Document


As filed with the Securities and Exchange Commission on May 10, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o (Do not check if smaller reporting company)
 
 
 
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes        o                                No           x
As of May 1, 2017, the registrant had outstanding 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock, and 9,066,370 shares of Class C Non-Voting Common Stock.



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I

Item 1.
Financial Statements



3


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)

 
As of
 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
313,641

 
$
265,229

Investment securities:
 

 
 

Available-for-sale, at fair value
2,479,244

 
2,515,851

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
5,243,046

 
4,853,685

Held-to-maturity, at amortized cost
1,074,686

 
1,149,231

Total Farmer Mac Guaranteed Securities
6,317,732

 
6,002,916

USDA Securities:
 

 
 

Trading, at fair value
18,602

 
20,388

Held-to-maturity, at amortized cost
2,025,822

 
2,009,225

Total USDA Securities
2,044,424

 
2,029,613

Loans:
 

 
 

Loans held for investment, at amortized cost
3,432,091

 
3,379,884

Loans held for investment in consolidated trusts, at amortized cost
1,208,950

 
1,132,966

Allowance for loan losses
(5,811
)
 
(5,415
)
Total loans, net of allowance
4,635,230

 
4,507,435

Real estate owned, at lower of cost or fair value
5,456

 
1,528

Financial derivatives, at fair value
2,674

 
23,182

Interest receivable (includes $8,163 and $12,584, respectively, related to consolidated trusts)
85,522

 
122,782

Guarantee and commitment fees receivable
38,748

 
38,871

Deferred tax asset, net
5,085

 
12,291

Prepaid expenses and other assets
4,001

 
86,322

Total Assets
$
15,931,757

 
$
15,606,020

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
7,616,431

 
$
8,440,123

Due after one year
6,300,750

 
5,222,977

Total notes payable
13,917,181

 
13,663,100

Debt securities of consolidated trusts held by third parties
1,212,792

 
1,142,704

Financial derivatives, at fair value
32,054

 
58,152

Accrued interest payable (includes $6,771 and $10,881, respectively, related to consolidated trusts)
46,845

 
49,700

Guarantee and commitment obligation
36,802

 
37,282

Accounts payable and accrued expenses
18,234

 
9,415

Reserve for losses
1,827

 
2,020

Total Liabilities
15,265,735

 
14,962,373

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, 9,065,194 shares and 9,007,481 shares outstanding, respectively
9,065

 
9,008

Additional paid-in capital
118,386

 
118,655

Accumulated other comprehensive income, net of tax
41,544

 
33,758

Retained earnings
290,530

 
275,714

Total Stockholders' Equity
665,815

 
643,425

Non-controlling interest
207

 
222

Total Equity
666,022

 
643,647

Total Liabilities and Equity
$
15,931,757

 
$
15,606,020

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



4


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
For the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
(in thousands, except per share amounts)
Interest income:
 
 
 
Investments and cash equivalents
$
7,243

 
$
6,681

Farmer Mac Guaranteed Securities and USDA Securities
42,522

 
35,510

Loans
36,852

 
31,700

Total interest income
86,617

 
73,891

Total interest expense
49,546

 
40,251

Net interest income
37,071

 
33,640

Provision for loan losses
(637
)
 
(49
)
Net interest income after provision for loan losses
36,434

 
33,591

Non-interest income/(loss):
 
 
 
Guarantee and commitment fees
3,844

 
3,626

Gains/(losses) on financial derivatives and hedging activities
2,486

 
(6,782
)
(Losses)/gains on trading securities
(82
)
 
358

Losses on sale of available-for-sale investment securities
—

 
(9
)
Losses on sale of real estate owned
(5
)
 
—

Other income
553

 
101

Non-interest income/(loss)
6,796

 
(2,706
)
Non-interest expense:
 
 
 
Compensation and employee benefits
6,317

 
5,774

General and administrative
3,800

 
3,526

Regulatory fees
625

 
613

Real estate owned operating costs, net
—

 
39

(Release of)/provision for reserve for losses
(193
)
 
14

Non-interest expense
10,549

 
9,966

Income before income taxes
32,681

 
20,919

Income tax expense
10,786

 
7,335

Net income
21,895

 
13,584

Less: Net loss attributable to non-controlling interest
15

 
28

Net income attributable to Farmer Mac
21,910

 
13,612

Preferred stock dividends
(3,295
)
 
(3,295
)
Net income attributable to common stockholders
$
18,615

 
$
10,317

 
 
 
 
