Document


As filed with the Securities and Exchange Commission on August 9, 2018
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, 2018
Commission File Number 001-14951 
 ____________________________________________________________

logo2016a13.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 August 1, 2018, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock, and 9,137,500 shares of Class C non-voting common stock.





Table of Contents
PART I - Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I

Item 1.
Financial Statements


3


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
430,812

 
$
302,022

Investment securities:
 

 
 

Available-for-sale, at fair value
2,324,598

 
2,215,405

Held-to-maturity, at amortized cost
45,032

 
45,032

Total Investment Securities
2,369,630

 
2,260,437

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
5,985,806

 
5,471,914

Held-to-maturity, at amortized cost
2,093,092

 
2,126,274

Total Farmer Mac Guaranteed Securities
8,078,898

 
7,598,188

USDA Securities:
 

 
 

Trading, at fair value
10,748

 
13,515

Held-to-maturity, at amortized cost
2,112,618

 
2,117,850

Total USDA Securities
2,123,366

 
2,131,365

Loans:
 

 
 

Loans held for investment, at amortized cost
3,916,127

 
3,873,755

Loans held for investment in consolidated trusts, at amortized cost
1,443,246

 
1,399,827

Allowance for loan losses
(6,789
)
 
(6,796
)
Total loans, net of allowance
5,352,584

 
5,266,786

Real estate owned, at lower of cost or fair value
56

 
139

Financial derivatives, at fair value
8,011

 
7,093

Interest receivable (includes $17,019 and $17,373, respectively, related to consolidated trusts)
156,194

 
155,278

Guarantee and commitment fees receivable
39,915

 
39,895

Deferred tax asset, net
—

 
2,048

Prepaid expenses and other assets
67,305

 
29,023

Total Assets
$
18,626,771

 
$
17,792,274

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
7,774,301

 
$
8,089,826

Due after one year
8,416,896

 
7,432,790

Total notes payable
16,191,197

 
15,522,616

Debt securities of consolidated trusts held by third parties
1,449,888

 
1,404,945

Financial derivatives, at fair value
20,164

 
26,599

Accrued interest payable (includes $14,559 and $14,631, respectively, related to consolidated trusts)
88,506

 
75,402

Guarantee and commitment obligation
38,428

 
38,400

Accounts payable and accrued expenses
67,295

 
14,096

Deferred tax liability, net
2,832

 
—

Reserve for losses
2,249

 
2,070

Total Liabilities
17,860,559

 
17,084,128

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, 9,136,194 shares and 9,087,670 shares outstanding, respectively
9,136

 
9,088

Additional paid-in capital
117,684

 
118,979

Accumulated other comprehensive income, net of tax
73,410

 
51,085

Retained earnings
359,692

 
322,704

Total Equity
766,212

 
708,146

Total Liabilities and Equity
$
18,626,771

 
$
17,792,274

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
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018

 
June 30, 2017
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
12,095

 
$
8,368

 
$
23,558

 
$
15,611

Farmer Mac Guaranteed Securities and USDA Securities
74,179

 
50,106

 
136,609

 
92,628

Loans
49,396

 
39,573

 
95,049

 
76,425

Total interest income
135,670

 
98,047

 
255,216

 
184,664

Total interest expense
91,737

 
58,316

 
168,054

 
107,862

Net interest income
43,933

 
39,731

 
87,162

 
76,802

(Provision for)/release of loan losses
(424
)
 
(327
)
 
7

 
(964
)
Net interest income after (provision for)/release of loan losses
43,509

 
39,404

 
87,169

 
75,838

Non-interest income:
 
 
 
 
 
 
 
Guarantee and commitment fees
3,481

 
3,472

 
6,980

 
7,316

Gains/(losses) on financial derivatives and hedging activities
2,534

 
(617
)
 
(1,316
)
 
1,869

Gains/(losses) on trading securities
11

 
(2
)
 
