Document
As filed with the Securities and Exchange Commission on November 9, 2016
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, 2016
Commission File Number 001-14951 
 ____________________________________________________________

logo2016a07.jpg
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 1, 2016, the registrant had outstanding 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,952,481 shares of Class C Non-Voting Common Stock.


Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I

Item 1.
Financial Statements



3
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
313,581

 
$
1,210,084

Investment securities:
 

 
 

Available-for-sale, at fair value
3,001,185

 
2,775,025

Trading, at fair value
—

 
491

Total investment securities
3,001,185

 
2,775,516

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
4,937,481

 
4,152,605

Held-to-maturity, at amortized cost
1,153,646

 
1,274,016

Total Farmer Mac Guaranteed Securities
6,091,127

 
5,426,621

USDA Securities:
 

 
 

Available-for-sale, at fair value
1,980,327

 
1,888,344

Trading, at fair value
23,489

 
28,975

Total USDA Securities
2,003,816

 
1,917,319

Loans:
 

 
 

Loans held for investment, at amortized cost
3,299,618

 
3,258,413

Loans held for investment in consolidated trusts, at amortized cost
1,039,770

 
708,111

Allowance for loan losses
(4,954
)
 
(4,480
)
Total loans, net of allowance
4,334,434

 
3,962,044

Real estate owned, at lower of cost or fair value
1,528

 
1,369

Financial derivatives, at fair value
4,627

 
3,816

Interest receivable (includes $7,683 and $7,938, respectively, related to consolidated trusts)
86,699

 
112,700

Guarantee and commitment fees receivable
39,655

 
40,189

Deferred tax asset, net
29,187

 
42,916

Prepaid expenses and other assets
95,066

 
47,780

Total Assets
$
16,000,905

 
$
15,540,354

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
9,295,700

 
$
9,111,461

Due after one year
4,820,388

 
4,967,036

Total notes payable
14,116,088

 
14,078,497

Debt securities of consolidated trusts held by third parties
1,044,559

 
713,536

Financial derivatives, at fair value
123,796

 
77,199

Accrued interest payable (includes $6,487 and $6,705, respectively, related to consolidated trusts)
40,270

 
47,621

Guarantee and commitment obligation
37,764

 
38,609

Accounts payable and accrued expenses
35,575

 
29,089

Reserve for losses
1,969

 
2,083

Total Liabilities
15,400,021

 
14,986,634

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, 8,949,511 shares and 9,155,661 shares outstanding, respectively
8,950

 
9,156

Additional paid-in capital
118,897

 
117,862

Accumulated other comprehensive income/(loss), net of tax
13,564

 
(11,019
)
Retained earnings
252,989

 
231,228

Total Stockholders' Equity
600,690

 
553,517

Non-controlling interest
194

 
203

Total Equity
600,884

 
553,720

Total Liabilities and Equity
$
16,000,905

 
$
15,540,354

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



4
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
6,994

 
$
3,185

 
$
20,235

 
$
9,144

Farmer Mac Guaranteed Securities and USDA Securities
38,129

 
34,002

 
110,938

 
101,608

Loans
34,409

 
29,731

 
99,486

 
86,509

Total interest income
79,532

 
66,918

 
230,659

 
197,261

Total interest expense
43,969

 
34,735

 
127,098

 
102,425

Net interest income
35,563

 
32,183

 
103,561

 
94,836

(Provision for)/release of loan losses
(191
)
 
1,164

 
(604
)
 
978

Net interest income after (provision for)/release of loan losses
35,372

 
33,347

 
102,957

 
95,814

Non-interest income/(loss):
 

 
 

 
 
 
 
Guarantee and commitment fees
3,798

 
3,532

 
11,079

 
10,297

(Losses)/gains on financial derivatives and hedging activities
(1,601
)
 
(9,568
)
 
(13,079
)
 
939

Gains/(losses) on trading securities
1,182

 
(8
)
 
1,934

 
524

Gains/(losses) on sale of available-for-sale investment securities
—

 
3

 
(9
)
 