Earnings per common share and dividends:
 
 
 
Basic earnings per common share
$
1.76

 
$
0.99

Diluted earnings per common share
$
1.73

 
$
0.94

Common stock dividends per common share
$
0.36

 
$
0.26

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


5


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
For the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
(in thousands)
Net income
$
21,895

 
$
13,584

Other comprehensive income/(loss) before taxes:
 
 
 
Net unrealized gains/(losses) on available-for-sale securities
14,838

 
(6,377
)
Net changes in held-to-maturity securities
(3,487
)
 
(1,011
)
Net unrealized gains/(losses) on cash flow hedges
629

 
(4,763
)
Other comprehensive income/(loss) before tax
11,980

 
(12,151
)
Income tax (expense)/benefit related to other comprehensive income
(4,194
)
 
4,253

Other comprehensive income/(loss), net of tax
7,786

 
(7,898
)
Comprehensive income
29,681

 
5,686

Less: comprehensive loss attributable to non-controlling interest
15

 
28

Comprehensive income attributable to Farmer Mac
$
29,696

 
$
5,714

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


6


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, 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
—

 
—

 
—

 
—

 
—

 
—

 
13,612

 
—

 
13,612

Attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(28
)
 
(28
)
Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
(7,898
)
 
—

 
—

 
(7,898
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(3,295
)
 
—

 
(3,295
)
Common stock
—

 
—

 
—

 
—

 
—

 
—

 
(2,702
)
 
—

 
(2,702
)
Issuance of Class C Common Stock
—

 
—

 
71

 
71

 
98

 
—

 
—

 
—

 
169

Repurchase of Class C Common Stock
—

 
—

 
(307
)
 
(307
)
 
—

 
—

 
(8,781
)
 
—

 
(9,088
)
Stock-based compensation cost
—

 
—

 
—

 
—

 
1,027

 
—

 
—

 
—

 
1,027

Other stock-based award activity
—

 
—

 
—

 
—

 
(1,553
)
 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
—

 
—

 
52

 
52

Balance as of March 31, 2016
8,400

 
$
204,759

 
10,451

 
$
10,451

 
$
117,434

 
$
(18,917
)
 
$
230,062

 
$
227

 
$
544,016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
8,400

 
$
204,759

 
10,539

 
$
10,539

 
$
118,655

 
$
33,758

 
$
275,714

 
$
222

 
$
643,647

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

 
—

 
—

 
—

 
—

 
—

 
21,910

 

 
21,910

Attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
7,786

 
—

 
—

 
7,786

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(3,295
)
 
—

 
(3,295
)
Common stock
—

 
—

 
—

 
—

 
—

 
—

 
(3,799
)
 
—

 
(3,799
)
Issuance of Class C Common Stock
—

 
—

 
57

 
57

 
144

 
—

 
—

 
—

 
201

Stock-based compensation cost
—

 
—

 
—

 
—

 
981

 
—

 
—

 
—

 
981

Other stock-based award activity
—

 
—

 
—

 
—

 
(1,394
)
 
—

 
—

 
—

 
(1,394
)
Investment in subsidiary - non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance as of March 31, 2017
8,400

 
$
204,759

 
10,596

 
$
10,596

 
$
118,386

 
$
41,544

 
$
290,530

 
$
207

 
$
666,022

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


7


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
21,895

 
$
13,584

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
181

 
501

Amortization of debt premiums, discounts and issuance costs
5,656

 
7,643

Net change in fair value of trading securities, hedged assets, and financial derivatives
525

 
2,631

Losses on sale of available-for-sale investment securities
—

 
9

Losses on sale of real estate owned
5

 
—

Total provision for losses
444

 
63

Excess tax benefits related to stock-based awards
679

 
—

Deferred income taxes
1,419

 
(1,483
)
Stock-based compensation expense
981

 
1,027

Proceeds from repayment of trading investment securities
—

 
205

Proceeds from repayment of loans purchased as held for sale
25,928

 
28,794

Net change in:
 
 
 
Interest receivable
37,292

 
37,633

Guarantee and commitment fees receivable
(357
)
 
800

Other assets
2,236

 
(31,021
)
Accrued interest payable
(2,855
)
 
(9,469
)
Other liabilities
8,605

 
2,495

Net cash provided by operating activities
102,634

 
53,412

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investment securities
(66,561
)
 
(341,099
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(692,245
)
 
(1,026,187
)
Purchases of loans held for investment
(341,702
)
 
(208,215
)
Purchases of defaulted loans
(311
)
 
