As filed with the Securities and Exchange Commission on August 11, 2014

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, 2014
Commission File Number 001-14951 
 ____________________________________________________________
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States
 
52-1578738
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer identification number)
 
 
 
1999 K Street, N.W., 4th Floor,
Washington, D.C.
 
20006
(Address of principal executive offices)
 
(Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes         x                                No            o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes         x                                 No           o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes         o                                 No            x
As of August 1, 2014 , the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301  shares of Class B voting common stock and 9,393,199 shares of Class C non-voting common stock.



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2


PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements


3

Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
 
June 30,
2014
 
December 31,
2013
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
384,123

 
$
749,313

Securities purchased under agreements to resell
1,640,686

 

Investment securities:
 

 
 

Available-for-sale, at fair value
2,315,963

 
2,483,147

Trading, at fair value
880

 
928

Total investment securities
2,316,843

 
2,484,075

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
3,437,556

 
5,091,600

Held-to-maturity, at amortized cost
1,656,454

 

Total Farmer Mac Guaranteed Securities
5,094,010

 
5,091,600

USDA Securities:
 

 
 

Available-for-sale, at fair value
1,636,930

 
1,553,669

Trading, at fair value
46,099

 
58,344

Total USDA Securities
1,683,029

 
1,612,013

Loans:
 

 
 

Loans held for investment, at amortized cost
2,671,451

 
2,570,125

Loans held for investment in consolidated trusts, at amortized cost
668,736

 
629,989

Allowance for loan losses
(5,770
)
 
(6,866
)
Total loans, net of allowance
3,334,417

 
3,193,248

Real estate owned, at lower of cost or fair value
1,182

 
2,617

Financial derivatives, at fair value
7,318

 
19,718

Interest receivable (includes $8,037 and $9,276, respectively, related to consolidated trusts)
94,288

 
107,201

Guarantee and commitment fees receivable
43,477

 
43,904

Deferred tax asset, net
40,545

 
44,045

Prepaid expenses and other assets
30,184

 
14,046

Total Assets
$
14,670,102

 
$
13,361,780

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
6,265,018

 
$
7,338,781

Due after one year
5,401,118

 
5,001,169

Total notes payable
11,666,136

 
12,339,950

Securities sold, not yet purchased
1,673,532

 

Debt securities of consolidated trusts held by third parties
377,518

 
261,760

Financial derivatives, at fair value
78,296

 
75,708

Accrued interest payable (includes $3,827 and $2,823, respectively, related to consolidated trusts)
49,587

 
53,772

Guarantee and commitment obligation
39,503

 
39,667

Accounts payable and accrued expenses
7,661

 
9,986

Reserve for losses
5,595

 
6,468

Total Liabilities
13,897,828

 
12,787,311

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
73,061

 

      Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding
73,380

 

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, 9,393,077 shares and 9,354,804 shares outstanding, respectively
9,393

 
9,355

Additional paid-in capital
111,958

 
110,722

Accumulated other comprehensive income/(loss), net of tax
21,923

 
(16,202
)
Retained earnings
186,842

 
168,877

Total Stockholders' Equity
536,421

 
332,616

Non-controlling interest - preferred stock
235,853

 
241,853

Total Equity
772,274

 
574,469

Total Liabilities and Equity
$
14,670,102

 
$
13,361,780

See accompanying notes to 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, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
5,101

 
$
5,471

 
$
10,338

 
$
11,205

Farmer Mac Guaranteed Securities and USDA Securities
30,257

 
31,605

 
60,369

 
63,326

Loans
26,417

 
24,669

 
40,786

 
48,712

Total interest income
61,775

 
61,745

 
111,493

 
123,243

Total interest expense
42,502

 
33,584

 
77,228

 
66,712

Net interest income
19,273

 
28,161

 
34,265

 
56,531

Release of allowance for loan losses
1,583

 
529

 
1,010

 
99

Net interest income after release for loan losses
20,856

 
28,690

 
35,275

 
56,630

Non-interest income:
 
 
 
 
 
 
 
Guarantee and commitment fees
6,403

 
6,759

 
12,921

 
13,371

(Losses)/gains on financial derivatives and hedging activities
(5,698
)
 
14,983

 
(13,276
)
 
19,477

Gains/(losses) on trading securities
7,748

 
(327
)
 
8,403

 
(117
)
Gains on sale of available-for-sale investment securities
143

 
3,071

 
158

 
3,073

Gains on sale of real estate owned
168

 
1,124

 
165

 
1,171

Other income
200

 
873

 
292

 
1,953

Non-interest income
8,964

 
26,483

 
8,663

 
38,928

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
4,889

 
4,571

 
9,345

 
9,269

General and administrative
3,288

 
2,715

 
6,082

 
5,632

Regulatory fees
594

 
594

 
1,188

 
1,188

Real estate owned operating costs, net
59

 
259

 
61

 
385

(Release of)/provision for reserve for losses
(974
)
 
(175
)
 
(873
)
 
571

Non-interest expense
7,856

 
7,964

 
15,803

 
17,045

Income before income taxes
21,964

 
47,209

 
28,135

 
78,513

Income tax (benefit)/expense
(6,368
)
 
13,036

 
(7,509
)
 
21,752

Net income
28,332

 
34,173

 
35,644

 
56,761

Less: Net income attributable to non-controlling interest - preferred stock dividends
(5,819
)
 
(5,547
)
 
(11,366
)
 
(11,094
)
Net income attributable to Farmer Mac
22,513

 
28,626

 
24,278

 
45,667

Preferred stock dividends
(2,308
)
 
(881
)
 
(3,260
)
 
(1,732
)
Net income attributable to common stockholders
$
20,205

 
$
27,745

 
$
21,018

 
$
43,935

 
 
 
 
 
 
 
 
Earnings per common share and dividends:
 
 
 
 
 
 
 
Basic earnings per common share
$
1.85

 
$
2.57

 
$
1.93

 
$
4.08

Diluted earnings per common share
$
1.78

 
$
2.48

 
$
1.85

 
$
3.93

Common stock dividends per common share
$
0.14

 
$
0.12

 
$
0.28

 
$
0.24

See accompanying notes to 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, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Net income
$
28,332

 
$
34,173

 
$
35,644

 
$
56,761

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Unrealized holding gains/(losses) on available-for-sale securities (1)
10,301

 
(48,190
)
 
44,542

 
(26,378
)
Unrealized losses on cash flow hedges (2)
(61
)
 

 
(129
)
 

Less reclassification adjustments included in:
 
 
 
 
 
 
 
(Losses)/gains on financial derivatives and hedging activities (3)
(3,106
)
 
(3,211
)
 
(6,207
)
 
(6,418
)
Gains on sale of available-for-sale investment securities (4)
(93
)
 
(1,996
)
 
(103
)
 
(1,997
)
Other income (5)
(72
)
 
(241
)
 
22

 
(455
)
Other comprehensive income/(loss)
6,969

 
(53,638
)
 
38,125

 
(35,248
)
Comprehensive income/(loss)
35,301

 
(19,465
)
 
73,769

 
21,513

Less: Comprehensive income attributable to noncontrolling interest - preferred stock dividends
(5,819
)
 
(5,547
)
 
(11,366
)
 
(11,094
)
Comprehensive income/(loss) attributable to Farmer Mac
$
29,482

 
$
(25,012
)
 
$
62,403

 
$
10,419

(1)
Presented net of income tax expense of $5.5 million and benefit of $25.9 million for the three months ended June 30, 2014 and 2013 , respectively, and income tax expense of $24.0 million and benefit of $14.2 million for the six months ended June 30, 2014 and 2013 , respectively.
(2)
Presented net of income tax benefit of $33,000 for the three months ended June 30, 2014 and tax benefit of $69,000 for the six months ended June 30, 2014 .
(3)
Relates to the amortization of the unrealized gains on the hedged items prior to application of hedge accounting. Presented net of income tax benefit of $1.7 million for both the three months ended June 30, 2014 and 2013 , and tax benefit of $3.3 million and $3.5 million for the six months ended June 30, 2014 and 2013 , respectively.
(4)
Represents realized gains on sales of available-for-sale investment securities. Presented net of income tax benefit of $50,000 and $1.1 million for the three months ended June 30, 2014 and 2013 , respectively, and income tax benefit of $55,000 and $1.1 million for the six months ended June 30, 2014 and 2013 , respectively.
(5)
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed Securities. Presented net of income tax benefit of $39,000 and $0.1 million for the three months ended June 30, 2014 and 2013 , respectively, and income tax expense of $12,000 and tax benefit of $0.2 million for the six months ended June 30, 2014 and 2013 , respectively.

See accompanying notes to consolidated financial statements.


6


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
  
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
Shares
 
Amount
 
Shares
 
Amount
 
(in thousands)
Preferred stock:
 
 
 
 
 
 
 
Balance, beginning of period
2,400

 
$
58,333

 
58

 
$
57,578

Issuance of Series A preferred stock

 

 
2,400

 
58,333

Issuance of Series B preferred stock
3,000

 
73,061

 

 

Issuance of Series C preferred stock
3,000

 
73,380

 

 

Redemption of retired Series C preferred stock (retired on January 17, 2013)

 

 
(58
)
 
(57,578
)
Balance, end of period
8,400

 
$
204,774

 
2,400

 
$
58,333

Common stock:
 

 
 

 
 

 
 

Balance, beginning of period
10,886

 
$
10,886

 
10,702

 
$
10,702

Issuance of Class C common stock
38

 
38

 
122

 
122

Balance, end of period
10,924

 
$
10,924

 
10,824

 
$
10,824

Additional paid-in capital:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
110,722

 
 

 
$
106,617

Stock-based compensation expense
 

 
1,426

 
 

 
1,540

Issuance of Class C common stock
 

 
12

 
 

 
3

Tax effect of stock-based awards
 

 
(202
)
 
 

 
841

Balance, end of period
  

 
$
111,958

 
  

 
$
109,001

Retained earnings:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
168,877

 
 

 
$
102,243

Net income attributable to Farmer Mac
 

 
24,278

 
 

 
45,667

Cash dividends:
 

 


 
 
 


Preferred stock, Series A ($0.7344 per share in 2014 and $0.6650 per share in 2013)
 
 
(1,762
)
 
 
 
(1,596
)
Preferred stock, Series B ($0.5347 per share)
 
 
(1,360
)
 
 
 

Preferred stock, Series C ($0.0458 per share)
 
 
(138
)
 
 
 

Preferred stock, retired Series C ($2.36 per share, retired on January 17, 2013)
 

 

 
 

 
(136
)
Common stock ($0.28 per share in 2014 and $0.24 per share in 2013)
 

 
(3,053
)
 
 

 
(2,589
)
Balance, end of period
 

 
$
186,842

 
 

 
$
143,589

Accumulated other comprehensive income:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
(16,202
)
 
 

 
$
73,969

Other comprehensive income/(loss), net of tax
 

 
38,125

 
 

 
(35,248
)
Balance, end of period
 

 
$
21,923

 
 

 
$
38,721

Total Stockholders' Equity
 

 
$
536,421

 
 

 
$
360,468

Non-controlling interest - preferred stock:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
241,853

 
 

 
$
241,853

Purchase of interest - Non-controlling interest - preferred stock
 
 
(6,000
)
 
 

 

Balance, end of period
 

 
$
235,853

 
 

 
$
241,853

Total Equity
 
 
$
772,274

 
 

 
$
602,321


See accompanying notes to consolidated financial statements.