9

Gains/(losses) on sale of real estate owned
15

 
—

 
15

 
(1
)
Other income
707

 
1,060

 
1,221

 
1,933

Non-interest income/(loss)
4,101

 
(4,981
)
 
1,161

 
13,701

Non-interest expense:
 

 
 

 
 
 
 
Compensation and employee benefits
5,438

 
5,236

 
16,823

 
16,662

General and administrative
3,474

 
3,676

 
10,757

 
9,873

Regulatory fees
613

 
600

 
1,838

 
1,800

Real estate owned operating costs, net
—

 
48

 
39

 
47

(Release of)/provision for reserve for losses
(222
)
 
861

 
(114
)
 
1,235

Non-interest expense
9,303

 
10,421

 
29,343

 
29,617

Income before income taxes
30,170

 
17,945

 
74,775

 
79,898

Income tax expense
10,529

 
6,327

 
26,264

 
24,327

Net income
19,641

 
11,618

 
48,511

 
55,571

Less: Net loss/(income) attributable to non-controlling interest
18

 
36

 
62

 
(5,199
)
Net income attributable to Farmer Mac
19,659

 
11,654

 
48,573

 
50,372

Preferred stock dividends
(3,295
)
 
(3,295
)
 
(9,886
)
 
(9,886
)
Loss on retirement of preferred stock
—

 
—

 
—

 
(8,147
)
Net income attributable to common stockholders
$
16,364

 
$
8,359

 
$
38,687

 
$
32,339

 
 
 
 
 
 
 
 
Earnings per common share and dividends:
 
 
 
 
 
 
 
Basic earnings per common share
$
1.56

 
$
0.76

 
$
3.70

 
$
2.94

Diluted earnings per common share
$
1.54

 
$
0.74

 
$
3.60

 
$
2.85

Common stock dividends per common share
$
0.26

 
$
0.16

 
$
0.78

 
$
0.48

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


5
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(in thousands)
Net income
$
19,641

 
$
11,618

 
$
48,511

 
$
55,571

Other comprehensive income/(loss) before taxes:
 
 
 
 
 
 
 
Net unrealized gains/(losses) on available-for sale securities
552

 
(56,949
)
 
46,305

 
(40,363
)
Net changes in held-to-maturity securities
(73
)
 
(2,236
)
 
(2,081
)
 
(8,930
)
Net unrealized gains/(losses) on cash flow hedges
1,336

 
(3,195
)
 
(6,403
)
 
(2,012
)
Other comprehensive income/(loss) before tax
1,815

 
(62,380
)
 
37,821

 
(51,305
)
Income tax (expense)/benefit related to other comprehensive income
(635
)
 
21,833

 
(13,238
)
 
17,958

Other comprehensive income/(loss), net of tax
1,180

 
(40,547
)
 
24,583

 
(33,347
)
Comprehensive income/(loss)
20,821

 
(28,929
)
 
73,094

 
22,224

Less: comprehensive loss/(income) attributable to non-controlling interest
18

 
36

 
62

 
(5,199
)
Comprehensive income/(loss) attributable to Farmer Mac
$
20,839

 
$
(28,893
)
 
$
73,156

 
$
17,025

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


6
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Other
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid-In
 
Comprehensive
 
Retained
 
Non-controlling
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income/(Loss)
 
Earnings
 
Interest
 
Equity
 
 
(in thousands)
Balance as of December 31, 2014
 
8,400

 
$
204,759

 
10,937

 
$
10,937

 
$
113,559

 
$
15,533

 
$
201,013

 
$
236,028

 
$
781,829

Net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac
 
—

 
—

 
—

 
—

 
—

 
—

 
50,372

 
—

 
50,372

Attributable to non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(155
)
 
(155
)
Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
—

 
(33,347
)
 
—

 
—

 
(33,347
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

 
(9,886
)
 
—

 
(9,886
)
Common stock
 
—

 
—

 
—

 
—

 
—

 
—

 
(5,280
)
 
—

 
(5,280
)
Issuance of Class C Common Stock
 
—

 
—

 
110

 
110

 
10

 
—

 
—

 
—

 
120

Repurchase of Class C Common Stock
 
—

 
—

 
(104
)
 