(1,415
)
Proceeds from repayment of available-for-sale investment securities
183,749

 
455,315

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
338,063

 
676,858

Proceeds from repayment of loans purchased as held for investment
182,790

 
132,652

Proceeds from sale of available-for-sale investment securities
—

 
186,769

Proceeds from sale of Farmer Mac Guaranteed Securities
149,607

 
139,561

Payments from sale of real estate owned
697

 
—

Net cash (used)/provided by investing activities
(245,913
)
 
14,239

Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
13,618,574

 
23,089,113

Proceeds from issuance of medium-term notes
2,251,535

 
1,207,092

Payments to redeem discount notes
(14,766,905
)
 
(22,873,972
)
Payments to redeem medium-term notes
(856,300
)
 
(921,000
)
Excess tax benefits related to stock-based awards
—

 
234

Payments to third parties on debt securities of consolidated trusts
(46,926
)
 
(33,010
)
Proceeds from common stock issuance
148

 
101

Tax payments related to share-based awards
(1,341
)
 
(1,499
)
Common stock repurchased
—

 
(9,286
)
Investment in subsidiary - non-controlling interest
—

 
52

Dividends paid on common and preferred stock
(7,094
)
 
(5,997
)
Net cash provided by financing activities
191,691

 
451,828

Net increase in cash and cash equivalents
48,412

 
519,479

Cash and cash equivalents at beginning of period
265,229

 
1,210,084

Cash and cash equivalents at end of period
$
313,641

 
$
1,729,563

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



8


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, 2016 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2016 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 2016 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, 2016 filed with the SEC on March 9, 2017. 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 months ended March 31, 2017.


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.  As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company as a company redemption in exchange for $5,000. Farmer Mac recognized a loss of approximately $0.1 million after-tax upon the transfer, which will be reflected in Farmer Mac's financial results for second quarter 2017. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.






9




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

Table 1.1
 
Consolidation of Variable Interest Entities
 
As of March 31, 2017
 
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
$
1,208,950

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,208,950

Debt securities of consolidated trusts held by third parties (1)
1,212,792

 
—

 
—

 
—

 
—

 
1,212,792

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

 
41,130

 
—

 
30,054

 
—

 
71,184

      Maximum exposure to loss (3)
—

 
40,734

 
—

 
30,000

 
—

 
70,734

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
809,988

 
809,988

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
808,155

 
808,155

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
387,272

 
135,334

 
—

 
970,000

 
—

 
1,492,606

(1) 
Includes borrower remittances of $3.8 million. The borrower remittances had not been passed through to third party investors as of March 31, 2017.
(2) 
Includes $0.4 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 $0.1 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.


10



 
Consolidation of Variable Interest Entities
 
As of December 31, 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
$
1,132,966

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,132,966

Debt securities of consolidated trusts held by third parties (1)
1,142,704

 
—

 
—

 
—

 
—

 
1,142,704

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

 
36,042

 
—

 
30,347

 
—

 
66,389

      Maximum exposure to loss (3)
—

 
35,599

 
—

 
30,000

 
—

 
65,599

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
827,874

 
827,874

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
825,909

 
825,909

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
415,441

 
103,976

 
—

 
970,000

 
—

 
1,489,417

(1) 
Includes borrower remittances of $9.7 million, which have not been passed through to third party investors as of December 31, 2016.
(2) 
Includes $0.4 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 $0.3 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 cash and non-cash transactions for the three months ended March 31, 2017 and 2016:

Table 1.2

 
For the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
(in thousands)
Non-cash activity:
 
 
 
Real estate owned acquired through loan liquidation
4,630

 
—

Loans acquired and securitized as Farmer Mac Guaranteed Securities
149,607

 
139,561

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
117,018

 
135,913


(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


11


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 months ended March 31, 2017 and 2016:

Table 1.3
 
For the Three Months Ended
 
March 31, 2017(1)
 
March 31, 2016
 
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
$
18,615

 
10,551

 
$
1.76

 
$
10,317

 
10,465

 
$
0.99

Effect of dilutive securities(2)
 
 
 
 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock
—

 
231

 
(0.03
)
 
—

 
538

 
(0.05
)
Diluted EPS
$
18,615

 
10,782

 
$
1.73

 
$
10,317

 
11,003

 
$
0.94

(1) 
For the effect of the adoption of the new Accounting Standard Update 2016-09 "Improvements to Employee Share-Based Payment Accounting" on Basic and Diluted EPS, see Note 1(d) "New Accounting Standards."
(2) 
For the three months ended March 31, 2017 and 2016, stock options and SARs of 50,757 and 201,401, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended March 31, 2017 and 2016, contingent shares of non-vested restricted stock of 32,892, and 37,284, 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