7


FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
35,644

 
$
56,761

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
15,029

 
5,138

Amortization of debt premiums, discounts and issuance costs
5,144

 
6,286

Net change in fair value of trading securities, hedged assets, and financial derivatives
7,636

 
(25,626
)
Gains on sale of available-for-sale investment securities
(158
)
 
(3,073
)
Gains on sale of real estate owned
(165
)
 
(1,171
)
Total (release of)/provision for losses
(1,883
)
 
472

Deferred income taxes
(17,496
)
 
10,117

Stock-based compensation expense
1,427

 
1,539

Proceeds from repayment of trading investment securities
414

 
501

Proceeds from repayment of loans purchased as held for sale
58,930

 
76,841

Net change in:
 
 
 

Interest receivable
12,913

 
9,233

Guarantee and commitment fees receivable
427

 
(1,285
)
Other assets
(14,473
)
 
37,930

   Securities sold not yet purchased
1,673,532

 

Accrued interest payable
(4,185
)
 
954

Other liabilities
(3,955
)
 
(864
)
Net cash provided by operating activities
1,768,781

 
173,753

Cash flows from investing activities:
 

 
 

Net change in securities purchased under agreements to resell
(1,640,686
)
 

Purchases of available-for-sale investment securities
(1,138,711
)
 
(744,464
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(681,044
)
 
(858,084
)
Purchases of loans held for investment
(407,595
)
 
(426,506
)
Purchases of defaulted loans
(440
)
 
(6,075
)
Proceeds from repayment of available-for-sale investment securities
575,393

 
622,116

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
670,079

 
459,241

Proceeds from repayment of loans purchased as held for investment
199,774

 
131,932

Proceeds from sale of available-for-sale investment securities
730,527

 
170,614

Proceeds from sale of Farmer Mac Guaranteed Securities
126,857

 
35,891

Proceeds from sale of real estate owned
461

 
3,407

Net cash used in investing activities
(1,565,385
)
 
(611,928
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
27,163,649

 
32,594,765

Proceeds from issuance of medium-term notes
1,759,012

 
1,725,931

Payments to redeem discount notes
(28,161,623
)
 
(32,998,256
)
Payments to redeem medium-term notes
(1,440,000
)
 
(972,000
)
Excess tax benefits related to stock-based awards
35

 
658

Payments to third parties on debt securities of consolidated trusts
(13,615
)
 
(35,024
)
Proceeds from common stock issuance
12

 
1,205

Proceeds from Series A Preferred stock issuance

 
58,333

Proceeds from Series B Preferred stock issuance
73,061

 

Proceeds from Series C Preferred stock issuance
73,380

 

Retirement of Series C Preferred stock

 
(57,578
)
Purchase of interest - Non-controlling interest - preferred stock
(6,000
)
 

Dividends paid - Non-controlling interest - preferred stock
(11,366
)
 
(11,094
)
Dividends paid on common and preferred stock
(5,131
)
 
(3,606
)
Net cash (used in)/provided by financing activities
(568,586
)
 
303,334

Net decrease in cash and cash equivalents
(365,190
)
 
(134,841
)
Cash and cash equivalents at beginning of period
749,313

 
785,564

Cash and cash equivalents at end of period
$
384,123

 
$
650,723

 See accompanying notes to consolidated financial statements.


8


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


1.
ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "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, 2013 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2013 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 2013 consolidated financial statements of Farmer Mac and subsidiaries included in Farmer Mac's Current Report on Form 8-K filed with the SEC on June 6, 2014 (the "Segment Recast 8-K"). The Segment Recast 8-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; Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities; Loans; Securitization of Loans; Non-accrual Loans; Real Estate Owned; Financial Derivatives; Notes Payable; Allowance for Losses; Earnings Per Common Share; Income Taxes; Stock-Based Compensation; Comprehensive Income; Long-Term Standby Purchase Commitments; Fair Value Measurement; and Consolidation of Variable Interest Entities ("VIEs"). Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three and six month periods ended June 30, 2014 .


9


Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of securities guaranteed by Farmer Mac that represent interests in, or obligations secured by, pools of eligible loans ("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 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, 2014
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost (1)
$
371,960

 
$

 
$
296,776

 
$

 
$

 
$
668,736

Debt securities of consolidated trusts held by third parties (2)
377,518

 

 

 

 

 
377,518

   Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Carrying value (3)

 
21,044

 

 
32,886

 

 
53,930

      Maximum exposure to loss (4)

 
20,675

 

 
30,000

 

 
50,675

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (5)

 

 

 

 
488,783

 
488,783

        Maximum exposure to loss (4) (5)

 

 

 

 
492,849

 
492,849

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (4) (6)
704,376

 
16,662

 

 
970,000

 

 
1,691,038


(1) Includes unamortized premiums related to the Rural Utilities line of business of $4.2 million .
(2) Includes unamortized premiums and borrower remittances of $5.6 million . The borrower remittances have not been passed through to third party investors as of June 30, 2014 .
(3) Includes unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees and Institutional Credit lines of business of $0.4 million and $2.9 million , respectively.
(4) Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(5) Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(6) The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.



10


 
Consolidation of Variable Interest Entities
 
As of December 31, 2013
 
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)
$
259,509

 
$

 
$
370,480

 
$

 
$

 
$
629,989

Debt securities of consolidated trusts held by third parties (2)
261,760

 

 

 

 

 
261,760

   Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Carrying value (3)

 
21,234

 

 
33,248

 

 
54,482

      Maximum exposure to loss (4)

 
21,088

 

 
30,000

 

 
51,088

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (5)

 

 

 

 
533,688

 
533,688

        Maximum exposure to loss (4) (5)

 

 

 

 
540,726

 
540,726

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss (4) (6)
765,751

 
20,222

 

 
970,000

 

 
1,755,973


(1) Includes unamortized premiums related to the Rural Utilities line of business of $16.2 million .
(2) Includes borrower remittances of $2.3 million , which have not been passed through to third party investors as of December 31, 2013.
(3) Includes unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees and Institutional Credit lines of business of $0.1 million and $3.2 million , respectively.
(4) Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
(5) Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.
(6) The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.

A guarantee by Farmer Mac of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities.  When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished.  For Farmer Mac Guaranteed Securities held in Farmer Mac's portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC.  The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the consolidated statements of operations.  These guarantee fees totaled $2.6 million and $5.2 million for the three and six months ended June 30, 2014 , respectively, compared to $2.7 million and $5.4 million for the same periods in 2013. The corresponding expense of FMMSC has been eliminated against interest income in consolidation.  All other inter-company balances and transactions have been eliminated in consolidation.


Transfers of Financial Assets and Liabilities

Securities purchased under agreements to resell are treated as collateralized lending transactions. Farmer Mac's counterparties are required to pledge collateral for transactions involving securities purchased under agreements to resell. Farmer Mac considers the types of securities being pledged as collateral when determining how much to lend in these transactions. Additionally, on a daily basis, Farmer Mac reviews the fair values of these securities compared to amounts loaned and derivative counterparty collateral


11


posting thresholds in an effort to minimize exposure to losses. These transactions are reported as securities purchased under agreements to resell in the consolidated balance sheets except for securities purchased under agreements to resell on an overnight basis, which are included in cash and cash equivalents in the consolidated balance sheets. Farmer Mac records securities purchased under agreements to resell at the amount loaned in the consolidated balance sheets. The resulting fees for these transactions are included in interest income in the consolidated statements of operations . As of June 30, 2014, the fair value of non-cash collateral accepted for securities purchased under agreements to resell or similar arrangements was $1.6 billion , all of which could be sold or repledged; $1.6 billion of the underlying collateral was sold or repledged as of June 30, 2014 . There were no securities purchased under agreements to resell as of December 31, 2013 .

Securities sold, not yet purchased, represent obligations of Farmer Mac to deliver specified securities at contracted prices, which would thereby require Farmer Mac to purchase the securities in the market at prevailing prices. Securities sold, not yet purchased consist of fixed rate U.S. Treasury securities. Farmer Mac records securities sold, not yet purchased in the consolidated balance sheets at fair value with changes in fair value recognized in " Gains/(losses) on trading securities " in the consolidated statements of operations . The resulting interest expense for these transactions is included in interest expense in the consolidated statements of operations .

(a)
Cash and Cash Equivalents and Statements of Cash Flows

Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents.  Farmer Mac does not consider securities purchased under agreements to resell to be cash equivalents if it intends to reinvest the funds from maturing repurchase agreements into new repurchase agreements and the aggregate term of the repurchase agreements exceeds three months. The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value.  Changes in the balance of cash and cash equivalents are reported in the consolidated statements of cash flows.  

The following table sets forth information regarding certain cash and non-cash transactions for the six months ended June 30, 2014 and 2013 :

Table 1.2

 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Cash paid during the period for:
 
 
 
Interest
$
60,585

 
$
54,674

Income taxes
11,750

 
13,000

Non-cash activity:
 
 
 
Real estate owned acquired through loan liquidation

 
1,034

Loans acquired and securitized as Farmer Mac Guaranteed Securities
126,857

 
35,891

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
129,305

 
35,891

Transfers of loans held for sale to loans held for investment

 
673,991

Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity
1,589,775

 




12



On January 1, 2014, Farmer Mac transferred $1.6 billion of Farmer Mac Guaranteed Securities from available-for-sale to held-to-maturity because Farmer Mac determined it has the ability and intent to hold these securities until maturity or payoff. Farmer Mac transferred these securities at fair value which reflected an unrealized holding gain of $22.3 million . Farmer Mac accounts for held-to-maturity securities at amortized cost. The unrealized holding gain is being amortized out of accumulated other comprehensive income over the remaining life of the transferred securities.

On January 1, 2013, Farmer Mac transferred $674.0 million of loans from held for sale to held for investment because Farmer Mac either (1) no longer intends to sell these loans in the foreseeable future or (2) securitizes these loans using VIEs that are ultimately consolidated on Farmer Mac's balance sheet and reported as "Loans held for investment in consolidated trusts, at amortized cost." Farmer Mac transferred these loans at the lower of cost or fair value (determined on a pooled basis). Farmer Mac recorded a $5.9 million unamortized discount for loans transferred at fair value. At the time of purchase, loans are classified as either held for sale or held for investment depending upon management's intent and ability to hold the loans for the foreseeable future. Cash receipts from the repayment of loans are classified within the statements of cash flows based on management's intent upon purchase of the loan.

      


13


(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, 2014 and 2013 :

Table 1.3

 
For the Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
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
$
20,205

 
10,924

 
$
1.85

 
$
27,745

 
10,815

 
$
2.57

Effect of dilutive securities (1):
 
 
 
 
 
 
 

 
 

 
 

Stock options, SARs and restricted stock

 
437

 
(0.07
)
 

 
383

 
(0.09
)
Diluted EPS
$
20,205

 
11,361

 
$
1.78

 
$
27,745

 
11,198

 
$
2.48

(1)
For the three months ended June 30, 2014 and 2013 , stock options and SARs of 121,468 and 89,937 , respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended June 30, 2014 and 2013 , contingent shares of non-vested restricted stock of 42,514 and 44,894 , respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions were not met.


 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
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
$
21,018

 
10,906

 
$
1.93

 
$
43,935

 
10,776

 
$
4.08

Effect of dilutive securities (1):
 
 
 
 
 
 
 

 
 

 
 

Stock options, SARs and restricted stock

 
448

 
(0.08
)
 

 
403

 
(0.15
)
Diluted EPS
$
21,018

 
11,354

 
$
1.85

 
$
43,935

 
11,179

 
$
3.93

(1)
For the six months ended June 30, 2014 and 2013 , stock options and SARs of 77,226 and 46,969 , respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the six months ended June 30, 2014 and 2013 , contingent shares of non-vested restricted stock of 37,054 and 35,097 , respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions were not met.


(c)
Reclassifications

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




14


2.
INVESTMENT SECURITIES

The following tables present the amount outstanding, amortized cost, and fair values of Farmer Mac's investment securities as of June 30, 2014 and December 31, 2013 :
 
Table 2.1

 
As of June 30, 2014
 
Amount Outstanding
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
61,600

 
$

 
$
61,600

 
$

 
$
(6,624
)
 
$
54,976

Floating rate asset-backed securities
120,002

 
(138
)
 
119,864

 
384

 
(4
)
 
120,244

Floating rate corporate debt securities
26,530

 

 
26,530

 
158

 

 
26,688

Fixed rate corporate debt securities
55,000

 
15

 
55,015

 
155

 

 
55,170

Floating rate Government/GSE guaranteed mortgage-backed securities
617,783

 
3,819

 
621,602

 
5,204

 
(262
)
 
626,544

Fixed rate GSE guaranteed mortgage-backed securities (1)
1,015

 
3,755

 
4,770

 
3,690

 

 
8,460

Floating rate GSE subordinated debt
70,000

 

 
70,000

 

 
(6,615
)
 
63,385

Fixed rate GSE preferred stock
78,500

 
138

 
78,638

 
3,787

 

 
82,425

Fixed rate taxable municipal bonds
11,960

 
15

 
11,975

 
3

 

 
11,978

Fixed rate senior agency debt
200,000

 
76

 
200,076

 
24

 

 
200,100

Floating rate U.S. Treasuries
75,000

 
(14
)
 
74,986

 
12

 

 
74,998

Fixed rate U.S. Treasuries
990,000

 
985

 
990,985

 
88

 
(78
)
 
990,995

Total available-for-sale
2,307,390

 
8,651

 
2,316,041

 
13,505

 
(13,583
)
 
2,315,963

Trading:
 
 
 
 
 

 
 

 
 

 
 

Floating rate asset-backed securities
3,139

 

 
3,139

 

 
(2,259
)
 
880

Total investment securities
$
2,310,529

 
$
8,651

 
$
2,319,180

 
$
13,505

 
$
(15,842
)
 
$
2,316,843

(1)
Fair value includes $7.4 million of an interest-only security with a notional amount of $152.4 million .