27

 
(84
)
Gains on sale of real estate owned
34

 
757

 
34

 
752

Other income
320

 
134

 
894

 
687

Non-interest income
6,380

 
3,744

 
6,619

 
10,540

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
6,936

 
6,682

 
13,590

 
12,999

General and administrative
5,202

 
3,921

 
9,528

 
7,721

Regulatory fees
625

 
625

 
1,250

 
1,250

Real estate owned operating costs, net
—

 
23

 
16

 
23

Provision for/(release of) reserve for losses
158

 
139

 
179

 
(54
)
Non-interest expense
12,921

 
11,390

 
24,563

 
21,939

Income before income taxes
36,968

 
31,758

 
69,225

 
64,439

Income tax expense
7,332

 
11,124

 
13,770

 
21,910

Net income
29,636

 
20,634

 
55,455

 
42,529

Less: Net loss attributable to non-controlling interest
—

 
150

 
—

 
165

Net income attributable to Farmer Mac
29,636

 
20,784

 
55,455

 
42,694

Preferred stock dividends
(3,296
)
 
(3,296
)
 
(6,591
)
 
(6,591
)
Net income attributable to common stockholders
$
26,340

 
$
17,488

 
$
48,864

 
$
36,103

 
 
 
 
 
 
 
 
Earnings per common share and dividends:
 
 
 
 
 
 
 
Basic earnings per common share
$
2.47

 
$
1.65

 
$
4.59

 
$
3.41

Diluted earnings per common share
$
2.45

 
$
1.62

 
$
4.55

 
$
3.35

Common stock dividends per common share
$
0.58

 
$
0.36

 
$
1.16

 
$
0.72

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
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
Net income
$
29,636

 
$
20,634

 
$
55,455

 
$
42,529

Other comprehensive income before taxes:
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
996

 
5,333

 
22,224

 
20,170

Net changes in held-to-maturity securities
(1,546
)
 
(2,125
)
 
(2,856
)
 
(5,612
)
Net unrealized gains/(losses) on cash flow hedges
2,194

 
(1,848
)
 
8,857

 
(1,219
)
Other comprehensive income before tax
1,644

 
1,360

 
28,225

 
13,339

Income tax expense related to other comprehensive income
(345
)
 
(476
)
 
(5,927
)
 
(4,669
)
Other comprehensive income net of tax
1,299

 
884

 
22,298

 
8,670

Comprehensive income
30,935

 
21,518

 
77,753

 
51,199

Less: comprehensive loss attributable to non-controlling interest
—

 
150

 
—

 
165

Comprehensive income attributable to Farmer Mac
$
30,935

 
$
21,668

 
$
77,753

 
$
51,364

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, 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
—

 
—

 
—

 
—

 
—

 
—

 
42,694

 
—

 
42,694

Attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(165
)
 
(165
)
Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
8,670

 
—

 
—

 
8,670

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(6,591
)
 
—

 
(6,591
)
Common stock
—

 
—

 
—

 
—

 
—

 
—

 
(7,616
)
 
—

 
(7,616
)
Issuance of Class C Common Stock
—

 
—

 
65

 
65

 
225

 
—

 
—

 
—

 
290

Stock-based compensation cost
—

 
—

 
—

 
—

 
1,784

 
—

 
—

 
—

 
1,784

Other stock-based award activity
—

 
—

 
—

 
—

 
(1,727
)
 
—

 
—

 
—

 
(1,727
)
Redemption of interest in subsidiary
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(57
)
 
(57
)
Balance as of June 30, 2017
8,400

 
$
204,759

 
10,604

 
$
10,604

 
$
118,937

 
$
42,428

 
$
304,201

 
$
—

 
$
680,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
8,400

 
$
204,759

 
10,619

 
$
10,619

 
$
118,979

 
$
51,085

 
$
322,704

 
$
—

 
$
708,146

Cumulative effect from change in hedge accounting
—

 
—

 
—

 
—

 
—

 
27

 
471

 
—

 
498

Balance as of January 1, 2018
8,400

 
$
204,759

 
10,619

 
$
10,619

 
$
118,979

 
$
51,112

 
$
323,175

 
$
—

 
$
708,644

Net income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac
—

 
—

 
—

 
—

 
—

 
—

 
55,455

 
—

 
55,455

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
22,298

 
—

 
—

 
22,298

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(6,591
)
 
—

 
(6,591
)
Common stock
—

 
—

 
—

 
—

 
—

 
—

 
(12,347
)
 
—

 
(12,347
)
Issuance of Class C Common Stock
—

 
—

 
48

 
48

 
7

 
—

 
—

 
—

 
55

Stock-based compensation cost
—

 
—

 
—

 
—

 
1,269

 
—

 
—

 
—

 
1,269

Other stock-based award activity
—

 
—

 
—

 
—

 
(2,571
)
 
