Document


As filed with the Securities and Exchange Commission on November 8, 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 September 30, 2018
Commission File Number 001-14951 
 ____________________________________________________________

logo2016a14.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 every Interactive Data File required to be submitted 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 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 November 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 9,137,550 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
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
436,152

 
$
302,022

Investment securities:
 

 
 

Available-for-sale, at fair value
2,224,002

 
2,215,405

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

 
45,032

Total Investment Securities
2,269,034

 
2,260,437

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
5,957,304

 
5,471,914

Held-to-maturity, at amortized cost
2,067,307

 
2,126,274

Total Farmer Mac Guaranteed Securities
8,024,611

 
7,598,188

USDA Securities:
 

 
 

Trading, at fair value
10,237

 
13,515

Held-to-maturity, at amortized cost
2,143,874

 
2,117,850

Total USDA Securities
2,154,111

 
2,131,365

Loans:
 

 
 

Loans held for investment, at amortized cost
3,884,636

 
3,873,755

Loans held for investment in consolidated trusts, at amortized cost
1,483,135

 
1,399,827

Allowance for loan losses
(6,871
)
 
(6,796
)
Total loans, net of allowance
5,360,900

 
5,266,786

Real estate owned, at lower of cost or fair value
128

 
139

Financial derivatives, at fair value
8,007

 
7,093

Interest receivable (includes $12,446 and $17,373, respectively, related to consolidated trusts)
135,677

 
155,278

Guarantee and commitment fees receivable
40,178

 
39,895

Deferred tax asset, net
—

 
2,048

Prepaid expenses and other assets
45,236

 
29,023

Total Assets
$
18,474,034

 
$
17,792,274

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
7,378,927

 
$
8,089,826

Due after one year
8,419,424

 
7,432,790

Total notes payable
15,798,351

 
15,522,616

Debt securities of consolidated trusts held by third parties
1,486,733

 
1,404,945

Financial derivatives, at fair value
17,841

 
26,599

Accrued interest payable (includes $10,507 and $14,631, respectively, related to consolidated trusts)
87,435

 
75,402

Guarantee and commitment obligation
38,597

 
38,400

Accounts payable and accrued expenses
260,753

 
14,096

Deferred tax liability, net
4,586

 
—

Reserve for losses
2,147

 
2,070

Total Liabilities
17,696,443

 
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, 9,137,500 shares and 9,087,670 shares outstanding, respectively
9,138

 
9,088

Additional paid-in capital
118,183

 
118,979

Accumulated other comprehensive income, net of tax
64,001

 
51,085

Retained earnings
379,979

 
322,704

Total Equity
777,591

 
708,146

Total Liabilities and Equity
$
18,474,034

 
$
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 Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
15,123

 
$
9,223

 
$
38,681

 
$
24,834

Farmer Mac Guaranteed Securities and USDA Securities
76,870

 
54,350

 
213,479

 
146,978

Loans
50,622

 
40,924

 
145,671

 
117,349

Total interest income
142,615

 
104,497

 
397,831

 
289,161

Total interest expense
97,557

 
64,935

 
265,611

 
172,797

Net interest income
45,058

 
39,562

 
132,220

 
116,364

Provision for loan losses
(99
)
 
(270
)
 
(92
)
 
(1,234
)
Net interest income after provision for loan losses
44,959

 
39,292

 
132,128

 
115,130

Non-interest income:
 
 
 
 
 
 
 
Guarantee and commitment fees
3,490

 
3,314

 
10,470

 
10,630

Gains/(losses) on financial derivatives and hedging activities
628

 
661

 
(688
)
 
2,530

(Losses)/gains on trading securities
(3
)
 
—

 
24

 
(84
)
Gains on sale of available-for-sale investment securities
—

 
89

 
—

 
89

(Losses)/gains on sale of real estate owned
(41
)
 
32

 
(7
)
 