15


 
As of December 31, 2013
 
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
$
74,100

 
$

 
$
74,100

 
$

 
$
(8,815
)
 
$
65,285

Floating rate asset-backed securities
166,185

 
(217
)
 
165,968

 
195

 
(59
)
 
166,104

Floating rate corporate debt securities
109,345

 
(3
)
 
109,342

 
445

 
(18
)
 
109,769

Fixed rate corporate debt securities
55,000

 
48

 
55,048

 
97

 
(4
)
 
55,141

Floating rate Government/GSE guaranteed mortgage-backed securities
612,413

 
4,336

 
616,749

 
4,955

 
(435
)
 
621,269

Fixed rate GSE guaranteed mortgage-backed securities (1)
1,173

 
3,966

 
5,139

 
3,518

 

 
8,657

Floating rate GSE subordinated debt
70,000

 

 
70,000

 

 
(6,615
)
 
63,385

Fixed rate GSE preferred stock
78,500

 
365

 
78,865

 
4,296

 

 
83,161

Fixed rate taxable municipal bonds
30,595

 
84

 
30,679

 
5

 
(3
)
 
30,681

Fixed rate senior agency debt
523,691

 
294

 
523,985

 
107

 
(30
)
 
524,062

Fixed rate U.S. Treasuries
754,405

 
1,141

 
755,546

 
95

 
(8
)
 
755,633

Total available-for-sale
2,475,407

 
10,014

 
2,485,421

 
13,713

 
(15,987
)
 
2,483,147

Trading:
 
 
 
 
 

 
 

 
 

 
 

Floating rate asset-backed securities
3,553

 

 
3,553

 

 
(2,625
)
 
928

Total investment securities
$
2,478,960

 
$
10,014

 
$
2,488,974

 
$
13,713

 
$
(18,612
)
 
$
2,484,075

(1)
Fair value includes $7.4 million of an interest-only security with a notional amount of $152.4 million .


During the three months ended June 30, 2014 , Farmer Mac received proceeds of $720.5 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.1 million , compared to proceeds of $155.6 million for the same period in 2013, resulting in gross realized gains of $3.1 million . During the six months ended June 30, 2014 , Farmer Mac received proceeds of $730.5 million from the sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.2 million , compared to proceeds of $170.6 million for the six months ended June 30, 2013 , resulting in gross realized gains of $3.1 million .



16


As of June 30, 2014 and December 31, 2013 , unrealized losses on available-for-sale investment securities were as follows:

Table 2.2

 
As of June 30, 2014
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
54,976

 
$
(6,624
)
Floating rate asset-backed securities
6,102

 
(4
)
 
2,676

 
(1
)
Floating rate Government/GSE guaranteed mortgage-backed securities
204,085

 
(252
)
 
6,860

 
(10
)
Floating rate GSE subordinated debt

 

 
63,385

 
(6,615
)
Fixed rate U.S. Treasuries
578,065

 
(77
)
 

 

Total
$
788,252

 
$
(333
)
 
$
127,897

 
$
(13,250
)

 
As of December 31, 2013
 
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
$

 
$

 
$
65,285

 
$
(8,815
)
Floating rate asset-backed securities
50,129

 
(59
)
 

 

Floating rate corporate debt securities
19,982

 
(18
)
 

 

Fixed rate corporate debt securities
10,058

 
(4
)
 

 

Floating rate Government/GSE guaranteed mortgage-backed securities
161,960

 
(435
)
 

 

Floating rate GSE subordinated debt

 

 
63,385

 
(6,615
)
Fixed rate taxable municipal bonds
8,041

 
(3
)
 

 

Fixed rate senior agency debt
316,273

 
(30
)
 

 

Fixed rate U.S. Treasuries
118,056

 
(8
)
 

 

Total
$
684,499

 
$
(557
)
 
$
128,670

 
$
(15,430
)

 
The unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to June 30, 2014 and December 31, 2013 , as applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial markets related to those securities. As of June 30, 2014 , all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least " AA+ ," except one , comprising the floating rate GSE subordinated debt category, that was rated " A- ." As of December 31, 2013 , 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 two that were rated " A- " and one that was rated " BBB+ ." The unrealized losses were on 33 and 64  individual investment securities as of June 30, 2014 and December 31, 2013 , respectively.


17



As of June 30, 2014 , 10  of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $13.3 million . As of December 31, 2013 , 7  of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $15.4 million .  Securities in unrealized loss positions for 12 months or longer have a fair value as of June 30, 2014 that is, on average, approximately 90.6 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 changes in credit spreads or maturity. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represents other-than-temporary impairment as of June 30, 2014 and December 31, 2013 . Farmer Mac does not intend to sell these securities and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

Farmer Mac did not own any held-to-maturity investment securities as of June 30, 2014 and December 31, 2013 . As of June 30, 2014 , Farmer Mac owned trading investment securities with an amortized cost of $3.1 million , a fair value of $0.9 million , and a weighted average yield of 4.24 percent . As of December 31, 2013 , Farmer Mac owned trading investment securities with an amortized cost of $3.6 million , a fair value of $0.9 million , and a weighted average yield of 4.25 percent .

The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by remaining contractual maturity as of June 30, 2014 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 2.3

 
As of June 30, 2014
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
1,250,632

 
$
1,250,753

 
0.32%
Due after one year through five years
177,581

 
178,519

 
0.90%
Due after five years through ten years
303,144

 
301,413

 
0.79%
Due after ten years
584,684

 
585,278

 
2.35%
Total
$
2,316,041

 
$
2,315,963

 
0.94%





18


3.
FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of June 30, 2014 and December 31, 2013 :

Table 3.1

 
As of June 30, 2014
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,640,650

 
$
15,804

 
$
1,656,454

 
$
4,161

 
$
(567
)
 
$
1,660,048

 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
3,410,393

 
$

 
$
3,410,393

 
$
37,497

 
$
(31,378
)
 
$
3,416,512

Farmer Mac Guaranteed USDA Securities
20,675

 
(467
)
 
20,208

 
840

 
(4
)
 
21,044

Total Farmer Mac Guaranteed Securities
3,431,068

 
(467
)
 
3,430,601

 
38,337

 
(31,382
)
 
3,437,556

USDA Securities
1,629,314

 
4,377

 
1,633,691

 
5,716

 
(2,477
)
 
1,636,930

Total available-for-sale
$
5,060,382

 
$
3,910

 
$
5,064,292

 
$
44,053

 
$
(33,859
)
 
$
5,074,486

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
43,684

 
$
4,197

 
$
47,881

 
$
147

 
$
(1,929
)
 
$
46,099


 
As of December 31, 2013
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
5,066,855

 
$
125

 
$
5,066,980

 
$
64,051

 
$
(60,665
)
 
$
5,070,366

Farmer Mac Guaranteed USDA Securities
21,089

 
(518
)
 
20,571

 
669

 
(6
)
 
21,234

Total Farmer Mac Guaranteed Securities
5,087,944

 
(393
)
 
5,087,551

 
64,720

 
(60,671
)
 
5,091,600

USDA Securities
1,590,433

 
4,585

 
1,595,018

 
2,753

 
(44,102
)
 
1,553,669

Total available-for-sale
$
6,678,377

 
$
4,192

 
$
6,682,569

 
$
67,473

 
$
(104,773
)
 
$
6,645,269

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
55,373

 
$
4,972

 
$
60,345

 
$
193

 
$
(2,194
)
 
$
58,344



The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to June 30, 2014 and December 31, 2013 , as applicable.  The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States.  As of June 30, 2014 , 18 AgVantage securities in loss positions that are secured by Farm & Ranch loans had been in a loss position for more than 12 months with a total unrealized loss of $20.7 million . AgVantage ® is a registered trademark of Farmer Mac used to designate Farmer Mac Guaranteed Securities that are general obligations of lenders secured by pools of eligible loans, with such Farmer Mac Guaranteed Securities referred to herein as AgVantage securities. Each AgVantage security backed by agricultural mortgages requires some level of overcollateralization, or, in the case of rural utilities loans, 100 percent collateralization, and is secured by eligible loans of the issuing institution with a requirement


19


that delinquent loans be removed from the collateral pool and then replaced with current eligible loans. Thus, Farmer Mac does not believe it will realize any of the losses presented above. Farmer Mac has concluded that none of the unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities and USDA Securities are other-than-temporary impairment as of June 30, 2014 and December 31, 2013 .  Farmer Mac does not intend to sell these securities, and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

During the three and six months ended June 30, 2014 and 2013, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Securities.

The amortized cost, fair value, and weighted average yield of available-for-sale and held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of June 30, 2014 are set forth below. The balances presented are based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 3.2

 
As of June 30, 2014
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
436,272

 
$
437,209

 
2.42
%
Due after one year through five years
1,559,855

 
1,578,619

 
1.89
%
Due after five years through ten years
1,089,791

 
1,091,644

 
1.61
%
Due after ten years
1,978,374

 
1,967,014

 
2.54
%
Total
$
5,064,292

 
$
5,074,486

 
2.12
%
 
As of June 30, 2014
 
Held-to-Maturity Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
501

 
$
501

 
5.75
%
Due after one year through five years
1,655,953

 
1,659,547

 
2.45
%
Total
$
1,656,454

 
$
1,660,048

 
2.45
%

Farmer Mac did not own any held-to-maturity Farmer Mac Guaranteed Securities or USDA Securities as of December 31, 2013 . See Note 1(a) for more information about the transfer of Farmer Mac Guaranteed Securities to held-to-maturity as of January 1, 2014. As of June 30, 2014 , Farmer Mac owned trading USDA Securities with an amortized cost of $47.9 million , a fair value of $46.1 million , and a weighted average yield of 5.54 percent . As of December 31, 2013 , Farmer Mac owned trading USDA Securities with an amortized cost of $60.3 million , a fair value of $58.3 million , and a weighted average yield of 5.60 percent .  



20


4.
FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows, or debt issuance, and not for trading or speculative purposes.  Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e., LIBOR). Other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.

All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives not designated as cash flow hedges are reported in " (Losses)/gains on financial derivatives and hedging activities " in the consolidated statements of operations . For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in " (Losses)/gains on financial derivatives and hedging activities " in the consolidated statements of operations . For financial derivatives designated in cash flow hedging relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income; amounts are disclosed as a reclassification out of other comprehensive income when the hedged transaction affects earnings. Any ineffective portion of designated hedge transactions is recognized immediately in" (Losses)/gains on financial derivatives and hedging activities " in the consolidated statements of operations .

As of June 30, 2014 and December 31, 2013 , Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $11.8 million and $25.1 million , respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $1.8 million and $3.3 million as of June 30, 2014 and December 31, 2013 , respectively. As of June 30, 2014 and December 31, 2013 , Farmer Mac held no cash as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $1.8 million and $3.0 million , respectively. Farmer Mac records cash held as collateral as an increase in the balance of cash and cash equivalents and an increase in the balance of accounts payable and accrued expenses.

As of June 30, 2014 and December 31, 2013 , the fair value of Farmer Mac's derivatives in a net liability position including accrued interest but excluding netting arrangements and any adjustment for nonperformance risk, was $91.1 million and $92.0 million , respectively; however, including netting arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level, was $85.5 million and $74.8 million as of June 30, 2014 and December 31, 2013 , respectively.  Farmer Mac posted cash of $23.8 million and no investment securities as of June 30, 2014 and posted cash of $9.8 million and investment securities with a fair value of $1.5 million as of December 31, 2013 as collateral for its derivatives in net liability positions.  Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. The investment securities posted as collateral are included in the investment securities balances on the consolidated balance sheets.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2014 and December 31, 2013 , it could have been required to settle its obligations under the agreements or post additional collateral of $61.7 million and $63.5 million , respectively. As of June 30, 2014 and December 31, 2013 , there were no financial derivatives in a net payable position where Farmer Mac was required to pledge collateral which the counterparty had the right to sell or repledge.