—

 
—

 
—

 
(2,571
)
Balance as of June 30, 2018
8,400

 
$
204,759

 
10,667

 
$
10,667

 
$
117,684

 
$
73,410

 
$
359,692

 
$
—

 
$
766,212

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 Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
55,455

 
$
42,529

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
1,536

 
534

Amortization of debt premiums, discounts and issuance costs
13,701

 
11,479

Net change in fair value of trading securities, hedged assets, and financial derivatives
26,100

 
(12,122
)
(Gains)/losses on sale of real estate owned
(34
)
 
(752
)
Total provision for losses
172

 
910

Excess tax benefits related to stock-based awards
903

 
832

Deferred income taxes
(2,457
)
 
2,095

Other
—

 
100

Stock-based compensation expense
1,269

 
1,784

Proceeds from repayment of loans purchased as held for sale
62,078

 
32,510

Net change in:
 
 
 
Interest receivable
(879
)
 
(3,700
)
Guarantee and commitment fees receivable
8

 
320

Other assets
(12,877
)
 
300

Accrued interest payable
13,104

 
14,260

Other liabilities
4,075

 
(488
)
Net cash provided by operating activities
162,154

 
90,591

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investment securities
(539,667
)
 
(271,684
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(1,843,294
)
 
(2,108,174
)
Purchases of loans held for investment
(491,858
)
 
(678,710
)
Purchases of defaulted loans
(721
)
 
(415
)
Proceeds from repayment of available-for-sale investment securities
403,018

 
508,409

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
1,331,245

 
618,340

Proceeds from repayment of loans purchased as held for investment
335,808

 
250,111

Proceeds from sale of Farmer Mac Guaranteed Securities
196,290

 
247,975

Proceeds from sale of real estate owned
101

 
6,144

Net cash used by investing activities
(609,078
)
 
(1,428,004
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
21,036,787

 
27,501,915

Proceeds from issuance of medium-term notes
4,103,234

 
5,257,762

Payments to redeem discount notes
(21,157,585
)
 
(29,090,607
)
Payments to redeem medium-term notes
(3,313,236
)
 
(2,206,300
)
Payments to third parties on debt securities of consolidated trusts
(72,031
)
 
(54,949
)
Proceeds from common stock issuance
7

 
232

Tax payments related to share-based awards
(2,523
)
 
(1,669
)
Dividends paid on common and preferred stock
(18,939
)
 
(14,207
)
Net cash provided/(used) by financing activities
575,714

 
1,392,177

Net increase in cash and cash equivalents
128,790

 
54,764

Cash and cash equivalents at beginning of period
302,022

 
265,229

Cash and cash equivalents at end of period
$
430,812

 
$
319,993

  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, 2017 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2017 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 2017 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, 2017 filed with the SEC on March 8, 2018. 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 June 30, 2018.

Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries during the year: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the USDA Guarantees line of business – primarily the acquisition of USDA Securities. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary. The accounts of Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016) ("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also included through June 30, 2017. Farmer Mac redeemed its ownership interest in AgVisory on May 1, 2017.



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 June 30, 2018
 
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
$
1,443,246

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,443,246

Debt securities of consolidated trusts held by third parties (1)
1,449,888

 
—

 
—

 
—

 
—

 
1,449,888

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

 
29,206

 
—

 
—

 
—

 
29,206

      Maximum exposure to loss (3)
—

 
28,938

 
—

 
—

 
—

 
28,938

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
917,479

 
917,479

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
917,260

 
917,260

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
297,833

 
325,652

 
—

 
—

 
—

 
623,485

(1) 
Includes borrower remittances of $6.6 million. The borrower remittances had not been passed through to third party investors as of June 30, 2018.
(2) 
Includes $0.3 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
(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, 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
$
1,399,827

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,399,827

Debt securities of consolidated trusts held by third parties (1)
1,404,945

 
—

 
—

 
—

 
—

 
1,404,945

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

 
30,300

 
—

 
—

 
—

 
30,300

      Maximum exposure to loss (3)
—

 
29,980

 
—

 
—

 
—

 
29,980

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
783,964

 
783,964

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
783,916

 
783,916

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
333,511

 
254,217

 
—

 
—

 
—

 
587,728

(1) 
Includes borrower remittances of $5.1 million, which have not been passed through to third party investors as of December 31, 2017.
(2) 
Includes $0.3 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
(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 six months ended June 30, 2018 and 2017:


Table 1.2

 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
Non-cash activity:
 
 
 
Real estate owned acquired through loan liquidation
—

 
5,261

Loans acquired and securitized as Farmer Mac Guaranteed Securities
196,290

 
247,975

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
116,983

 
161,880

Purchases of securities - traded not yet settled
48,600

 
50,000






11


(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, 2018 and 2017:

Table 1.3
 
For the Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
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
$
26,340

 
10,658

 
$
2.47

 
$
17,488

 
10,600

 
$
1.65

Effect of dilutive securities(1)
 

 
 

 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock
—

 
84

 
(0.02
)
 
—

 
183

 
(0.03
)
Diluted EPS
$
26,340

 
10,742

 
$
2.45

 
$
17,488

 
10,783

 
$
1.62

(1) 
For the three months ended June 30, 2018, no SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 24,907 stock options and SARs for the three months ended June 30, 2017. For the three months ended June 30, 2018 and 2017, contingent shares of non-vested restricted stock of 13,138 and 32,892, 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 Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
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
$
48,864

 
10,640

 
$
4.59

 
$
36,103

 
10,576

 
$
3.41

Effect of dilutive securities(1)
 

 
 

 
 
 
 
 
 
 
 
Stock options, SARs and restricted stock
—

 
102

 
(0.04
)
 
—

 
207

 
(0.06
)
Diluted EPS
$
48,864

 
10,742

 
$
4.55

 
$
36,103

 
10,783

 
$
3.35

(1)  
For the six months ended June 30, 2018, 25,062 SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 37,832 stock options and SARs for the six months ended June 30, 2017. For the six months ended June 30, 2018 and 2017, contingent shares of non-vested restricted stock of 13,138 and 32,892, 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 and six months ended June 30, 2018 and 2017:

Table 1.4

 
As of June 30, 2018
 
As of June 30, 2017
 
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
$
15,094

 
$
47,201

 
$
9,816

 
$
72,111

 
$
(4,742
)
 
$
43,485

 
$
2,801

 
$
41,544

Other comprehensive income/(loss) before reclassifications
2,209

 
—

 
1,778

 
3,987

 
6,191

 
—

 
(1,500
)
 
4,691

Amounts reclassified from AOCI
(1,421
)
 
(1,222
)
 
(45
)
 
(2,688
)
 
(2,725
)
 
(1,381
)
 
299

 
(3,807
)
Net comprehensive income/(loss)
788

 
(1,222
)
 
1,733

 
1,299

 
3,466

 
(1,381
)
 
(1,201
)
 
884

Ending Balance
$
15,882

 
$
45,979

 
$
11,549

 
$
73,410

 
$
(1,276
)
 
$
42,104

 
$
1,600

 
$
42,428

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
(1,676
)
 
$
48,236

 
$
4,525

 
$
51,085

 
$
(14,387
)
 
$
45,752

 
$
2,393

 
$
33,758

Cumulative effect from change in hedge accounting
—

 
—

 
27

 
27

 
—

 
—

 
—

 
—

Adjusted Beginning Balance
(1,676
)
 
48,236

 
4,552

 
51,112

 
(14,387
)
 
45,752

 
2,393

 
33,758

Other comprehensive income/(loss) before reclassifications
20,396

 
—

 
6,831

 
27,227

 
18,413

 
—

 
(1,426
)
 
16,987

Amounts reclassified from AOCI
(2,838
)
 
(2,257
)
 
166

 
(4,929
)
 
(5,302
)
 
(3,648
)
 
633

 
(8,317
)
Net comprehensive income/(loss)
17,558

 
(2,257
)
 
6,997

 
22,298

 
13,111

 
(3,648
)
 
(793
)
 
8,670

Ending Balance
$
15,882

 
$
45,979

 
$
11,549

 
$
73,410

 
$
(1,276
)
 
$
42,104

 
$
1,600

 
$
42,428





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 and six months ended June 30, 2018 and 2017:

Table 1.5

 
For the Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
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
$
2,795

 
$
586

 
$
2,209

 
$
9,525

 
$
3,334


$
6,191

Less reclassification adjustments included in:
 
 
 
 
 
 

 
 
 
 
Net Interest Income(1)
(1,791
)
 
(376
)
 
(1,415
)
 