784

Other income
365

 
203

 
1,259

 
890

Non-interest income
4,439

 
4,299

 
11,058

 
14,839

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
6,777

 
5,987

 
20,367

 
18,986

General and administrative
4,350

 
3,890

 
13,878

 
11,611

Regulatory fees
625

 
625

 
1,875

 
1,875

Real estate owned operating costs, net
—

 
—

 
16

 
23

(Release of)/provision for reserve for losses
(102
)
 
114

 
77

 
60

Non-interest expense
11,650

 
10,616

 
36,213

 
32,555

Income before income taxes
37,748

 
32,975

 
106,973

 
97,414

Income tax expense
7,979

 
11,193

 
21,749

 
33,103

Net income
29,769

 
21,782

 
85,224

 
64,311

Less: Net loss attributable to non-controlling interest
—

 
—

 
—

 
165

Net income attributable to Farmer Mac
29,769

 
21,782

 
85,224

 
64,476

Preferred stock dividends
(3,295
)
 
(3,295
)
 
(9,886
)
 
(9,886
)
Net income attributable to common stockholders
$
26,474

 
$
18,487

 
$
75,338

 
$
54,590

 
 
 
 
 
 
 
 
Earnings per common share and dividends:
 
 
 
 
 
 
 
Basic earnings per common share
$
2.48

 
$
1.74

 
$
7.07

 
$
5.16

Diluted earnings per common share
$
2.46

 
$
1.71

 
$
7.01

 
$
5.06

Common stock dividends per common share
$
0.58

 
$
0.36

 
$
1.74

 
$
1.08

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 Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Net income
$
29,769

 
$
21,782

 
$
85,224

 
$
64,311

Other comprehensive income before taxes:
 
 
 
 
 
 
 
Net unrealized (losses)/gains on available-for-sale securities
(13,546
)
 
(886
)
 
8,678

 
19,283

Net changes in held-to-maturity securities
(1,544
)
 
(1,879
)
 
(4,400
)
 
(7,491
)
Net unrealized gains/(losses) on cash flow hedges
3,181

 
253

 
12,038

 
(966
)
Other comprehensive (loss)/income before tax
(11,909
)
 
(2,512
)
 
16,316

 
10,826

Income tax expense related to other comprehensive (loss)/income
2,500

 
879

 
(3,427
)
 
(3,789
)
Other comprehensive (loss)/income net of tax
(9,409
)
 
(1,633
)
 
12,889

 
7,037

Comprehensive income
20,360

 
20,149

 
98,113

 
71,348

Less: comprehensive loss attributable to non-controlling interest
—

 
—

 
—

 
165

Comprehensive income attributable to Farmer Mac
$
20,360

 
$
20,149

 
$
98,113

 
$
71,513

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
—

 
—

 
—

 
—

 
—

 
—

 
64,476

 
—

 
64,476

Attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
7,037

 
—

 
—

 
7,037

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(9,886
)
 
—

 
(9,886
)
Common stock
—

 
—

 
—

 
—

 
—

 
—

 
(11,435
)
 
—

 
(11,435
)
Issuance of Class C Common Stock
—

 
—

 
74

 
74

 
228

 
—

 
—

 
—

 
302

Stock-based compensation cost
—

 
—

 
—

 
—

 
2,597

 
—

 
—

 
—

 
2,597

Other stock-based award activity
—

 
—

 
—

 
—

 
(2,350
)
 
—

 
—

 
—

 
(2,350
)
Redemption of interest in subsidiary
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
$
204,759

 
10,613

 
$
10,613

 
$
119,130

 
$
40,795

 
$
318,869

 
$
—

 
$
694,166

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
—

 
—

 
—

 
85,224

 
—

 
85,224

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
12,889

 
—

 
—

 
12,889

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(9,886
)
 
—

 
(9,886
)
Common stock
—

 
—

 
—

 
—

 
—

 
—

 
(18,534
)
 