21


Effective in second quarter 2013, Farmer Mac expanded its use of centrally-cleared derivatives by clearing through a clearinghouse certain interest rate swaps. Farmer Mac posts initial and variation margin to the clearinghouses through which centrally-cleared derivatives and futures contracts are traded. These collateral postings expose Farmer Mac to institutional credit risk in the event that either the clearinghouse or the futures commission merchant that Farmer Mac uses to post collateral to the clearinghouse fails to meet its obligations. Conversely, the use of centrally-cleared derivatives mitigates Farmer Mac's credit risk to individual counterparties because clearinghouses assume the credit risk among counterparties in centrally-cleared derivatives transactions. Of Farmer Mac's $6.5 billion notional amount of interest rate swaps outstanding as of June 30, 2014 , $3.4 billion were cleared through swap clearinghouses. Of Farmer Mac's $6.6 billion notional amount of interest rate swaps outstanding as of December 31, 2013 , $2.3 billion were cleared through swap clearinghouses.

The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of June 30, 2014 and December 31, 2013 and the effects of financial derivatives on the consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 :

Table 4.1

  
As of June 30, 2014
  
 
 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
900,000

 
$

 
$
(29,589
)
 
2.25%
 
0.23%
 
 
 
2.75
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
10,000

 

 
(129
)
 
2.50%
 
0.50%
 
 
 
6.45
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
507,552

 
1,955

 
(47,646
)
 
4.27%
 
0.23%
 
 
 
7.34
Receive fixed non-callable
3,968,832

 
4,979

 
(186
)
 
0.19%
 
0.39%
 
 
 
0.48
Receive fixed callable
200,000

 
22

 
(424
)
 
0.09%
 
0.98%
 
 
 
3.49
Basis swaps
880,000

 
418

 
(240
)
 
0.12%
 
0.30%
 
 
 
2.29
Agency forwards
15,836

 

 
(149
)
 
 
 
 
 
98.27

 
 
Treasury futures
13,700

 

 
(62
)
 
 
 
 
 
124.72

 
 
Credit valuation adjustment
 
 
(56
)
 
129

 
 
 
 
 
 
 
 
Total financial derivatives
$
6,495,920

 
$
7,318

 
$
(78,296
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 

 
23,822

 
 
 
 
 
 
 
 
Net amount
 
 
$
7,318

 
$
(54,474
)
 
 
 
 
 
 
 
 


22


  
As of December 31, 2013
  

 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
900,000

 
$

 
$
(28,989
)
 
2.25%
 
0.24%
 
 
 
3.25
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
10,000

 
68

 

 
2.50%
 
0.48%
 
 
 
6.95
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
806,596

 
7,570

 
(45,360
)
 
4.63%
 
0.24%
 
 
 
4.86
Receive fixed non-callable
4,324,663

 
11,836

 
(262
)
 
0.27%
 
0.70%
 
 
 
0.53
Receive fixed callable
175,000

 
83

 
(934
)
 
0.10%
 
0.65%
 
 
 
3.30
Basis swaps
404,288

 
276

 
(318
)
 
0.32%
 
0.29%
 
 
 
1.52
Agency forwards
65,704

 
86

 

 
 
 
 
 
98.91

 
 
Treasury futures
5,600

 

 
(1
)
 
 
 
 
 
123.02

 
 
Credit valuation adjustment
 
 
(201
)
 
156

 
 
 
 
 
 
 
 
Total financial derivatives
$
6,691,851

 
$
19,718

 
$
(75,708
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 

 
11,320

 
 
 
 
 
 
 
 
Net amount
 
 
$
19,718

 
$
(64,388
)
 
 
 
 
 
 
 
 

Table 4.2

 
(Losses)/Gains on Financial Derivatives and Hedging Activities
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps (1)
$
(799
)
 
$
17,535

 
$
(599
)
 
$
23,326

Hedged items
3,818

 
(14,729
)
 
6,568

 
(17,867
)
Gains on hedging activities
3,019

 
2,806

 
5,969

 
5,459

No hedge designation:
 
 
 
 
 
 
 
Interest rate swaps
(8,126
)
 
10,913

 
(17,674
)
 
13,759

Agency forwards
(235
)
 
1,076

 
(1,087
)
 
92

Treasury futures
(356
)
 
188

 
(484
)
 
167

(Losses)/gains on financial derivatives not designated in hedging relationships
(8,717
)
 
12,177

 
(19,245
)
 
14,018

(Losses)/gains on financial derivatives and hedging activities
$
(5,698
)
 
$
14,983

 
$
(13,276
)
 
$
19,477

(1)
Included in the assessment of hedge effectiveness at June 30, 2014 , but excluded from the amounts in the table, were losses of $2.9 million and $5.9 million for the three and six months ended June 30, 2014 , respectively, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the three and six months ended June 30, 2014 were gains of $0.1 million . The comparable amounts at June 30, 2013 were losses of $3.0 million and $6.0 million for the three and six months ended June 30, 2013 , respectively, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, losses of $0.2 million and $0.5 million for the three and six months ended June 30, 2013 , respectively attributable to hedge ineffectiveness.





23


5.
LOANS AND ALLOWANCE FOR LOSSES

Loans

Farmer Mac classifies loans as either held for investment or held for sale. Loans held for investment are recorded at the unpaid principal balance, net of unamortized premium or discount and other cost adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled basis. As of June 30, 2014 and December 31, 2013 , Farmer Mac had no loans held for sale. The following table displays the composition of the loan balances as of June 30, 2014 and December 31, 2013 :

Table 5.1

 
As of June 30, 2014
 
As of December 31, 2013
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
(in thousands)
Farm & Ranch
$
1,955,207

 
$
371,960

 
$
2,327,167

 
$
1,875,958

 
$
259,509

 
$
2,135,467

Rural Utilities
719,784

 
292,529

 
1,012,313

 
698,010

 
354,241

 
1,052,251

Total unpaid principal balance (1)
2,674,991

 
664,489

 
3,339,480

 
2,573,968

 
613,750

 
3,187,718

Unamortized premiums, discounts and other cost basis adjustments
(3,540
)
 
4,247

 
707

 
(3,843
)
 
16,239

 
12,396

Total loans
2,671,451

 
668,736

 
3,340,187

 
2,570,125

 
629,989

 
3,200,114

Allowance for loan losses
(5,274
)
 
(496
)
 
(5,770
)
 
(6,587
)
 
(279
)
 
(6,866
)
Total loans, net of allowance
$
2,666,177

 
$
668,240

 
$
3,334,417

 
$
2,563,538

 
$
629,710

 
$
3,193,248

(1)
Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.

Allowances for Losses

Farmer Mac maintains an allowance for loan losses to account for estimated probable losses on loans held and a reserve for losses to account for estimated probable losses on loans underlying long-term standby purchase commitments ("LTSPCs") and off-balance sheet Farmer Mac Guaranteed Securities.  As of June 30, 2014 and December 31, 2013 , Farmer Mac recorded allowances for losses of $11.4 million and $13.3 million , respectively. See Note 3 and Note 6 for more information about Farmer Mac Guaranteed Securities.  Farmer Mac Guaranteed Securities do not include AgVantage securities with regard to the allowance for losses discussion.

Farmer Mac's allowance for losses is presented in two components on its consolidated balance sheets:
 
an "Allowance for loan losses" on loans held; and
a "Reserve for losses" on loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities.
 


24


The following is a summary of the changes in the total allowance for losses for the three and six months ended June 30, 2014 and 2013:

Table 5.2

 
June 30, 2014
 
June 30, 2013
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
For the Three Months Ended:
(in thousands)
Beginning Balance
$
7,410

 
$
6,569

 
$
13,979

 
$
7,967

 
$
6,285

 
$
14,252

Release of losses
(1,583
)
 
(974
)
 
(2,557
)
 
(529
)
 
(175
)
 
(704
)
Charge-offs
(57
)
 

 
(57
)
 
(70
)
 

 
(70
)
Ending Balance
$
5,770

 
$
5,595

 
$
11,365

 
$
7,368

 
$
6,110

 
$
13,478

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
Beginning Balance
$
6,866

 
$
6,468

 
$
13,334

 
$
11,351

 
$
5,539

 
$
16,890

(Release of)/provision for losses
(1,010
)
 
(873
)
 
(1,883
)
 
(99
)
 
571

 
472

Charge-offs
(86
)
 

 
(86
)
 
(3,884
)
 

 
(3,884
)
Ending Balance
$
5,770

 
$
5,595

 
$
11,365

 
$
7,368

 
$
6,110

 
$
13,478



During second quarter 2014 , Farmer Mac recorded releases to its allowance for loan losses of $1.6 million and releases to its reserve for losses of $1.0 million . Farmer Mac also recorded $0.1 million of charge-offs to its allowance for loan losses during second quarter 2014 . The releases recorded during second quarter 2014 primarily relate to a significant decline in the balance of its ethanol-related Agricultural Storage and Processing portfolio. During second quarter 2013, Farmer Mac recorded a release from its allowance for loan losses of $0.5 million and a release from its reserve for losses of $0.2 million . Farmer Mac also recorded charge-offs of $0.1 million to its allowance for loan losses during second quarter 2013. Charge-offs recorded in first quarter 2013 included a $3.6 million charge-off related to one ethanol loan that transitioned to real estate owned ("REO") during that quarter and for which Farmer Mac had previously provided a specific allowance.







25


The following tables present the changes in the total allowance for losses for the three and six months ended June 30, 2014 and 2013 by commodity type:

Table 5.3

 
June 30, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,278

 
$
2,131

 
$
1,387

 
$
464

 
$
7,715

 
$
4

 
$
13,979

Provision for/(release of) losses
112

 
86

 
(19
)
 
(20
)
 
(2,716
)
 

 
(2,557
)
Charge-offs

 

 
(57
)
 

 

 

 
(57
)
Ending Balance
$
2,390

 
$
2,217

 
$
1,311

 
$
444

 
$
4,999

 
$
4

 
$
11,365

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,124

 
$
2,186

 
$
1,271

 
$
454

 
$
7,292

 
$
7

 
$
13,334

Provision for/(release of) losses
266

 
31

 
97

 
19

 
(2,293
)
 
(3
)
 
(1,883
)
Charge-offs

 

 
(57
)
 
(29
)
 

 

 
(86
)
Ending Balance
$
2,390

 
$
2,217

 
$
1,311

 
$
444

 
$
4,999

 
$
4

 
$
11,365

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
June 30, 2013
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,617

 
$
2,326

 
$
1,587

 
$
733

 
$
6,971

 
$
18

 
$
14,252

(Release of)/provision for losses
(212
)
 
(158
)
 
(308
)
 
(238
)
 
225

 
(13
)
 
(704
)
Charge-offs

 

 

 
(70
)
 

 

 
(70
)
Ending Balance
$
2,405

 
$
2,168

 
$
1,279

 
$
425

 
$
7,196

 
$
5

 
$
13,478

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,589

 
$
2,316

 
$
1,534

 
$
784

 
$
9,661

 
$
6

 
$
16,890

(Release of)/provision for losses
(184
)
 
41

 
(255
)
 
(289
)
 
1,160

 
(1
)
 
472

Charge-offs

 
(189
)
 

 
(70
)
 
(3,625
)
 

 
(3,884
)
Ending Balance
$
2,405

 
$
2,168

 
$
1,279

 
$
425

 
$
7,196

 
$
5

 
$
13,478



26



The following tables present the unpaid principal balances of loans held and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities and the related total allowance for losses by impairment method and commodity type as of June 30, 2014 and December 31, 2013 :

Table 5.4

  
As of June 30, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,487,792

 
$
318,616

 
$
368,556

 
$
40,744

 
$
35,593

 
$
662

 
$
2,251,963

Off-balance sheet
1,323,765

 
546,073

 
875,870

 
105,263

 
112,247

 
7,520

 
2,970,738

Total
$
2,811,557

 
$
864,689

 
$
1,244,426

 
$
146,007

 
$
147,840

 
$
8,182

 
$
5,222,701

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
18,011

 
$
38,782

 
$
8,094

 
$
10,317

 
$

 
$

 
$
75,204

Off-balance sheet
3,217

 
3,331

 
4,309

 
1,902

 

 

