
Floating rate asset-backed securities	91,382		(317		)	91,065		182		(69		)	91,178
Floating rate corporate debt securities	10,000		—			10,000		62		(2		)	10,060
Fixed rate corporate debt securities	15,000		(3		)	14,997		4		(16		)	14,985
Floating rate Government/GSE guaranteed mortgage-backed securities	703,990		3,265			707,255		4,111		(306		)	711,060
Fixed rate GSE guaranteed mortgage-backed securities⁽¹⁾	765		3,330			4,095		3,952		—			8,047
Floating rate GSE subordinated debt	70,000		—			70,000		—		(4,028		)	65,972
Fixed rate senior agency debt	297,806		(29		)	297,777		68		—			297,845
Fixed rate U.S. Treasuries	612,194		260			612,454		127		(11		)	612,570
Total available-for-sale	1,847,737		6,506			1,854,243		8,506		(10,850		)	1,851,899
Trading:
Floating rate asset-backed securities	2,431		—			2,431		—		(1,825		)	606
Total investment securities	$	1,850,168	$	6,506		$	1,856,674	$	8,506	$	(12,675	)	$	1,852,505


(1)	Fair value includes $7.2 million of an interest-only security with a notional amount of $152.4 million.

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	As of December 31, 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	$	—	$	(6,024	)	$	40,576
Floating rate asset-backed securities	100,730		(74		)	100,656		283		(37		)	100,902
Floating rate corporate debt securities	10,000		—			10,000		91		—			10,091
Fixed rate corporate debt securities	30,000		(10		)	29,990		35		—			30,025
Floating rate Government/GSE guaranteed mortgage-backed securities	605,053		3,431			608,484		4,712		(443		)	612,753
Fixed rate GSE guaranteed mortgage-backed securities⁽¹⁾	853		3,542			4,395		3,807		—			8,202
Floating rate GSE subordinated debt	70,000		—			70,000		—		(3,680		)	66,320
Fixed rate senior agency debt	18,806		130			18,936		3		—			18,939
Floating rate U.S. Treasuries	75,000		(10		)	74,990		—		(11		)	74,979
Fixed rate U.S. Treasuries	975,194		462			975,656		72		(16		)	975,712
Total available-for-sale	1,932,236		7,471			1,939,707		9,003		(10,211		)	1,938,499
Trading:
Floating rate asset-backed securities	2,868		—			2,868		—		(2,179		)	689
Total investment securities	$	1,935,104	$	7,471		$	1,942,575	$	9,003	$	(12,390	)	$	1,939,188


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

During the three months ended June 30, 2015, Farmer Mac did not sell any securities from its available-for-sale investment portfolio, compared to proceeds of $720.5 million for the same period in 2014, resulting in gross realized gains of $0.1 million. During the six months ended June 30, 2015, Farmer Mac received proceeds of $75.0 million from the sale of securities from its available-for-sale investment portfolio, resulting in realized gains of $6,000, compared to proceeds of $730.5 million for the six months ended June 30, 2014, resulting in gross realized gains of $0.2 million.

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As of June 30, 2015 and December 31, 2014, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2



	As of June 30, 2015
	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	$	—	$	—		$	40,182	$	(6,418	)
Floating rate asset-backed securities	14,940		(69		)	—		—
Floating rate corporate debt securities	4,998		(2		)	—		—
Fixed rate corporate debt securities	9,981		(16		)	—		—
Floating rate Government/GSE guaranteed mortgage-backed securities	59,590		(162		)	88,205		(144		)
Floating rate GSE subordinated debt	—		—			65,972		(4,028		)
Fixed rate U.S. Treasuries	85,038		(11		)	—		—
Total	$	174,547	$	(260	)	$	194,359	$	(10,590	)



	As of December 31, 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	$	—	$	—		$	40,576	$	(6,024	)
Floating rate asset-backed securities	19,388		(37		)	—		—
Floating rate Government/GSE guaranteed mortgage-backed securities	76,100		(164		)	76,867		(279		)
Floating rate GSE subordinated debt	—		—			66,320		(3,680		)
Floating rate U.S. Treasuries	74,980		(11		)	—		—
Fixed rate U.S. Treasuries	325,033		(16		)	—		—
Total	$	495,501	$	(228	)	$	183,763	$	(9,983	)

The unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to June 30, 2015 and December 31, 2014, 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 June 30, 2015, 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 three that were rated "A-." As of December 31, 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 one that was rated "A-." The unrealized losses were on 29 and 35 individual investment securities as of June 30, 2015 and December 31, 2014, respectively.