(104
)
 
—

 
—

 
(2,686
)
 
—

 
(2,790
)
Stock-based compensation cost
 
—

 
—

 
—

 
—

 
2,457

 
—

 
—

 
—

 
2,457

Other stock-based award activity
 
—

 
—

 
—

 
—

 
1,051

 
—

 
—

 
—

 
1,051

Investment in subsidiary - non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
175

 
175

Redemption of Farmer Mac II LLC preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

 
(8,147
)
 
(235,853
)
 
(244,000
)
Balance as of September 30, 2015
 
8,400

 
$
204,759

 
10,943

 
$
10,943

 
$
117,077

 
$
(17,814
)
 
$
225,386

 
$
195

 
$
540,546

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
8,400

 
$
204,759

 
10,687

 
$
10,687

 
$
117,862

 
$
(11,019
)
 
$
231,228

 
$
203

 
$
553,720

Net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac
 
—

 
—

 
—

 
—

 
—

 
—

 
48,573

 
—

 
48,573

Attributable to non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(62
)
 
(62
)
Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
24,583

 
—

 
—

 
24,583

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

 
(9,886
)
 
—

 
(9,886
)
Common stock
 
—

 
—

 
—

 
—

 
—

 
—

 
(8,145
)
 
—

 
(8,145
)
Issuance of Class C Common Stock
 
—

 
—

 
101

 
101

 
23

 
—

 
—

 
—

 
124

Repurchase of Class C Common Stock
 
—

 
—

 
(307
)
 
(307
)
 
—

 
—

 
(8,781
)
 
—

 
(9,088
)
Stock-based compensation cost
 
—

 
—

 
—

 
—

 
2,565

 
—

 
—

 
—

 
2,565

Other stock-based award activity
 
—

 
—

 
—

 
—

 
(1,553
)
 
—

 
—

 
—

 
(1,553
)
Investment in subsidiary - non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
53

 
53

Balance as of September 30, 2016
 
8,400

 
$
204,759

 
10,481

 
$
10,481

 
$
118,897

 
$
13,564

 
$
252,989

 
$
194

 
$
600,884

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


7
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
48,511

 
$
55,571

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
1,343

 
2,199

Amortization of debt premiums, discounts and issuance costs
24,789

 
9,601

Net change in fair value of trading securities, hedged assets, and financial derivatives
1,672

 
(8,705
)
Losses/(gains) on sale of available-for-sale investment securities
9

 
(9
)
(Gains)/losses on sale of real estate owned
(15
)
 
1

Total provision for losses
490

 
257

Deferred income taxes
(1,270
)
 
2,182

Stock-based compensation expense
2,565

 
2,457

Proceeds from repayment of trading investment securities
2,212

 
544

Proceeds from repayment of loans purchased as held for sale
67,506

 
82,864

Net change in:
 
 
 
Interest receivable
26,172

 
32,911

Guarantee and commitment fees receivable
534

 
(698
)
Other assets
(46,832
)
 
(2,369
)
Accrued interest payable
(7,351
)
 
(10,525
)
Other liabilities
(1,468
)
 
(864
)
Net cash provided by operating activities
118,867

 
165,417

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investment securities
(1,365,314
)
 
(1,282,474
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(2,203,574
)
 
(1,093,737
)
Purchases of loans held for investment
(762,018
)
 
(565,829
)
Purchases of defaulted loans
(2,516
)
 
(2,244
)
Proceeds from repayment of available-for-sale investment securities
957,973

 
1,111,093

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
1,467,052

 
901,327

Proceeds from repayment of loans purchased as held for investment
333,920

 
248,989

Proceeds from sale of available-for-sale investment securities
186,769

 
83,735

Proceeds from sale of Farmer Mac Guaranteed Securities
457,369

 
231,242

Payments from sale of real estate owned
295

 
(1
)
Net cash used in investing activities
(930,044
)
 
(367,899
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
77,411,229

 
68,066,267

Proceeds from issuance of medium-term notes
4,763,631

 
3,406,037

Payments to redeem discount notes
(79,058,129
)
 