 
12,759

Total
$
21,228

 
$
42,113

 
$
12,403

 
$
12,219

 
$

 
$

 
$
87,963

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,505,803

 
$
357,398

 
$
376,650

 
$
51,061

 
$
35,593

 
$
662

 
$
2,327,167

Off-balance sheet
1,326,982

 
549,404

 
880,179

 
107,165

 
112,247

 
7,520

 
2,983,497

Total
$
2,832,785

 
$
906,802

 
$
1,256,829

 
$
158,226

 
$
147,840

 
$
8,182

 
$
5,310,664

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,723

 
$
369

 
$
615

 
$
32

 
$
756

 
$

 
$
3,495

Off-balance sheet
311

 
162

 
529

 
48

 
4,243

 
4

 
5,297

Total
$
2,034

 
$
531

 
$
1,144

 
$
80

 
$
4,999

 
$
4

 
$
8,792

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
269

 
$
1,594

 
$
103

 
$
309

 
$

 
$

 
$
2,275

Off-balance sheet
87

 
92

 
64

 
55

 

 

 
298

Total
$
356

 
$
1,686

 
$
167

 
$
364

 
$

 
$

 
$
2,573

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,992

 
$
1,963

 
$
718

 
$
341

 
$
756

 
$

 
$
5,770

Off-balance sheet
398

 
254

 
593

 
103

 
4,243

 
4

 
5,595

Total
$
2,390

 
$
2,217

 
$
1,311

 
$
444

 
$
4,999

 
$
4

 
$
11,365




27


  
As of December 31, 2013
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,363,861

 
$
295,037

 
$
319,665

 
$
39,940

 
$
32,636

 
$
359

 
$
2,051,498

Off-balance sheet
1,279,887

 
567,932

 
912,397

 
109,884

 
138,282

 
8,159

 
3,016,541

Total
$
2,643,748

 
$
862,969

 
$
1,232,062

 
$
149,824

 
$
170,918

 
$
8,518

 
$
5,068,039

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
21,147

 
$
41,441

 
$
10,844

 
$
10,422

 
$

 
$
115

 
$
83,969

Off-balance sheet
1,962

 
3,414

 
3,199

 
2,497

 

 

 
11,072

Total
$
23,109

 
$
44,855

 
$
14,043

 
$
12,919

 
$

 
$
115

 
$
95,041

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,385,008

 
$
336,478

 
$
330,509

 
$
50,362

 
$
32,636

 
$
474

 
$
2,135,467

Off-balance sheet
1,281,849

 
571,346

 
915,596

 
112,381

 
138,282

 
8,159

 
3,027,613

Total
$
2,666,857

 
$
907,824

 
$
1,246,105

 
$
162,743

 
$
170,918

 
$
8,633

 
$
5,163,080

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,321

 
$
325

 
$
436

 
$
20

 
$
2,290

 
$

 
$
4,392

Off-balance sheet
397

 
159

 
642

 
42

 
5,002

 
4

 
6,246

Total
$
1,718

 
$
484

 
$
1,078

 
$
62

 
$
7,292

 
$
4

 
$
10,638

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
362

 
$
1,641

 
$
140

 
$
331

 
$

 
$

 
$
2,474

Off-balance sheet
44

 
61

 
53

 
61

 

 
3

 
222

Total
$
406

 
$
1,702

 
$
193

 
$
392

 
$

 
$
3

 
$
2,696

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,683

 
$
1,966

 
$
576

 
$
351

 
$
2,290

 
$

 
$
6,866

Off-balance sheet
441

 
220

 
695

 
103

 
5,002

 
7

 
6,468

Total
$
2,124

 
$
2,186

 
$
1,271

 
$
454

 
$
7,292

 
$
7

 
$
13,334




28


The following tables present by commodity type the unpaid principal balances, recorded investment, and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of June 30, 2014 and December 31, 2013 :

Table 5.5

  
As of June 30, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including 
ethanol
facilities)
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
8,284

 
$
8,411

 
$
6,417

 
$
1,745

 
$

 
$

 
$
24,857

Unpaid principal balance
8,071

 
8,364

 
6,284

 
1,753

 

 

 
24,472

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment (1)
13,763

 
34,256

 
5,898

 
10,409

 

 

 
64,326

Unpaid principal balance
13,157

 
33,749

 
6,119

 
10,466

 

 

 
63,491

Associated allowance
356

 
1,686

 
167

 
364

 

 

 
2,573

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
22,047

 
42,667

 
12,315

 
12,154

 

 

 
89,183

Unpaid principal balance
21,228

 
42,113

 
12,403

 
12,219

 

 

 
87,963

Associated allowance
356

 
1,686

 
167

 
364

 

 

 
2,573

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status (2)
$
9,737

 
$
15,020

 
$
5,141

 
$
5,757

 
$

 
$

 
$
35,655

(1)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $57.1 million ( 64 percent ) of impaired loans as of June 30, 2014 , which resulted in a specific reserve of $1.3 million .
(2)
Includes $10.5 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.


29


  
As of December 31, 2013
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including 
ethanol
facilities)
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
6,956

 
$
9,880

 
$
6,671

 
$
1,444

 
$

 
$

 
$
24,951

Unpaid principal balance
6,825

 
9,877

 
6,588

 
1,443

 

 

 
24,733

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment (1)
16,697

 
36,146

 
7,600

 
11,554

 

 
119

 
72,116

Unpaid principal balance
16,284

 
34,978

 
7,455

 
11,476

 

 
115

 
70,308

Associated allowance
406

 
1,702

 
193

 
392

 

 
3

 
2,696

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
23,653

 
46,026

 
14,271

 
12,998

 

 
119

 
97,067

Unpaid principal balance
23,109

 
44,855

 
14,043

 
12,919

 

 
115

 
95,041

Associated allowance
406

 
1,702

 
193

 
392

 

 
3

 
2,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status (2)
$
10,812

 
$
15,237

 
$
5,344

 
$
5,835

 
$

 
$

 
$
37,228

(1)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $65.1 million ( 67 percent ) of impaired loans as of December 31, 2013 , which resulted in a specific reserve of $1.3 million .
(2)
Includes $9.6 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.


The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2014 and 2013 :

Table 5.6

 
June 30, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including 
ethanol
facilities)
 
Other
 
Total
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
22,969

 
$
43,329

 
$
12,798

 
$
12,116

 
$

 
$

 
$
91,212

Income recognized on impaired loans
105

 
76

 
59

 
79

 

 

 
319

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
23,197

 
$
44,228

 
$
13,289

 
$
12,410

 
$

 
$
40

 
$
93,164

Income recognized on impaired loans
275

 
270

 
135

 
201

 

 

 
881




30


 
June 30, 2013
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including 
ethanol
facilities)
 
Other
 
Total
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
34,879

 
$
46,300

 
$
17,403

 
$
12,181

 
$

 
$
571

 
$
111,334

Income recognized on impaired loans
61

 
123

 
38

 
78

 

 

 
300

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
31,422

 
$
43,606

 
$
17,270

 
$
13,207

 
$
1,446

 
$
722

 
$
107,673

Income recognized on impaired loans
403

 
497

 
192

 
272

 

 

 
1,364



For the three and six months ended June 30, 2014 , the recorded investment of loans determined to be troubled debt restructurings ("TDRs") was $0.3 million and $0.8 million , respectively, both before and after restructuring. For the three months and six months ended June 30, 2013 , the recorded investment of loans determined to be TDRs was $0.7 million and $0.9 million before restructuring and $0.7 million and $1.0 million after restructuring. As of June 30, 2014 , there were no TDRs identified during the previous 12 months that were in default under the modified terms. As of June 30, 2013 , there were two TDRs identified during the previous 12 months that were in default under the modified terms, with a recorded investment of $0.4 million . The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial for the three and six months ended June 30, 2014.

During the three months ended June 30, 2014 , Farmer Mac purchased no defaulted loans. During the six months ended June 30, 2014 , Farmer Mac purchased one defaulted loan having an unpaid principal balance of $0.4 million from a pool underlying an LTSPC.  During the three and six months ended June 30, 2013 , Farmer Mac purchased six defaulted loans having an unpaid principal balance of $5.9 million and eight defaulted loans having an unpaid principal balance of $6.1 million , respectively, from pools underlying Farm & Ranch Guaranteed Securities and LTSPCs.



31


The following tables present information related to Farmer Mac's acquisition of defaulted loans for the three and six months ended June 30, 2014 and 2013 and the outstanding balances and carrying amounts of all such loans as of June 30, 2014 and December 31, 2013 :

Table 5.7

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Unpaid principal balance at acquisition date:
 
 
 
 
 
 
 
  Loans underlying LTSPCs
$

 
$

 
$
440

 
$
37

  Loans underlying off-balance sheet Farmer Mac Guaranteed Securities

 
5,935

 

 
6,038

    Total unpaid principal balance at acquisition date

 
5,935

 
440

 
6,075

Contractually required payments receivable

 
6,086

 
440

 
6,229

Impairment recognized subsequent to acquisition
17

 
61

 
69

 
447

Recovery/release of allowance for defaulted loans
5

 
839

 
7

 
889


 
As of
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Outstanding balance
$
30,463

 
$
32,838

Carrying amount
28,429

 
29,613






32


Net credit losses and 90 -day delinquencies as of and for the periods indicated for loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs are presented in the table below.  As of June 30, 2014 , there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac has not experienced credit losses on any Rural Utilities loans.

Table 5.8

 
90-Day Delinquencies (1)
 
Net Credit (Recoveries)/Losses
 
As of
 
For the Six Months Ended
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
On-balance sheet assets:
 
 
 
 
 
 
 
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
25,118

 
$
27,580

 
$
(21
)
 
$
2,857

Total on-balance sheet
$
25,118

 
$
27,580

 
$
(21
)
 
$
2,857

Off-balance sheet assets:
 

 
 
 
 

 
 

Farm & Ranch:
 

 
 
 
 

 
 

LTSPCs
$
793

 
$
716

 
$

 
$

Total off-balance sheet
$
793

 
$
716

 
$

 
$

Total
$
25,911

 
$
28,296

 
$
(21
)
 
$
2,857

(1)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, or in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.


Of the $25.1 million and $27.6 million of on-balance sheet loans reported as 90 -day delinquencies as of June 30, 2014 and December 31, 2013 , respectively, $1.2 million , were loans subject to "removal-of-account" provisions.

Credit Quality Indicators

Farmer Mac analyzes credit risk related to loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities based on internally assigned loan scores (i.e., risk ratings) that are derived by taking into consideration such factors as historical repayment performance, indicators of current financial condition, loan seasoning, loan size, and loan-to-value ratio. Loans are then classified into one of the following asset categories based on their underlying risk rating: acceptable; other assets especially mentioned; and substandard. Farmer Mac believes this analysis provides meaningful information regarding the credit risk profile of its Farm & Ranch portfolio as of each quarterly reporting period end date.

Farmer Mac also uses 90 -day delinquency information to evaluate its credit risk exposure on these assets because historically it has been the best measure of borrower credit quality deterioration. Most of the loans held and underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities have annual (January 1) or semi-annual (January 1 and July 1) payment dates and are supported by less frequent and less predictable revenue sources, such as the cash flows generated from the maturation of crops, sales of livestock, and government farm support programs.  Taking into account the reduced frequency of payment due dates and revenue sources, Farmer Mac considers 90 -day delinquency to be the most significant observation point when evaluating delinquency information.


33



The following tables present credit quality indicators related to Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2014 and December 31, 2013 :  

Table 5.9

  
As of June 30, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,457,197

 
$
316,996

 
$
340,433

 
$
39,591

 
$
26,279

 
$
662

 
$
2,181,158

Special mention (2)
30,594

 
1,620

 
28,429

 
1,153

 
4,080

 

 
65,876

Substandard (3)
18,012

 
38,782

 
7,788

 
10,317

 
5,234

 

 
80,133

Total on-balance sheet
$
1,505,803

 
$
357,398

 
$
376,650

 
$
51,061

 
$
35,593

 
$
662

 
$
2,327,167

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,299,651

 
$
522,316

 
$
818,678

 
$
100,514

 
$
83,711

 
$
6,854

 
$
2,831,724

Special mention (2)
13,624

 
17,265

 
34,222

 
1,033

 
13,911

 
565

 
80,620

Substandard (3)
13,707

 
9,823

 
27,279

 
5,618

 
14,625

 
101

 
71,153

Total off-balance sheet
$
1,326,982

 
$
549,404

 
$
880,179

 
$
107,165

 
$
112,247

 
$
7,520

 
$
2,983,497

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
2,756,848

 
$
839,312

 
$
1,159,111

 
$
140,105

 
$
109,990

 
$
7,516

 
$
5,012,882

Special mention (2)
44,218

 
18,885

 
62,651

 
2,186

 
17,991

 
565

 
146,496

Substandard (3)
31,719

 
48,605

 
35,067

 
15,935

 
19,859

 
101

 
151,286

Total
$
2,832,785

 
$
906,802

 
$
1,256,829

 
$
158,226

 
$
147,840

 
$
8,182

 
$
5,310,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
5,910

 
$
11,339

 
$
5,511

 
$
2,358

 
$

 
$

 
$
25,118

Off-balance sheet
379

 

 

 
414

 

 

 
793

90-days or more past due
$
6,289

 
$
11,339

 
$
5,511

 
$
2,772

 
$

 
$

 
$
25,911

(1)
Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans. 
(2)
Assets in the Special mention category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  
(3)
Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.