As of June 30, 2015, 12 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $10.6 million. As of December 31, 2014, 15 of the securities

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in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $10.0 million. Securities in unrealized loss positions for 12 months or longer have a fair value as of June 30, 2015 that is, on average, approximately 95 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 maturity or changes in credit spreads. 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 June 30, 2015 and December 31, 2014.

Farmer Mac did not own any held-to-maturity investment securities as of June 30, 2015 and December 31, 2014. As of June 30, 2015, Farmer Mac owned trading investment securities with an amortized cost of $2.4 million, a fair value of $0.6 million, and a weighted average yield of 4.27 percent. As of December 31, 2014, Farmer Mac owned trading investment securities with an amortized cost of $2.9 million, a fair value of $0.7 million, and a weighted average yield of 4.24 percent.

The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by remaining contractual maturity as of June 30, 2015 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 June 30, 2015
	Available-for-Sale Securities
	Amortized Cost		Fair Value		Weighted- Average Yield
	(dollars in thousands)
Due within one year	$	925,228	$	925,400	0.31%
Due after one year through five years	103,309		103,939		1.19%
Due after five years through ten years	239,193		239,790		0.88%
Due after ten years	586,513		582,770		0.90%
Total	$	1,854,243	$	1,851,899	0.62%

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3.	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 June 30, 2015 and December 31, 2014:

Table 3.1



	As of June 30, 2015
	Unpaid Principal Balance		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Held-to-maturity:
AgVantage	$	1,819,159	$	2,868		$	1,822,027	$	14,269	$	—		$	1,836,296
Available-for-sale:
AgVantage	$	4,022,251	$	—		$	4,022,251	$	36,810	$	(42,861	)	$	4,016,200
Farmer Mac Guaranteed USDA Securities	33,822		(339		)	33,483		1,525		—			35,008
Total Farmer Mac Guaranteed Securities	4,056,073		(339		)	4,055,734		38,335		(42,861		)	4,051,208
USDA Securities	1,785,662		2,536			1,788,198		37,243		(35		)	1,825,406
Total available-for-sale	$	5,841,735	$	2,197		$	5,843,932	$	75,578	$	(42,896	)	$	5,876,614
Trading:
USDA Securities	$	32,058	$	2,384		$	34,442	$	100	$	(772	)	$	33,770



	As of December 31, 2014
	Unpaid Principal Balance		Unamortized Premium/(Discount)			Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Held-to-maturity:
AgVantage	$	1,785,340	$	9,280		$	1,794,620	$	6,211	$	(255	)	$	1,800,576
Available-for-sale:
AgVantage	$	3,625,073	$	—		$	3,625,073	$	36,442	$	(29,853	)	$	3,631,662
Farmer Mac Guaranteed USDA Securities	27,831		(442		)	27,389		237		(7		)	27,619
Total Farmer Mac Guaranteed Securities	3,652,904		(442		)	3,652,462		36,679		(29,860		)	3,659,281
USDA Securities	1,717,813		3,162			1,720,975		11,850		(1,603		)	1,731,222
Total available-for-sale	$	5,370,717	$	2,720		$	5,373,437	$	48,529	$	(31,463	)	$	5,390,503
Trading:
USDA Securities	$	38,412	$	2,748		$	41,160	$	114	$	(964	)	$	40,310

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As of June 30, 2015 and December 31, 2014, unrealized losses on held-to-maturity and available-for-sale on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities were as follows:

Table 3.2



	As of June 30, 2015
	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)
Available-for-sale:
AgVantage	$	1,185,341	$	(33,229	)	$	859,874	$	(9,632	)
USDA Securities	—		—			97,848		(35		)
Total available-for-sale	$	1,185,341	$	(33,229	)	$	957,722	$	(9,667	)



	As of December 31, 2014
	Held-to-Maturity and 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)
Held-to-maturity:
AgVantage	$	547	$	(1	)	$	49,745	$	(254	)

Available-for-sale:
AgVantage	$	685,131	$	(13,115	)	$	1,460,089	$	(16,738	)
Farmer Mac Guaranteed USDA Securities	3,720		(7		)	—		—
USDA Securities	264,375		(1,549		)	97,817		(54		)
Total available-for-sale	$	953,226	$	(14,671	)	$	1,557,906	$	(16,792	)

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to June 30, 2015 and December 31, 2014, 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. The unrealized losses from AgVantage securities were on 16 available-for-sale securities as of June 30, 2015. There were no unrealized losses from held-to-maturity AgVantage securities as of June 30, 2015. The unrealized losses from AgVantage securities were on 2 held-to-maturity securities and 23 available-for-sale securities as of As of December 31, 2014. As of June 30, 2015, 6 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $9.6 million. As of December 31, 2014, 15 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $16.7 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. These Farmer Mac Guaranteed Securities are referred to 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 a requirement that delinquent loans be removed

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