—

 
(18,534
)
Issuance of Class C Common Stock
—

 
—

 
50

 
50

 
7

 
—

 
—

 
—

 
57

Stock-based compensation cost
—

 
—

 
—

 
—

 
1,882

 
—

 
—

 
—

 
1,882

Other stock-based award activity
—

 
—

 
—

 
—

 
(2,685
)
 
—

 
—

 
—

 
(2,685
)
Balance as of September 30, 2018
8,400

 
$
204,759

 
10,669

 
$
10,669

 
$
118,183

 
$
64,001

 
$
379,979

 
$
—

 
$
777,591

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 Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
85,224

 
$
64,311

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
713

 
1,701

Amortization of debt premiums, discounts and issuance costs
21,744

 
17,078

Net change in fair value of trading securities, hedged assets, and financial derivatives
42,054

 
(12,232
)
Losses/(gains) on sale of real estate owned
7

 
(784
)
Total provision for losses
169

 
1,294

Excess tax benefits related to stock-based awards
1,105

 
1,170

Deferred income taxes
1,750

 
1,910

Other
—

 
11

Stock-based compensation expense
1,882

 
2,597

Proceeds from repayment of loans purchased as held for sale
76,259

 
54,919

Net change in:
 
 
 
Interest receivable
18,537

 
12,678

Guarantee and commitment fees receivable
(86
)
 
226

Other assets
(7,268
)
 
(109
)
Accrued interest payable
12,033

 
12,104

Other liabilities
(1,898
)
 
435

Net cash provided by operating activities
252,225

 
157,309

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investment securities
(833,650
)
 
(614,423
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(2,544,812
)
 
(2,580,229
)
Purchases of loans held for investment
(684,486
)
 
(1,047,001
)
Purchases of defaulted loans
(7,756
)
 
(3,458
)
Proceeds from repayment of available-for-sale investment securities
814,712

 
895,497

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
2,201,723

 
787,743

Proceeds from repayment of loans purchased as held for investment
508,969

 
368,826

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

 
5,089

Proceeds from sale of Farmer Mac Guaranteed Securities
305,391

 
404,246

Proceeds from sale of real estate owned
116

 
6,464

Net cash used by investing activities
(239,793
)
 
(1,777,246
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
30,946,426

 
40,262,122

Proceeds from issuance of medium-term notes
6,109,613

 
7,160,298

Payments to redeem discount notes
(31,530,896
)
 
(42,174,697
)
Payments to redeem medium-term notes
(5,254,430
)
 
(3,416,300
)
Payments to third parties on debt securities of consolidated trusts
(117,966
)
 
(86,582
)
Proceeds from common stock issuance
7

 
235

Tax payments related to share-based awards
(2,635
)
 
(2,283
)
Dividends paid on common and preferred stock
(28,421
)
 
(21,321
)
Net cash provided by financing activities
121,698

 
1,721,472

Net increase in cash and cash equivalents
134,130

 
101,535

Cash and cash equivalents at beginning of period
302,022

 
265,229

Cash and cash equivalents at end of period
$
436,152

 
$
366,764

  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 September 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 September 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
$
1,483,135

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,483,135

Debt securities of consolidated trusts held by third parties (1)
1,486,733

 
—

 
—

 
—

 
—

 
1,486,733

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

 
28,117

 
—

 
—

 
—

 
28,117

      Maximum exposure to loss (3)
—

 
27,861

 
—

 
—

 
—

 
27,861

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)
—

 
—

 
—

 
—

 
924,099

 
924,099

        Maximum exposure to loss (3) (4)
—

 
—

 
—

 
—

 
924,494

 
924,494

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (3) (5)
287,594

 
346,689

 
—

 
—

 
—

 
634,283

(1) 
Includes borrower remittances of $3.6 million. The borrower remittances had not been passed through to third party investors as of September 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 nine months ended September 30, 2018 and 2017:


Table 1.2

 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Non-cash activity:
 
 
 