34


  
As of December 31, 2013
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,348,205

 
$
290,064

 
$
300,308

 
$
39,022

 
$
10,987

 
$
359

 
$
1,988,945

Special Mention (2)
15,656

 
4,973

 
19,357

 
918

 
6,267

 

 
47,171

Substandard (3)
21,147

 
41,441

 
10,844

 
10,422

 
15,382

 
115

 
99,351

Total on-balance sheet
$
1,385,008

 
$
336,478

 
$
330,509

 
$
50,362

 
$
32,636

 
$
474

 
$
2,135,467

Off-Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,251,834

 
$
548,254

 
$
844,130

 
$
105,589

 
$
99,072

 
$
7,478

 
$
2,856,357

Special Mention (2)
10,977

 
15,621

 
36,555

 
917

 
11,011

 
578

 
75,659

Substandard (3)
19,038

 
7,471

 
34,911

 
5,875

 
28,199

 
103

 
95,597

Total off-balance sheet
$
1,281,849

 
$
571,346

 
$
915,596

 
$
112,381

 
$
138,282

 
$
8,159

 
$
3,027,613

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
2,600,039

 
$
838,318

 
$
1,144,438

 
$
144,611

 
$
110,059

 
$
7,837

 
$
4,845,302

Special Mention (2)
26,633

 
20,594

 
55,912

 
1,835

 
17,278

 
578

 
122,830

Substandard (3)
40,185

 
48,912

 
45,755

 
16,297

 
43,581

 
218

 
194,948

Total
$
2,666,857

 
$
907,824

 
$
1,246,105

 
$
162,743

 
$
170,918

 
$
8,633

 
$
5,163,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
8,036

 
$
11,841

 
$
4,462

 
$
3,122

 
$

 
$
119

 
$
27,580

Off-balance sheet
220

 

 

 
496

 

 

 
716

90-days or more past due
$
8,256

 
$
11,841

 
$
4,462

 
$
3,618

 
$

 
$
119

 
$
28,296

(1)
Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans.  
(2)
Assets in the Special mention category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  
(3)
Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.



35


Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of June 30, 2014 and December 31, 2013 :

Table 5.10

  
As of June 30, 2014
 
As of December 31, 2013
  
(in thousands)
By commodity/collateral type:
 
 
 
Crops
$
2,832,785

 
$
2,666,857

Permanent plantings
906,802

 
907,824

Livestock
1,256,829

 
1,246,105

Part-time farm
158,226

 
162,743

Ag. Storage and Processing (including ethanol facilities)
147,840

 
170,918

Other
8,182

 
8,633

Total
$
5,310,664

 
$
5,163,080

By geographic region (1):
 

 
 

Northwest
$
551,254

 
$
524,034

Southwest
1,716,331

 
1,752,109

Mid-North
1,834,187

 
1,702,668

Mid-South
622,183

 
601,359

Northeast
224,830

 
231,731

Southeast
361,879

 
351,179

Total
$
5,310,664

 
$
5,163,080

By original loan-to-value ratio:
 

 
 

0.00% to 40.00%
$
1,439,917

 
$
1,375,758

40.01% to 50.00%
1,160,478

 
1,099,033

50.01% to 60.00%
1,462,113

 
1,431,562

60.01% to 70.00%
1,107,922

 
1,113,427

70.01% to 80.00%
106,556

 
110,828

80.01% to 90.00%
33,678

 
32,472

Total
$
5,310,664

 
$
5,163,080

(1)
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).


The original loan-to-value ratio is calculated by dividing the loan principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of loan origination or, when available, the updated appraised value at the time of guarantee, purchase, or commitment.  Current loan-to-value ratios may be higher or lower than the original loan-to-value ratios.




36


6.
OFF-BALANCE SHEET GUARANTEES AND LONG-TERM STANDBY PURCHASE COMMITMENTS

Farmer Mac offers two credit enhancement alternatives to direct loan purchases that allow approved lenders the ability to retain the cash flow benefits of their loans and increase their liquidity and lending capacity: (1) Farmer Mac Guaranteed Securities, which are available through each of the Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business, and (2) LTSPCs, which are available through the Farm & Ranch and the Rural Utilities lines of business.

Off-Balance Sheet Farmer Mac Guaranteed Securities

The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2014 and December 31, 2013 , not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans:

Table 6.1
Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
  
As of June 30, 2014
 
As of December 31, 2013
  
(in thousands)
Farm & Ranch:
 
 
 
Guaranteed Securities
$
704,376

 
$
765,751

USDA Guarantees:
 

 
 

Farmer Mac Guaranteed USDA Securities
16,662

 
20,222

Institutional Credit:
 

 
 

AgVantage Securities
988,187

 
981,009

Total off-balance sheet Farmer Mac Guaranteed Securities
$
1,709,225

 
$
1,766,982


Eligible loans and other eligible assets may be placed into trusts that are used as vehicles for the securitization of the transferred assets and the Farmer Mac-guaranteed beneficial interests in the trusts are sold to investors.  The following table summarizes the significant cash flows received from and paid to trusts used for Farmer Mac securitizations:

Table 6.2
 
For the Six Months Ended
  
June 30, 2014
 
June 30, 2013
  
(in thousands)
Proceeds from new securitizations
$
126,857

 
$
35,891

Guarantee fees received
2,416

 
2,687

Purchases of assets from the trusts

 
(6,038
)

Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $12.4 million as of June 30, 2014 and $13.4 million as of December 31, 2013 . As of June 30, 2014 and December 31, 2013 , the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 12.5 years and 12.8 years , respectively.  As of


37


June 30, 2014 and December 31, 2013 , the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 2.9 years and 3.4 years , respectively.

Long-Term Standby Purchase Commitments

An LTSPC commits Farmer Mac, subject to the terms of the applicable LTSPC agreement, to a future purchase of one or more loans from an identified pool of eligible loans that met Farmer Mac's standards at the time the transaction was entered into and on which Farmer Mac assumed the credit risk.  As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly in arrears in an amount approximating what would have been the guarantee fee if the transaction were structured as a swap for Farmer Mac Guaranteed Securities.

The maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans, was $2.3 billion as of June 30, 2014 and December 31, 2013 .

As of June 30, 2014 and December 31, 2013 , the weighted-average remaining maturity of all loans underlying LTSPCs was 14.2 years and 13.9 years , respectively.  For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $27.1 million as of June 30, 2014 and $26.3 million as of December 31, 2013 .



7.
EQUITY

Common Stock

Farmer Mac has three classes of common stock outstanding:
 
Class A voting common stock, which may be held only by banks, insurance companies, and other financial institutions or similar entities that are not institutions of the Farm Credit System ("FCS").  By federal statute, no holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33 percent of the outstanding shares of Class A voting common stock.
Class B voting common stock, which may be held only by institutions of the FCS.  There are no restrictions on the maximum holdings of Class B voting common stock.
Class C non-voting common stock, which has no ownership restrictions.

During each of the first and second quarters of 2014 , Farmer Mac paid a quarterly dividend of $0.14 per share on all classes of its common stock. During each quarter of 2013, Farmer Mac paid a quarterly dividend of $0.12 per share on all classes of its common stock. Farmer Mac's ability to declare and pay a dividend could be restricted if it fails to comply with applicable capital requirements.



38


Preferred Stock

On June 20, 2014, Farmer Mac issued 3.0 million shares of 6.000 percent Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (the "Series C Preferred Stock"). On March 25, 2014, Farmer Mac issued 3.0 million shares of 6.875 percent Non-Cumulative Preferred Stock, Series B (the "Series B Preferred Stock"). On January 17, 2013, Farmer Mac issued 2.4 million shares of 5.875 percent Non-Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"). The Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock each have a par value of $25.00 per share and a liquidation preference of $25.00 per share. The Series A Preferred Stock and the Series B Preferred Stock pay an annual dividend rate of 5.875 percent and 6.875 percent , respectively, for the life of the securities. The Series C Preferred Stock pays an annual dividend rate of 6.000 percent from the date of issuance to and including the quarterly payment date occurring on July 17, 2024, and thereafter, at a floating rate equal to three-month LIBOR plus 3.26 percent . Farmer Mac will have the option to redeem the Series A Preferred Stock at any time on and after January 17, 2018, the Series B Preferred Stock at any time on and after April 17, 2019, and the Series C Preferred Stock at any time on and after July 18, 2024. Dividends on the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock are payable when, as, and if declared by Farmer Mac's board of directors and are non-cumulative, so dividends that are not declared for a payment date will not accrue. Farmer Mac incurred direct costs of $1.7 million related to the issuance of the Series A Preferred Stock, direct costs of $1.9 million related to the issuance of the Series B Preferred Stock, and direct costs of $1.6 million related to the issuance of the Series C Preferred Stock. Farmer Mac used the proceeds from the sale of the Series A Preferred Stock to redeem and retire its outstanding shares of Series C Non-Voting Cumulative Preferred Stock, which had a par value of $1,000 per share and a liquidation preference of $1,000 per share, that had been issued in 2008 and 2009 ("retired Series C Preferred Stock") on January 17, 2013. As of June 30, 2014 , Farmer Mac had 2.4 million shares of Series A Preferred Stock outstanding, 3.0 million shares of Series B Preferred Stock outstanding, and 3.0 million of Series C Preferred Stock outstanding.

Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it fails to comply with applicable capital requirements. Farmer Mac's preferred stock is included as a component of core capital for regulatory and statutory capital compliance measurements.

Non-Controlling Interest in Farmer Mac II LLC

On January 25, 2010 , Farmer Mac completed a private offering of $250.0 million of securities issued by a newly formed Delaware statutory trust.  The trust securities, called Farm Asset-Linked Capital Securities or "FALConS," represent undivided beneficial ownership interests in 250,000 shares of non-cumulative perpetual preferred stock (the "Farmer Mac II LLC Preferred Stock") of Farmer Mac's subsidiary, Farmer Mac II LLC, a Delaware limited liability company.  The Farmer Mac II LLC Preferred Stock has a liquidation preference of $1,000  per share.

Dividends on the Farmer Mac II LLC Preferred Stock will be payable if, when, and as declared by Farmer Mac II LLC's board of directors, quarterly, on a non-cumulative basis, on March 30, June 30, September 30, and December 30 of each year.  From the date of issuance to but excluding the quarterly payment date occurring on March 30, 2015, the annual dividend rate on the Farmer Mac II LLC Preferred Stock will be 8.875 percent .  From March 30, 2015 to but excluding the quarterly payment date occurring on March 30, 2020, the annual dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875 percent .  Beginning on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be an annual rate equal to three-month LIBOR plus 8.211 percent .  Dividends on the Farmer Mac II LLC Preferred Stock are non-cumulative, so dividends that are not declared for any payment date will not


39


accrue.  Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented as "Non-controlling interest – preferred stock" within permanent equity on the consolidated balance sheets of Farmer Mac. The accrual of declared dividends is presented as "Net income attributable to non-controlling interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis.  The consolidated tax benefit is included in income tax expense. Farmer Mac II LLC may redeem the preferred stock on March 30 of 2015, 2016, 2017, 2018, and 2019 and on any payment date on or after March 30, 2020, in whole or in part, at a cash redemption price equal to the liquidation preference. On May 14, 2014, Farmer Mac purchased $6.0 million of FALConS from certain holders.