(66,933,948
)
Payments to redeem medium-term notes
(3,103,800
)
 
(3,875,715
)
Excess tax benefits related to stock-based awards
408

 
154

Payments to third parties on debt securities of consolidated trusts
(71,806
)
 
(42,449
)
Proceeds from common stock issuance
405

 
1,685

Common stock repurchased
(9,286
)
 
(1,994
)
Investment in subsidiary - non-controlling interest
53

 
175

Redemption of Farmer Mac II LLC Preferred Stock
—

 
(244,000
)
Dividends paid - Non-controlling interest - preferred stock
—

 
(5,415
)
Dividends paid on common and preferred stock
(18,031
)
 
(15,166
)
Net cash (used)/provided by financing activities
(85,326
)
 
355,631

Net (decrease)/increase in cash and cash equivalents
(896,503
)
 
153,149

Cash and cash equivalents at beginning of period
1,210,084

 
1,363,387

Cash and cash equivalents at end of period
$
313,581

 
$
1,516,536

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



8
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1.
SUMMARY OF SIGNIFICANT 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, 2015 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2015 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 2015 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, 2015 filed with the SEC on March 10, 2016. 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 nine months ended September 30, 2016.

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 (which began doing business as AgVisory during first quarter 2016), whose principal activity is to appraise agricultural real estate.  The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.  



9
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 September 30, 2016
 
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
$
1,039,770

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,039,770

Debt securities of consolidated trusts held by third parties (1)
1,044,559

 
—

 
—

 
—

 
—

 
1,044,559

   Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Carrying value (2)
—

 
32,824

 
—

 
30,666

 
—

 
63,490

      Maximum exposure to loss (3)
—

 
32,364

 
—

 
30,000

 
—

 
62,364

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
758,066

 
758,066

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
756,693

 
756,693

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
441,417

 
61,054

 
—

 
970,000

 
—

 
1,472,471

(1) 
Includes borrower remittances of $4.8 million. The borrower remittances have not been passed through to third party investors as of September 30, 2016.
(2) 
Includes $0.5 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 $0.7 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.



10
Table of Contents

 
Consolidation of Variable Interest Entities
 
As of December 31, 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
$
708,111

 
$
—

 
$
—

 
$
—

 
$
—

 
$
708,111

Debt securities of consolidated trusts held by third parties (1)
713,536

 
—

 
—

 
—

 
—

 
713,536

   Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Carrying value (2)
—

 
31,360

 
—

 
31,400

 
—

 
62,760

      Maximum exposure to loss (3)
—

 
31,553

 
—

 
30,000

 
—

 
61,553

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
917,292

 
917,292

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
918,121

 
918,121

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
514,051

 
10,272

 
—

 
970,000

 
—

 
1,494,323

(1) 
Includes borrower remittances of $5.4 million, which have not been passed through to third party investors as of December 31, 2015.
(2) 
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 $1.4 million.
(3) 
Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
(4) 
Includes auction-rate certificates, asset-backed securities, and 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.
 
(a)
Statements of Cash Flows

The following table sets forth information regarding certain non-cash transactions for the nine months ended September 30, 2016 and 2015:

Table 1.2

 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
(in thousands)
Non-cash activity:
 
 
 
Loans acquired and securitized as Farmer Mac Guaranteed Securities
$
457,369

 
$
231,242

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
402,841

 
231,242

Purchases of securities - traded, not yet settled
25,000

 
15,000

Issuance costs on the retirement of Farmer Mac II LLC Preferred Stock
—

 
8,147

Unsettled common stock repurchases
—

 
796




11
Table of Contents


(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 three and nine months ended September 30, 2016 and 2015:

Table 1.3

 
For the Three Months Ended
 
September 30, 2016
 
September 30, 2015
 
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
$
16,364

 
10,473

 
$
1.56

 
$
8,359

 
11,028

 
$
0.76

Effect of dilutive securities(1)
 
 
 
 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock
—

 
176

 
(0.02
)
 