Real estate owned acquired through loan liquidation
128

 
5,261

Loans acquired and securitized as Farmer Mac Guaranteed Securities
305,391

 
404,246

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
199,764

 
277,307

Purchases of securities - traded not yet settled
248,600

 
9,987






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 nine months ended September 30, 2018 and 2017:

Table 1.3
 
For the Three Months Ended
 
September 30, 2018
 
September 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
$
26,474

 
10,668

 
$
2.48

 
$
18,487

 
10,605

 
$
1.74

Effect of dilutive securities(1)
 

 
 

 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock
—

 
76

 
(0.02
)
 
—

 
210

 
(0.03
)
Diluted EPS
$
26,474

 
10,744

 
$
2.46

 
$
18,487

 
10,815

 
$
1.71

(1) 
For the three months ended September 30, 2018, 10,122 SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 24,657 stock options and SARs for the three months ended September 30, 2017. For the three months ended September 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 Nine Months Ended
 
September 30, 2018
 
September 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
$
75,338

 
10,650

 
$
7.07

 
$
54,590

 
10,586

 
$
5.16

Effect of dilutive securities(1)
 

 
 

 
 
 
 
 
 
 
 
Stock options, SARs and restricted stock
—

 
93

 
(0.06
)
 
—

 
208

 
(0.10
)
Diluted EPS
$
75,338

 
10,743

 
$
7.01

 
$
54,590

 
10,794

 
$
5.06

(1)  
For the nine months ended September 30, 2018, 15,437 SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 33,440 stock options and SARs for the nine months ended September 30, 2017. For the nine months ended September 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 nine months ended September 30, 2018 and 2017:

Table 1.4

 
As of September 30, 2018
 
As of September 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
$
15,882

 
$
45,979

 
$
11,549

 
$
73,410

 
$
(1,276
)
 
$
42,104

 
$
1,600

 
$
42,428

Other comprehensive (loss)/income before reclassifications
(9,947
)
 
—

 
2,662

 
(7,285
)
 
2,298

 
—

 
(97
)
 
2,201

Amounts reclassified from AOCI
(755
)
 
(1,220
)
 
(149
)
 
(2,124
)
 
(2,875
)
 
(1,221
)
 
262

 
(3,834
)
Net comprehensive (loss)/income
(10,702
)
 
(1,220
)
 
2,513

 
(9,409
)
 
(577
)
 
(1,221
)
 
165

 
(1,633
)
Ending Balance
$
5,180

 
$
44,759

 
$
14,062

 
$
64,001

 
$
(1,853
)
 
$
40,883

 
$
1,765

 
$
40,795

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine 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
10,450

 
—

 
9,493

 
19,943

 
20,711

 
—

 
(1,522
)
 
19,189

Amounts reclassified from AOCI
(3,594
)
 
(3,477
)
 
17

 
(7,054
)
 
(8,177
)
 
(4,869
)
 
894

 
(12,152
)
Net comprehensive income/(loss)
6,856

 
(3,477
)
 
9,510

 
12,889

 
12,534

 
(4,869
)
 
(628
)
 
7,037

Ending Balance
$
5,180

 
$
44,759

 
$
14,062

 
$
64,001

 
$
(1,853
)
 
$
40,883

 
$
1,765

 
$
40,795





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 nine months ended September 30, 2018 and 2017:

Table 1.5

 
For the Three Months Ended
 
September 30, 2018
 
September 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 (losses)/gains on available-for-sale-securities
$
(12,590
)
 
$
(2,643
)
 
$
(9,947
)
 
$
3,536

 
$
1,238

 
$
2,298

Less reclassification adjustments included in:
 
 
 
 
 
 

 
 
 
 
Net Interest Income(1)
(946
)
 
(199
)
 
(747
)
 
—

 
—

 
—

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

 
—

 
—

 
(4,326
)
 
(1,514
)
 
(2,812
)
Gains on sale of available-for-sale investment securities(2)
—

 
—

 
—

 
(89
)
 