Statutory and Regulatory Capital Requirements

Farmer Mac is subject to the following statutory and regulatory capital requirements:
 
Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income plus non-controlling interest – preferred stock) equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically including:   
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and
other off-balance sheet obligations of Farmer Mac.
Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core capital equal to 50 percent of the total minimum capital requirement at that time.
Risk-based capital requirement – Farmer Mac's charter directs the Farm Credit Administration ("FCA") to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.

Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement.

As of June 30, 2014 , Farmer Mac's minimum and critical capital requirements were $432.6 million and $216.3 million , respectively, and its actual core capital level was $750.3 million , which was $317.7 million above the minimum capital requirement and $534.0 million above the critical capital requirement as of that date.  As of December 31, 2013 , Farmer Mac's minimum and critical capital requirements were $398.5 million and $199.3 million , respectively, and its actual core capital level was $590.7 million , which was $192.2 million above the minimum capital requirement and $391.4 million above the critical capital requirement as of that date.

Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of June 30, 2014 was $122.8 million , and Farmer Mac's regulatory capital (core capital plus the allowance for losses) of $761.7 million exceeded that amount by approximately $638.9 million .  As of December 31, 2013 , Farmer Mac's risk-based capital requirement was $90.8 million , and Farmer Mac's regulatory capital of $604.0 million exceeded that amount by approximately $513.2 million .

In accordance with FCA's rule on Farmer Mac's capital planning that became effective on January 3, 2014, and as part of Farmer Mac's capital plan, Farmer Mac has adopted a policy for maintaining a sufficient


40


level of capital (consisting of retained earnings, paid-in-capital, common stock, qualifying preferred stock, and accumulated other comprehensive income allocable to investments not included in one of the four operating lines of business) and imposing restrictions on common stock dividends and employee (including officer) bonus payments in the event that this capital falls below specified thresholds.

8.
FAIR VALUE DISCLOSURES

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). In determining fair value, Farmer Mac uses various valuation approaches, including market and income based approaches.  The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  When available, the fair value of Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs, or unobservable inputs that are corroborated by market data.  Pricing information obtained from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. Farmer Mac's accounting policies for fair value measurement and a description of the fair value techniques used for instruments measured at fair value is discussed in Note 2(p) and Note 13 to the consolidated financial statements included in the Segment Recast 8-K.

Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements.  Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as nonrecurring fair value measurements.

Fair Value Classification and Transfers

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The following three levels are used to classify fair value measurements:

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3
Prices or valuations that require unobservable inputs that are significant to the fair value measurement.

As of June 30, 2014 , Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.2 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3).  These financial instruments measured as level 3 represented 35 percent of total assets and 56 percent of financial instruments measured at fair value as of June 30, 2014 . As of December 31, 2013 , Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.8 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3


41


represented 51 percent of total assets and 73 percent of financial instruments measured at fair value as of December 31, 2013 .

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period.  There were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives during the first six months of 2014 and 2013. See Note 1(a) for information about the transfer of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity as of January 1, 2014.



42


The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2014 and December 31, 2013 , respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 8.1
Assets and Liabilities Measured at Fair Value as of June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
54,976

 
$
54,976

Floating rate asset-backed securities

 
120,244

 

 
120,244

Floating rate corporate debt securities

 
26,688

 

 
26,688

Fixed rate corporate debt securities

 
55,170

 

 
55,170

Floating rate Government/GSE guaranteed mortgage-backed securities

 
626,349

 
195

 
626,544

Fixed rate GSE guaranteed mortgage-backed securities

 
8,460

 

 
8,460

Floating rate GSE subordinated debt

 
63,385

 

 
63,385

Fixed rate GSE preferred stock

 
82,425

 

 
82,425

Fixed rate taxable municipal bonds

 
11,978

 

 
11,978

Fixed rate senior agency debt

 
200,100

 

 
200,100

Floating rate U.S. Treasuries
74,998

 

 

 
74,998

Fixed rate U.S. Treasuries
990,995

 

 

 
990,995

Total available-for-sale
1,065,993

 
1,194,799

 
55,171

 
2,315,963

Trading:
 

 
 

 
 

 
 

Floating rate asset-backed securities

 

 
880

 
880

Total trading

 

 
880

 
880

Total Investment Securities
1,065,993

 
1,194,799

 
56,051

 
2,316,843

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
3,416,512

 
3,416,512

Farmer Mac Guaranteed USDA Securities

 

 
21,044

 
21,044

Total Farmer Mac Guaranteed Securities

 

 
3,437,556

 
3,437,556

USDA Securities:
 

 
 

 
 

 
 

Available-for-sale

 

 
1,636,930

 
1,636,930

Trading

 

 
46,099

 
46,099

Total USDA Securities

 

 
1,683,029

 
1,683,029

Financial derivatives

 
7,318

 

 
7,318

Total Assets at fair value
$
1,065,993

 
$
1,202,117

 
$
5,176,636

 
$
7,444,746

Liabilities:
 

 
 

 
 

 
 

Securities sold, not yet purchased
 
 
 
 
 
 
 
Fixed rate U.S. Treasuries
$
1,673,532

 
$

 
$

 
$
1,673,532

Financial derivatives
62

 
78,234

 

 
78,296

Total Liabilities at fair value
$
1,673,594

 
$
78,234

 
$

 
$
1,751,828

Nonrecurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
5,003

 
$
5,003

REO

 

 
762

 
762

Total Nonrecurring Assets at fair value
$

 
$

 
$
5,765

 
$
5,765



43



Assets and Liabilities Measured at Fair Value as of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
65,285

 
$
65,285

Floating rate asset-backed securities

 
166,104

 

 
166,104

Floating rate corporate debt securities

 
109,769

 

 
109,769

Fixed rate corporate debt

 
55,141

 

 
55,141

Floating rate Government/GSE guaranteed mortgage-backed securities

 
621,064

 
205

 
621,269

Fixed rate GSE guaranteed mortgage-backed securities

 
8,657

 

 
8,657

Floating rate GSE subordinated debt

 
63,385

 

 
63,385

Fixed rate GSE preferred stock

 
83,161

 

 
83,161

Fixed rate taxable municipal bonds

 
30,681

 

 
30,681

Fixed rate senior agency debt

 
524,062

 

 
524,062

Fixed rate U.S. Treasuries
755,633

 

 

 
755,633

Total available-for-sale
755,633

 
1,662,024

 
65,490

 
2,483,147

Trading:
 

 
 

 
 

 
 

Floating rate asset-backed securities

 

 
928

 
928

Total trading

 

 
928

 
928

Total Investment Securities
755,633

 
1,662,024

 
66,418

 
2,484,075

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
5,070,366

 
5,070,366

Farmer Mac Guaranteed USDA Securities

 

 
21,234

 
21,234

Total Farmer Mac Guaranteed Securities

 

 
5,091,600

 
5,091,600

USDA Securities:
 

 
 

 
 

 
 

Available-for-sale

 

 
1,553,669

 
1,553,669

Trading

 

 
58,344

 
58,344

Total USDA Securities

 

 
1,612,013

 
1,612,013

Financial derivatives

 
19,718

 

 
19,718

Total Assets at fair value
$
755,633

 
$
1,681,742

 
$
6,770,031

 
$
9,207,406

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
1

 
$
75,472

 
$
235

 
$
75,708

Total Liabilities at fair value
$
1

 
$
75,472

 
$
235

 
$
75,708

Nonrecurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment

 

 
4,420

 
4,420

REO

 

 
1,818

 
1,818

Total Nonrecurring Assets at fair value
$

 
$

 
$
6,238

 
$
6,238






44


The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which Farmer Mac has used significant unobservable inputs to determine fair value. Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period.

Table 8.2
 
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2014
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
64,963

 
$

 
$
(12,125
)
 
$

 
$
(375
)
 
$
2,513

 
$
54,976

Floating rate Government/GSE guaranteed mortgage-backed securities
203

 

 

 
(7
)
 

 
(1
)
 
195

Total available-for-sale
65,166

 

 
(12,125
)
 
(7
)
 
(375
)
 
2,512

 
55,171

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities (1)
923

 

 

 
(131
)
 
88

 

 
880

Total trading
923

 

 

 
(131
)
 
88

 

 
880

Total Investment Securities
66,089

 

 
(12,125
)
 
(138
)
 
(287
)
 
2,512

 
56,051

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
3,467,655

 
295,775

 

 
(356,319
)
 
3,818

 
5,583

 
3,416,512

Farmer Mac Guaranteed USDA Securities
21,608

 

 

 
(191
)
 

 
(373
)
 
21,044

Total Farmer Mac Guaranteed Securities
3,489,263

 
295,775

 

 
(356,510
)
 
3,818

 
5,210

 
3,437,556

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,600,659

 
90,785

 

 
(59,640
)
 

 
5,126

 
1,636,930

Trading (2)
51,102

 

 

 
(4,843
)
 
(160
)
 

 
46,099

Total USDA Securities
1,651,761

 
90,785

 

 
(64,483
)
 
(160
)
 
5,126

 
1,683,029

Total Assets at fair value
$
5,207,113

 
$
386,560

 
$
(12,125
)
 
$
(421,131
)
 
$
3,371

 
$
12,848

 
$
5,176,636

Liabilities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Financial derivatives
$
(161
)
 
$

 
$

 
$

 
$
161

 
$

 
$

Total Liabilities at fair value
$
(161
)
 
$

 
$

 
$

 
$
161

 
$

 
$

(1)
Unrealized gains are attributable to assets still held as of June 30, 2014 and are recorded in " Gains/(losses) on trading securities ."
(2)
Includes immaterial unrealized gains attributable to assets still held as of June 30, 2014 that are recorded in " Gains/(losses) on trading securities ."





45


Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2013
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/
(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
65,213

 
$

 
$

 
$

 
$

 
$
(125
)
 
$
65,088

Floating rate Government/GSE guaranteed mortgage-backed securities
233

 

 

 
(9
)
 

 
(2
)
 
222

Total available-for-sale
65,446

 

 

 
(9
)
 

 
(127
)
 
65,310

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities (1)
1,129

 

 

 
(186
)
 
121

 

 
1,064

Total trading
1,129

 

 

 
(186
)
 
121

 

 
1,064

Total Investment Securities
66,575

 




(195
)

121


(127
)

66,374

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
5,072,882

 
200,000

 

 
(206,519
)
 
(14,730
)
 
(18,574
)
 
5,033,059

Farmer Mac Guaranteed USDA Securities
27,198

 

 

 
(515
)
 

 
(889
)
 
25,794

Total Farmer Mac Guaranteed Securities
5,100,080

 
200,000

 

 
(207,034
)
 
(14,730
)
 
(19,463
)
 
5,058,853

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,569,160

 
110,897

 

 
(76,364
)
 

 
(59,929
)
 
1,543,764

Trading (2)
87,271

 

 

 
(13,231
)
 
(448
)
 

 
73,592

Total USDA Securities
1,656,431

 
110,897

 

 
(89,595
)
 
(448
)
 
(59,929
)
 
1,617,356

Total Assets at fair value
$
6,823,086

 
$
310,897

 
$

 
$
(296,824
)
 
$
(15,057
)
 
$
(79,519
)
 
$
6,742,583

Liabilities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Financial derivatives (3)
$
(532
)
 
$

 
$

 
$

 
$
142

 
$

 
$
(390
)
Total Liabilities at fair value
$
(532
)
 
$

 
$

 
$

 
$
142

 
$

 
$
(390
)
(1)
Unrealized gains are attributable to assets still held as of June 30, 2013 and are recorded in " Gains/(losses) on trading securities ."
(2)
Includes unrealized losses of $0.3 million attributable to assets still held as of June 30, 2013 that are recorded in " Gains/(losses) on trading securities ."
(3)
Unrealized gains are attributable to liabilities still held as of June 30, 2013 and are recorded in " (Losses)/gains on financial derivatives and hedging activities ."