—

 
243

 
(0.02
)
Diluted EPS
$
16,364

 
10,649

 
$
1.54

 
$
8,359

 
11,271

 
$
0.74

(1) 
For the three months ended September 30, 2016 and 2015, stock options and SARs of 54,709 and 476,699, 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, 2016 and 2015, contingent shares of non-vested restricted stock of 37,284 and 45,034, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.
 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
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
$
38,687

 
10,464

 
$
3.70

 
$
32,339

 
10,992

 
$
2.94

Effect of dilutive securities(1)
 
 
 
 
 
 
 
 
 
 
 
Stock options, SARs and restricted stock
—

 
291

 
(0.10
)
 
—

 
355

 
(0.09
)
Diluted EPS
$
38,687

 
10,755

 
$
3.60

 
$
32,339

 
11,347

 
$
2.85

(1) 
For the nine months ended September 30, 2016 and 2015, stock options and SARs of 115,875 and 302,598, 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, 2016 and 2015, contingent shares of non-vested restricted stock of 37,284 and 40,194, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.

(c)
Comprehensive Income

Comprehensive income represents all changes in stockholders' equity except those resulting from investments by or distributions to stockholders, and is comprised of net income and unrealized gains and losses on available-for-sale securities, certain held-to-maturity securities transferred from the available-for-sale classification, and cash flow hedges, net of related taxes.



12
Table of Contents

The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of tax, by component for the three and nine months ended September 30, 2016 and 2015:

Table 1.4

 
As of September 30, 2016
 
As of September 30, 2015
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Cash Flow Hedges
 
Total
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Cash Flow Hedges
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
19,704

 
$
(1,781
)
 
$
(5,539
)
 
$
12,384

 
$
20,498

 
$
1,622

 
$
613

 
$
22,733

Other comprehensive income/(loss) before reclassifications
2,746

 
—

 
527

 
3,273

 
(33,392
)
 
—

 
(2,347
)
 
(35,739
)
Amounts reclassified from AOCI
(2,388
)
 
(47
)
 
342

 
(2,093
)
 
(3,624
)
 
(1,454
)
 
270

 
(4,808
)
Net other comprehensive income/(loss)
358

 
(47
)
 
869

 
1,180

 
(37,016
)
 
(1,454
)
 
(2,077
)
 
(40,547
)
Ending Balance
$
20,062

 
$
(1,828
)
 
$
(4,670
)
 
$
13,564

 
$
(16,518
)
 
$
168

 
$
(1,464
)
 
$
(17,814
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
(10,035
)
 
$
(476
)
 
$
(508
)
 
$
(11,019
)
 
$
9,716

 
$
5,973

 
$
(156
)
 
$
15,533

Other comprehensive income/(loss) before reclassifications
37,446

 
—

 
(5,136
)
 
32,310

 
(15,985
)
 
—

 
(1,814
)
 
(17,799
)
Amounts reclassified from AOCI
(7,349
)
 
(1,352
)
 
974

 
(7,727
)
 
(10,249
)
 
(5,805
)
 
506

 
(15,548
)
Net other comprehensive income/(loss)
30,097

 
(1,352
)
 
(4,162
)
 
24,583

 
(26,234
)
 
(5,805
)
 
(1,308
)
 
(33,347
)
Ending Balance
$
20,062

 
$
(1,828
)
 
$
(4,670
)
 
$
13,564

 
$
(16,518
)
 
$
168

 
$
(1,464
)
 
$
(17,814
)



13
Table of Contents

The following table presents other comprehensive income activity, the impact on net income of amounts reclassified from each component of AOCI, and the related tax impact for the three and nine months ended September 30, 2016 and 2015:

Table 1.5

 
For the Three Months Ended
 
September 30, 2016
 
September 30, 2015
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains/(losses) on available-for-sale-securities
$
4,225

 
$
1,479

 
$
2,746

 
$
(51,373
)
 
$
(17,981
)
 
$
(33,392
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
(Losses)/gains on financial derivatives and hedging activities(1)
(3,652
)
 
(1,278
)
 
(2,374
)
 
(5,038
)
 
(1,763
)
 
(3,275
)
Gains/(losses) on sale of available-for-sale investment securities(2)
—

 
—

 
—

 
(4
)
 