The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of tax, by component for the three months ended March 31, 2017 and 2016:


Table 1.4

 
For the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
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
$
(14,387
)
 
$
45,752

 
$
2,393

 
$
33,758

 
$
(10,035
)
 
$
(476
)
 
$
(508
)
 
$
(11,019
)
Other Comprehensive Income Before Reclassifications
12,223

 
—

 
76

 
12,299

 
(1,769
)
 
—

 
(3,395
)
 
(5,164
)
Amounts reclassified from AOCI
(2,578
)
 
(2,267
)
 
332

 
(4,513
)
 
(2,376
)
 
(657
)
 
299

 
(2,734
)
Net Comprehensive Income
9,645

 
(2,267
)

408


7,786

 
(4,145
)
 
(657
)

(3,096
)

(7,898
)
Ending Balance
$
(4,742
)
 
$
43,485


$
2,801


$
41,544

 
$
(14,180
)
 
$
(1,133
)

$
(3,604
)

$
(18,917
)



13


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 months ended March 31, 2017 and 2016:

Table 1.5

 
For the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains/(losses) on available-for-sale-securities
$
18,804

 
$
6,581

 
$
12,223

 
$
(2,722
)
 
$
(953
)
 
$
(1,769
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) on financial derivatives and hedging activities(1)
(3,959
)
 
(1,386
)
 
(2,573
)
 
(3,923
)
 
(1,373
)
 
(2,550
)
Losses on sale of available-for-sale investment securities(2)
—

 
—

 
—

 
9

 
3

 
6

Other income(3)
(7
)
 
(2
)
 
(5
)
 
259

 
91

 
168

Total
$
14,838

 
$
5,193

 
$
9,645

 
$
(6,377
)
 
$
(2,232
)
 
$
(4,145
)
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
$
(3,487
)
 
$
(1,220
)
 
$
(2,267
)
 
$
(1,011
)
 
$
(354
)
 
$
(657
)
Total
$
(3,487
)
 
$
(1,220
)
 
$
(2,267
)
 
$
(1,011
)
 
$
(354
)
 
$
(657
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
$
117

 
$
41

 
$
76

 
$
(5,222
)
 
$
(1,827
)
 
$
(3,395
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
512

 
180

 
332

 
459

 
160

 
299

Total
$
629

 
$
221

 
$
408

 
$
(4,763
)
 
$
(1,667
)
 
$
(3,096
)
Other comprehensive income/(loss)
$
11,980

 
$
4,194

 
$
7,786

 
$
(12,151
)
 
$
(4,253
)
 
$
(7,898
)
(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents unrealized 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


(d) New Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which provides new guidance intended to simplify several aspects of accounting and presentation for employee share-based payment transactions. The ASU became effective for Farmer Mac on January 1, 2017. The adoption of the new guidance had the following effect on Farmer Mac's financial position, results of operations, and cash flows:

•
Consolidated Statements of Operations - The ASU requires the recognition of all net tax benefits related to share-based compensation awards in the income tax provision. Previously, these amounts were recognized in additional paid-in capital. Net tax benefits related to share-based compensation awards of $0.7 million were recognized as a reduction to income tax expense in the three months ended March 31, 2017 in the consolidated statement of operations. Net tax benefits result from the excess of the tax deduction over the compensation expense recognized under GAAP for share-based compensation awards. That excess arises because the tax deduction is based upon the value of share-based awards upon their exercise (or vesting, in the case of restricted stock units), whereas the compensation expense under GAAP is based upon the value of the share-based awards upon their grant date.

The ASU also changed the calculation of diluted earnings per share. GAAP requires the "treasury stock method" to determine the number of dilutive securities in calculating diluted earnings per share. The ASU changed the calculation of "assumed proceeds" under the treasury stock method to exclude the amount of net tax benefits that would have been recognized in additional paid-in capital under the previous accounting standard. This change in the calculation reduces the amount of shares assumed to have been repurchased under the treasury stock method, thus increasing the number of dilutive shares.

Both of these changes in the guidance were applied prospectively beginning January 1, 2017 and for the three months ended March 31, 2017. The change in the recognition of all net tax benefits related to share-based compensation awards in the income tax provision resulted in an increase of $0.06 in both basic earnings per share and diluted earnings per share for the three months ended March 31, 2017. The change in the guidance for the calculation of diluted earnings per share had an immaterial impact on diluted earnings per share.