(31
)
 
(58
)
Other income(2)
(10
)
 
(2
)
 
(8
)
 
(7
)
 
(2
)
 
(5
)
Total
$
(13,546
)
 
$
(2,844
)
 
$
(10,702
)
 
$
(886
)
 
$
(309
)
 
$
(577
)
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(3)
(1,544
)
 
(324
)
 
(1,220
)
 
(1,879
)
 
(658
)
 
(1,221
)
Total
$
(1,544
)
 
$
(324
)
 
$
(1,220
)
 
$
(1,879
)
 
$
(658
)
 
$
(1,221
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
$
3,370

 
$
708

 
$
2,662

 
$
(150
)
 
$
(53
)
 
$
(97
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
(189
)
 
(40
)
 
(149
)
 
403

 
141

 
262

Total
$
3,181

 
$
668

 
$
2,513

 
$
253

 
$
88

 
$
165

Other comprehensive (loss)/income
$
(11,909
)
 
$
(2,500
)
 
$
(9,409
)
 
$
(2,512
)
 
$
(879
)
 
$
(1,633
)
(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 Nine Months Ended
 
September 30, 2018
 
September 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
$
13,227

 
$
2,777

 
$
10,450

 
$
31,863

 
$
11,152

 
$
20,711

Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net Interest Income(1)
(4,523
)
 
(949
)
 
(3,574
)
 
—

 
—

 
—

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

 
—

 
—

 
(12,470
)
 
(4,365
)
 
(8,105
)
Gains on sale of available-for-sale investment securities(2)
—

 
—

 
—

 
(89
)
 
(31
)
 
(58
)
Other income(2)
(26
)
 
(6
)
 
(20
)
 
(21
)
 
(7
)
 
(14
)
Total
$
8,678

 
$
1,822

 
$
6,856

 
$
19,283

 
$
6,749

 
$
12,534

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(3)
(4,400
)
 
(923
)
 
(3,477
)
 
(7,491
)
 
(2,622
)
 
(4,869
)
Total
$
(4,400
)
 
$
(923
)
 
$
(3,477
)
 
$
(7,491
)
 
$
(2,622
)
 
$
(4,869
)
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
$
12,017

 
$
2,524

 
$
9,493

 
$
(2,342
)
 
$
(820
)
 
$
(1,522
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
 
 
 
 
Net interest income(4)
21

 
4

 
17

 
1,376

 
482

 
894

Total
$
12,038

 
$
2,528

 
$
9,510

 
$
(966
)
 
$
(338
)
 
$
(628
)
Other comprehensive income
$
16,316

 
$
3,427

 
$
12,889

 
$
10,826

 
$
3,789

 
$
7,037

(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 (Topic 842)," 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 (Topic 326)," 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 adoption will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Farmer Mac is


15


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

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which removes or modifies certain disclosures and adds new disclosures. The new requirements are designed to improve the effectiveness of disclosures in the notes to the financial statements. 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 August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract," which requires the application of the same criteria for capitalization of implementation costs as for an arrangement that has a software license. Additionally, the new guidance prescribes the balance sheet, income statement, and cash flows classifications of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. Farmer Mac does not expect that adoption of this 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 September 30, 2018 and December 31, 2017:
 
Table 2.1

 
As of September 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

 
$
—

 
$
(739
)
 
$
18,961

Floating rate asset-backed securities
30,266

 
(143
)
 
30,123

 
18

 
(85
)
 
30,056

Floating rate Government/GSE guaranteed mortgage-backed securities
1,336,138

 
1,616

 
1,337,754

 
1,196

 
(2,476
)
 
1,336,474

Fixed rate GSE guaranteed mortgage-backed securities(1)
400

 
—

 
400

 
22

 
—

 
422

Fixed rate U.S. Treasuries
843,362

 
(4,031
)
 
839,331

 
—

 
(1,242
)
 
838,089