(2
)
 
(2
)
Other income(3)
(21
)
 
(7
)
 
(14
)
 
(534
)
 
(187
)
 
(347
)
Total
$
552

 
$
194

 
$
358

 
$
(56,949
)
 
$
(19,933
)
 
$
(37,016
)
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
$
(73
)
 
$
(26
)
 
$
(47
)
 
$
(2,236
)
 
$
(782
)
 
$
(1,454
)
Total
$
(73
)
 
$
(26
)
 
$
(47
)
 
$
(2,236
)
 
$
(782
)
 
$
(1,454
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
$
810

 
$
283

 
$
527

 
$
(3,611
)
 
$
(1,264
)
 
$
(2,347
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
526

 
184

 
342

 
416

 
146

 
270

Total
$
1,336

 
$
467

 
$
869

 
$
(3,195
)
 
$
(1,118
)
 
$
(2,077
)
Other comprehensive income/(loss)
$
1,815

 
$
635

 
$
1,180

 
$
(62,380
)
 
$
(21,833
)
 
$
(40,547
)
(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents unrealized gains and losses on sales of available-for-sale investment securities.
(3) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(4) 
Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income.
(5) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.



14
Table of Contents

 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale-securities
$
57,610

 
$
20,164

 
$
37,446

 
$
(24,594
)
 
$
(8,609
)
 
$
(15,985
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
(Losses)/gains on financial derivatives and hedging activities(1)
(11,591
)
 
(4,056
)
 
(7,535
)
 
(14,852
)
 
(5,198
)
 
(9,654
)
Gains/(losses) on sale of available-for-sale investment securities(2)
9

 
3

 
6

 
(10
)
 
(5
)
 
(5
)
Other income(3)
277

 
97

 
180

 
(907
)
 
(317
)
 
(590
)
Total
$
46,305

 
$
16,208

 
$
30,097

 
$
(40,363
)
 
$
(14,129
)
 
$
(26,234
)
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
$
(2,081
)
 
$
(729
)
 
$
(1,352
)
 
$
(8,930
)
 
$
(3,125
)
 
$
(5,805
)
Total
$
(2,081
)
 
$
(729
)
 
$
(1,352
)
 
$
(8,930
)
 
$
(3,125
)
 
$
(5,805
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses)/gains on cash flow hedges
$
(7,901
)
 
$
(2,765
)
 
$
(5,136
)
 
$
(2,791
)
 
$
(977
)
 
$
(1,814
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
1,498

 
524

 
974

 
779

 
273

 
506

Total
$
(6,403
)
 
$
(2,241
)
 
$
(4,162
)
 
$
(2,012
)
 
$
(704
)
 
$
(1,308
)
Other comprehensive income
$
37,821

 
$
13,238

 
$
24,583

 
$
(51,305
)
 
$
(17,958
)
 
$
(33,347
)
(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents unrealized gains and losses on sales of available-for-sale investment securities.
(3) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(4) 
Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income.
(5) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.

(d) New Accounting Standards

In January 2016, the FASB issued Accounting Standards Update ("ASU") 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in GAAP on the classification and measurement of financial instruments. The ASU significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU 2016-02, "Leases," which provides new guidance intended to improve financial reporting about leasing transactions. The ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.



15
Table of Contents

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which provides new guidance intended to simplify several aspects of accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses," which will require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Entities will be required to use forward-looking information to form their credit loss estimates.  The ASU will also require enhanced disclosures to help users of financial statements better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.  The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019.   Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Farmer Mac is currently evaluating the impact of adopting the new guidance on its consolidated financial statements. 

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)," which amends the existing guidance to add or clarify current guidance in GAAP on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice in how certain transactions are classified. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac's statement of cash flows.

(e)
Reclassifications

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



16
Table of Contents


2.
INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of September 30, 2016 and December 31, 2015:
 
Table 2.1

 
As of September 30, 2016
 
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
$
19,700

 
$
—

 
$
19,700

 
$
—

 
$
(2,118
)
 
$
17,582

Floating rate asset-backed securities
52,406