Additionally, the ASU allows companies to choose to either include an estimate of forfeitures expected to occur in share-based compensation expense or account for them as they occur. Previously, GAAP required companies to include an estimate of forfeitures expected to occur in their share-based compensations expense. Farmer Mac has elected to account for forfeitures in compensation expense as they occur. The cumulative impact of the change in the treatment of forfeitures was not material for the three months ended March 31, 2017.

•
Consolidated Statements of Cash Flows - The ASU requires excess tax benefits from share-based employee awards to be reported within operating activities. Previously, these cash flows were reported within financing activities. Farmer Mac has applied this guidance prospectively, resulting in an increase in net cash provided by operating activities and a corresponding decrease in net cash provided by financing activities of $0.7 million for the three months ended March 31, 2017.



15


The ASU requires employee taxes paid when an employer withholds shares for tax purposes to be reported within financing activities. Under the previous guidance, these cash flows were included in operating activities. These changes were required to be applied on a retrospective basis. As a result, the consolidated statement of cash flows for prior periods was revised, resulting in an increase in net cash provided by operating activities and a decrease in net cash provided by financing activities of $1.5 million for the three months ended March 31, 2016, compared to previously reported amounts. The amount of employee taxes paid for shares withheld was $1.3 million for the three months ended March 31, 2017.

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 that the new guidance will have on its consolidated financial statements. That impact will primarily be from the new requirement to recognize all expected losses rather than just incurred losses as of the reporting date. 

In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. 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.

(e)
Reclassifications

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



16



2.
INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of March 31, 2017 and December 31, 2016:
 
Table 2.1

 
As of March 31, 2017
 
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

 
$
—

 
$
(1,576
)
 
$
18,124

Floating rate asset-backed securities
40,825

 
(189
)
 
40,636

 
—

 
(266
)
 
40,370

Floating rate corporate debt securities
10,000

 
—

 
10,000

 
60

 
—

 
10,060

Floating rate Government/GSE guaranteed mortgage-backed securities
1,342,378

 
2,637

 
1,345,015

 
2,494

 
(2,819
)
 
1,344,690

Fixed rate GSE guaranteed mortgage-backed securities(1)
514

 
2,469

 
2,983

 
2,394

 
—

 
5,377

Floating rate GSE subordinated debt
70,000

 
—

 
70,000

 
—

 
(2,424
)
 
67,576

Fixed rate senior agency debt
187,295

 
53

 
187,348

 
—

 
(283
)
 
187,065

Fixed rate U.S. Treasuries
806,493

 
233

 
806,726

 
7

 
(751
)
 
805,982

Total available-for-sale
2,477,205

 
5,203

 
2,482,408

 
4,955

 
(8,119
)
 
2,479,244

Total investment securities
$
2,477,205

 
$
5,203

 
$
2,482,408

 
$
4,955

 
$
(8,119
)
 
$
2,479,244

(1) 
Fair value includes $4.8 million of an interest-only security with a notional amount of $145.5 million.

 
As of December 31, 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

 
$
—

 
$
(1,970
)
 
$
17,730

Floating rate asset-backed securities
44,442

 
(202
)
 
44,240

 
1

 
(390
)
 
43,851

Floating rate corporate debt securities
10,000

 
—

 
10,000

 
41

 
—

 
10,041

Floating rate Government/GSE guaranteed mortgage-backed securities
1,359,700

 
2,827

 
1,362,527

 
1,768

 
(3,266
)
 
1,361,029

Fixed rate GSE guaranteed mortgage-backed securities(1)
538

 
2,582

 
3,120

 
4,505

 
—

 
7,625

Floating rate GSE subordinated debt
70,000

 
—

 
70,000

 
—

 
(3,047
)
 
66,953

Fixed rate senior agency debt
187,295

 
106

 
187,401

 
—

 
(268
)
 
187,133

Fixed rate U.S. Treasuries
821,619

 
359

 
821,978

 
47

 
(536
)
 
821,489

Total available-for-sale
2,513,294

 
5,672

 
2,518,966

 
6,362

 
(9,477
)
 
2,515,851

Total investment securities
$
2,513,294

 
$
5,672

 
$
2,518,966

 
$
6,362

 
$
(9,477
)
 
$
2,515,851

(1) 
Fair value includes $7.0 million of an interest-only security with a notional amount of $146.1 million.


Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the three months ended March 31, 2017. During the three months ended March 31, 2016, Farmer Mac received proceeds of $186.8 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.1 million and gross realized losses of $0.1 million.
 


17


As of March 31, 2017 and December 31, 2016, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2

 
As of March 31, 2017
 
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
$
—

 
$
—

 
$
18,124

 
$
(1,576
)
Floating rate asset-backed securities
—

 
—

 
35,514

 
(266
)
Floating rate Government/GSE guaranteed mortgage-backed securities
241,188

 
(608
)
 
409,002

 
(2,211
)
Floating rate GSE subordinated debt
—

 
—

 
67,576

 
(2,424
)
Fixed rate U.S. Treasuries
776,996

 
(751
)
 
—

 
—

Fixed rate senior agency debt
187,066

 
(283
)
 
—

 
—

Total
$
1,205,250

 
$
(1,642
)
 
$
530,216

 
$
(6,477
)

 
As of December 31, 2016
 
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
$
—

 
$
—

 
$
17,730

 
$
(1,970
)
Floating rate asset-backed securities
4,654

 
(10
)
 
38,077

 
(380
)
Floating rate Government/GSE guaranteed mortgage-backed securities
384,586

 
(1,030
)
 
442,041

 
(2,236
)
Floating rate GSE subordinated debt
—

 
—

 
66,953

 
(3,047
)
Fixed rate U.S. Treasuries
732,371

 
(536
)
 
—

 
—

Fixed rate senior agency debt
187,133

 
(268
)
 
—

 
—

Total
$
1,308,744

 
$
(1,844
)
 
$
564,801

 
$
(7,633
)

The unrealized losses presented above are principally due to a general widening of market spreads and an increase in the levels of interest rates from the dates of acquisition to March 31, 2017 and December 31, 2016, 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 March 31, 2017, 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-." As of December 31, 2016, 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 96 and 97 individual investment securities as of March 31, 2017 and December 31, 2016, respectively.

As of March 31, 2017, 40 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $6.5 million. As of December 31, 2016, 36 of the securities


18


in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $7.6 million.  Securities in unrealized loss positions for 12 months or longer have a fair value as of March 31, 2017 that is, on average, approximately 99 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 are other-than-temporary impairment as of March 31, 2017 and December 31, 2016.

Farmer Mac did not own any held-to-maturity or trading investment securities as of March 31, 2017 and December 31, 2016.

The amortized cost, fair value, and weighted-average yield of available-for-sale investment securities by remaining contractual maturity as of March 31, 2017 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 March 31, 2017
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
988,363

 
$
987,343

 
0.77%
Due after one year through five years
227,113

 
227,471

 
1.42%
Due after five years through ten years
437,367

 
438,280

 
1.54%
Due after ten years
829,565

 
826,150

 
1.42%
Total
$
2,482,408

 
$
2,479,244

 
1.18%




19


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 March 31, 2017 and December 31, 2016:

Table 3.1

 
As of March 31, 2017
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,035,587

 
$
(2,031
)
 
$
1,033,556

 
$
6,290

 
$
(3,115
)
 
$
1,036,731

Farmer Mac Guaranteed USDA Securities
40,734

 
396

 
41,130

 
293

 
(5
)
 
41,418

Total Farmer Mac Guaranteed Securities
1,076,321

 
(1,635
)
 
1,074,686

 
6,583

 
(3,120
)
 
1,078,149

USDA Securities
1,955,868

 
69,954

 
2,025,822

 
1

 
(66,210
)
 
1,959,613

Total held-to-maturity
$
3,032,189

 
$
68,319

 
$
3,100,508

 
$
6,584

 
$
(69,330
)
 
$
3,037,762

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
5,266,782

 
$
(258
)
 
$
5,266,524

 
$
33,450

 
$
(56,928
)
 
$
5,243,046

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
17,760

 
$
1,274

 
$
19,034

 
$
56

 
$
(488
)
 
$
18,602


 
As of December 31, 2016
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,115,465

 
$
(2,276
)
 
$
1,113,189

 
$
7,187

 
$
(3,175
)
 
$
1,117,201

Farmer Mac Guaranteed USDA Securities
35,599

 
443

 
36,042

 
5

 
(239
)
 
35,808

Total Farmer Mac Guaranteed Securities
1,151,064

 
(1,833
)
 
1,149,231

 
7,192

 
(3,414
)
 
1,153,009

USDA Securities
1,935,440

 
73,785

 
2,009,225

 
—

 
(95,590
)
 
1,913,635

Total held-to-maturity
$
3,086,504

 
$