—

 
—

 
—

Gains/(losses) on financial derivatives and hedging activities(1)
—

 
—

 
—

 
(4,186
)
 
(1,465
)
 
(2,721
)
Other income(2)
(8
)
 
(2
)
 
(6
)
 
(6
)
 
(2
)
 
(4
)
Total
$
996

 
$
208

 
$
788

 
$
5,333

 
$
1,867

 
$
3,466

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(3)
(1,546
)
 
(324
)
 
(1,222
)
 
(2,125
)
 
(744
)
 
(1,381
)
Total
$
(1,546
)
 
$
(324
)
 
$
(1,222
)
 
$
(2,125
)
 
$
(744
)
 
$
(1,381
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
$
2,251

 
$
473

 
$
1,778

 
$
(2,309
)
 
$
(809
)
 
$
(1,500
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
(57
)
 
(12
)
 
(45
)
 
461

 
162

 
299

Total
$
2,194

 
$
461

 
$
1,733

 
$
(1,848
)
 
$
(647
)
 
$
(1,201
)
Other comprehensive income
$
1,644

 
$
345

 
$
1,299

 
$
1,360

 
$
476

 
$
884

(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(3) 
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.
(4) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.



14


 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
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
$
25,817

 
$
5,421

 
$
20,396

 
$
28,328

 
$
9,915

 
$
18,413

Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net Interest Income(1)
(3,578
)
 
(752
)
 
(2,826
)
 
—

 
—

 
—

Gains/(losses) on financial derivatives and hedging activities(1)
—

 
—

 
—

 
(8,145
)
 
(2,851
)
 
(5,294
)
Other income(2)
(15
)
 
(3
)
 
(12
)
 
(13
)
 
(5
)
 
(8
)
Total
$
22,224

 
$
4,666

 
$
17,558

 
$
20,170

 
$
7,059

 
$
13,111

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(3)
(2,856
)
 
(599
)
 
(2,257
)
 
(5,612
)
 
(1,964
)
 
(3,648
)
Total
$
(2,856
)
 
$
(599
)
 
$
(2,257
)
 
$
(5,612
)
 
$
(1,964
)
 
$
(3,648
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
$
8,647

 
$
1,816

 
$
6,831

 
$
(2,192
)
 
$
(766
)
 
$
(1,426
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
210

 
44

 
166

 
973

 
340

 
633

Total
$
8,857

 
$
1,860

 
$
6,997

 
$
(1,219
)
 
$
(426
)
 
$
(793
)
Other comprehensive income
$
28,225

 
$
5,927

 
$
22,298

 
$
13,339

 
$
4,669

 
$
8,670

(1) 
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(3) 
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.
(4) 
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.



(d) New Accounting Standards

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases," which provides new guidance intended to improve financial reporting about leasing transactions. The ASU requires 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 requires new 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.

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 developing its accounting policy, planning for changes to its loss estimation methodologies and


15


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.

In first quarter 2018 Farmer Mac adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends hedge accounting recognition and presentation requirements to better align a reporting entity's risk management activities and hedge accounting. The new guidance reduces the complexity and simplifies the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The cumulative-effect adjustment to retained earnings as of January 1, 2018 reflected application of the new guidance and did not 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 June 30, 2018 and December 31, 2017:
 
Table 2.1

 
As of June 30, 2018
 
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

 
$
—

 
$
(690
)
 
$
19,010

Floating rate asset-backed securities
31,531

 
(132
)
 
31,399

 
25

 
(103
)
 
31,321

Floating rate Government/GSE guaranteed mortgage-backed securities
1,367,091

 
1,796

 
1,368,887

 
1,250

 
(2,012
)
 
1,368,125

Fixed rate GSE guaranteed mortgage-backed securities(1)
416

 
—

 
416

 
23

 
—

 
439

Fixed rate U.S. Treasuries
909,921

 
(2,714
)
 
907,207

 
—

 
(1,504
)
 
905,703

Total available-for-sale
2,328,659

 
(1,050
)
 
2,327,609

 
1,298

 
(4,309
)
 
2,324,598

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Fixed rate Government/GSE guaranteed mortgage-backed securities
45,032

 
—

 
45,032

 
831

 
—

 
45,863

Total investment securities
$
2,373,691

 
$
(1,050
)
 
$
2,372,641

 
$
2,129

 
$
(4,309
)
 
$
2,370,461