46


Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2014
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Transfers Out
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
65,285

 
$

 
$
(12,125
)
 
$

 
$
(375
)
 
$
2,191

 
$

 
$
54,976

Floating rate Government/GSE guaranteed mortgage-backed securities
205

 

 

 
(11
)
 

 
1

 

 
195

Total available-for-sale
65,490

 

 
(12,125
)
 
(11
)
 
(375
)
 
2,192

 

 
55,171

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Floating rate asset-backed securities (1)
928

 

 

 
(414
)
 
366

 

 

 
880

Total trading
928

 

 

 
(414
)
 
366

 

 

 
880

Total Investment Securities
66,418

 

 
(12,125
)
 
(425
)
 
(9
)
 
2,192

 

 
56,051

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

AgVantage
5,070,366

 
465,775

 

 
(532,588
)
 
6,568

 
18,477

 
(1,612,086
)
 
3,416,512

Farmer Mac Guaranteed USDA Securities
21,234

 

 

 
(362
)
 

 
172

 

 
21,044

Total Farmer Mac Guaranteed Securities
5,091,600

 
465,775

 

 
(532,950
)
 
6,568

 
18,649

 
(1,612,086
)
 
3,437,556

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Available-for-sale
1,553,669

 
158,769

 

 
(120,095
)
 

 
44,587

 

 
1,636,930

Trading (2)
58,344

 

 

 
(12,462
)
 
217

 

 

 
46,099

Total USDA Securities
1,612,013

 
158,769

 

 
(132,557
)
 
217

 
44,587

 

 
1,683,029

Total Assets at fair value
$
6,770,031

 
$
624,544

 
$
(12,125
)
 
$
(665,932
)
 
$
6,776

 
$
65,428

 
$
(1,612,086
)
 
$
5,176,636

Liabilities:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Financial derivatives
$
(235
)
 
$

 
$

 
$

 
$
235

 
$

 
$

 
$

Total Liabilities at fair value
$
(235
)
 
$

 
$

 
$

 
$
235

 
$

 
$

 
$

(1)
Unrealized gains are attributable to assets still held as of June 30, 2014 and are recorded in " Gains/(losses) on trading securities ."
(2)
Includes unrealized gains of $0.7 million attributable to assets still held as of June 30, 2014 that are recorded in " Gains/(losses) on trading securities ."




47


Level 3 Assets and Liabilities Measured at Fair Value for the Six Months Ended June 30, 2013
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/
(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
63,159

 
$

 
$

 
$

 
$

 
$
1,929

 
$
65,088

Floating rate Government/GSE guaranteed mortgage-backed securities

 
233

 

 
(9
)
 

 
(2
)
 
222

Total available-for-sale
63,159

 
233

 

 
(9
)
 

 
1,927

 
65,310

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities (1)
1,247

 

 

 
(500
)
 
317

 

 
1,064

Total trading
1,247

 

 

 
(500
)
 
317

 

 
1,064

Total Investment Securities
64,406

 
233

 

 
(509
)
 
317

 
1,927

 
66,374

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
4,739,577

 
625,000

 

 
(284,452
)
 
(17,868
)
 
(29,198
)
 
5,033,059

Farmer Mac Guaranteed USDA Securities
26,681

 

 

 
(898
)
 

 
11

 
25,794

Total Farmer Mac Guaranteed Securities
4,766,258

 
625,000

 

 
(285,350
)
 
(17,868
)
 
(29,187
)
 
5,058,853

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,486,595

 
233,084

 

 
(145,566
)
 

 
(30,349
)
 
1,543,764

Trading (2)
104,188

 

 

 
(30,162
)
 
(434
)
 

 
73,592

Total USDA Securities
1,590,783

 
233,084

 

 
(175,728
)
 
(434
)
 
(30,349
)
 
1,617,356

Total Assets at fair value
$
6,421,447

 
$
858,317

 
$

 
$
(461,587
)
 
$
(17,985
)
 
$
(57,609
)
 
$
6,742,583

Liabilities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Financial derivatives (3)
$
(691
)
 
$

 
$

 
$

 
$
301

 
$

 
$
(390
)
Total Liabilities at fair value
$
(691
)
 
$

 
$

 
$

 
$
301

 
$

 
$
(390
)
(1)
Unrealized gains are attributable to assets still held as of June 30, 2013 and are recorded in " Gains/(losses) on trading securities ."
(2)
Includes unrealized losses of $0.1 million attributable to assets still held as of June 30, 2013 that are recorded in " Gains/(losses) on trading securities ."
(3)
Unrealized gains are attributable to liabilities still held as of June 30, 2013 and are recorded in " (Losses)/gains on financial derivatives and hedging activities ."




48


The following tables present additional information about the significant unobservable inputs, such as discount rates and constant prepayment rates ("CPR"), used in the fair value measurements categorized in level 3 of the fair value hierarchy as of June 30, 2014 and December 31, 2013 .

Table 8.3
 
 
As of June 30, 2014
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
54,976

 
Indicative bids
 
Range of broker quotes
 
82.0% - 96.0% (89.3%)
Floating rate asset-backed securities
 
$
880

 
Discounted cash flow
 
Discount rate
 
12.2% - 21.5% (16.8%)
 
 
 
 
 
 
CPR
 
10%
Floating rate Government/GSE guaranteed mortgage-backed securities
 
$
195

 
Discounted cash flow
 
Discount rate
 
1.8% - 1.8% (1.8%)
 
 
 
 
 
 
CPR
 
7%
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
3,416,512

 
Discounted cash flow
 
Discount rate
 
0.8% - 2.2% (1.4%)
Farmer Mac Guaranteed USDA Securities
 
$
21,044

 
Discounted cash flow
 
Discount rate
 
0.8% - 3.3% (1.9%)
 
 
 
 
 
 
CPR
 
8% - 17% (14%)
USDA Securities
 
$
1,683,029

 
Discounted cash flow
 
Discount rate
 
1.1% - 5.2% (3.2%)
 
 
 
 
 
 
CPR
 
0% - 18% (7%)

 
 
As of December 31, 2013
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
65,285

 
Indicative bids
 
Range of broker quotes
 
82.0% - 92.0% (88.1%)
Floating rate asset-backed securities
 
$
928

 
Discounted cash flow
 
Discount rate
 
13.0% - 22.5% (17.7%)
 
 
 
 
 
 
CPR
 
10%
Floating rate Government/GSE guaranteed mortgage-backed securities
 
$
205

 
Discounted cash flow
 
Discount rate
 
1.8% - 1.8% (1.8%)
 
 
 
 
 
 
CPR
 
6%
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
5,070,366

 
Discounted cash flow
 
Discount rate
 
0.9% - 3.6% (1.8%)
Farmer Mac Guaranteed USDA Securities
 
$
21,234

 
Discounted cash flow
 
Discount rate
 
0.9% - 3.2% (1.9%)
 
 
 
 
 
 
CPR
 
7% - 14% (11%)
USDA Securities
 
$
1,612,013

 
Discounted cash flow
 
Discount rate
 
1.2% - 5.3% (3.4%)
 
 
 
 
 
 
CPR
 
0% - 23% (5%)
Liabilities:
 
 
 
 
 
 
 
 
Financial Derivatives:
 
 
 
 
 
 
 
 
Basis swaps
 
$
235

 
Discounted cash flow
 
Discount rate
 
0.7% - 2.3% (1.3%)
 
 
 
 
 
 
CPR
 
10% - 11% (10%)




49


The significant unobservable inputs used in the fair value measurements of Farmer Mac Guaranteed Securities and USDA Securities are prepayment rates and discount rates commensurate with the risks involved. Typically, significant increases (decreases) in any of these inputs in isolation may result in materially lower (higher) fair value measurements. Generally, in a rising interest rate environment, Farmer Mac would expect average discount rates to increase and would likely expect a corresponding decrease in forecasted prepayment rates. Conversely, in a declining interest rate environment, Farmer Mac would expect average discount rates to decrease and would likely expect a corresponding increase in forecasted prepayment rates. Prepayment rates are not presented in the table above for AgVantage securities because they generally do not pay down principal based on amortization schedules but instead typically have fixed maturity dates when the secured general obligations are due.

Disclosures on Fair Value of Financial Instruments

The following table sets forth the estimated fair values and carrying values for financial assets, liabilities, and guarantees and commitments as of June 30, 2014 and December 31, 2013 :

Table 8.4

 
As of June 30, 2014
 
As of December 31, 2013
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
384,123

 
$
384,123

 
$
749,313

 
$
749,313

Securities purchased under agreements to resell
1,640,184

 
1,640,686

 

 

Investment securities
2,316,843

 
2,316,843

 
2,484,075

 
2,484,075

Farmer Mac Guaranteed Securities
5,097,604

 
5,094,010

 
5,091,600

 
5,091,600

USDA Securities
1,683,029

 
1,683,029

 
1,612,013

 
1,612,013

Loans
3,363,595

 
3,334,417

 
3,138,932

 
3,193,248

Financial derivatives
7,318

 
7,318

 
19,718

 
19,718

Guarantee and commitment fees receivable:
 
 
 
 
 
 
 
LTSPCs
31,621

 
28,038

 
33,807

 
27,244

Farmer Mac Guaranteed Securities
16,209

 
15,440

 
18,470

 
16,660

Financial liabilities:
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
Due within one year
6,264,106

 
6,265,018

 
7,353,356

 
7,338,781

Due after one year
5,455,927

 
5,401,118

 
4,977,942

 
5,001,169

Securities sold, not yet purchased
1,673,532

 
1,673,532

 

 

Debt securities of consolidated trusts held by third parties
373,514

 
377,518

 
257,512

 
261,760

Financial derivatives
78,296

 
78,296

 
75,708

 
75,708

Guarantee and commitment obligations:
 
 
 
 
 
 
 
LTSPCs
30,676

 
27,092

 
32,856

 
26,293

Farmer Mac Guaranteed Securities
13,180

 
12,411

 
15,185

 
13,374








50


9.
BUSINESS SEGMENT REPORTING

After an evaluation of Farmer Mac's overall portfolio of product offerings and reportable segments, Farmer Mac's management has determined that Farmer Mac's operations consist of four reportable operating segments effective January 1, 2014 – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. The Institutional Credit segment comprises Farmer Mac's guarantees of AgVantage securities related to general obligations of lenders that are secured by pools of eligible loans. Prior to January 1, 2014, AgVantage securities were included under either the Farm & Ranch or Rural Utilities line of business, as applicable, depending on the type of loans pledged to secure the AgVantage securities. Because the AgVantage product is priced differently and has different credit characteristics than the loans that Farmer Mac purchases, are pooled in LTSPCs, or underlie non-AgVantage Farmer Mac Guaranteed Securities, Farmer Mac's management determined AgVantage securities should be reported in a separate business segment. All prior period information has been recast to reflect the breakout of the Institutional Credit segment from both the Farm & Ranch and Rural Utilities segments.  

Farmer Mac uses these four segments to manage business risk, and each segment is based on distinct products and distinct business activities.  In addition to these four operating segments, a corporate segment is presented.  That segment represents activity in Farmer Mac's investment portfolio and other corporate activities.  The segment financial results include directly attributable revenues and expenses.  Corporate charges for administrative expenses that are not directly attributable to an operating segment are allocated based on headcount.

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics, and business trends.  Core earnings principally differs from net income attributable to common stockholders by excluding the effects of fair value accounting guidance, which are not expected to have a cumulative net impact on financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is generally expected. Core earnings also differs from net income attributable to common stockholders by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of this non-GAAP measure is intended to be supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.

The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis.  Accordingly, the core earnings for Farmer Mac's reportable operating segments will differ from the stand-alone financial statements of Farmer Mac's subsidiaries.  These differences will be due to various factors, including the reversal of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the incurrence of indebtedness managed at the corporate level.  The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences.  The assets of Farmer Mac's subsidiary Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.  As of June 30, 2014 , Farmer Mac II LLC held assets with a fair value of $1.7 billion , had debt outstanding of $383.0 million , had preferred stock outstanding


51


with a liquidation preference of $250.0 million , and had $1.0 billion of common stock outstanding held by Farmer Mac.

The following tables present core earnings for Farmer Mac's reportable operating segments and a reconciliation to consolidated net income for the three and six months ended June 30, 2014 and 2013 :

Table 9.1

Core Earnings by Business Segment
For the Three Months Ended June 30, 2014
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Interest income (1)
$
19,598

 
$
13,307

 
$
6,782

 
$
17,373

 
$
5,185

 
$
(470
)
 
$
61,775

Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
(513
)
 

 

 

 

 
513

 

Interest expense (2)
(11,265
)
 
(9,148
)
 
(3,829
)
 
(10,116
)
 
(1,025
)
 
(7,119
)
 
(42,502
)
Net effective spread
7,820

 
4,159

 
2,953

 
7,257

 
4,160

 
(7,076
)
 
19,273

Guarantee and commitment fees
3,807

 
23

 

 
3,086

 

 
(513
)
 
6,403

Other income/(expense) (3)
242

 
9

 

 

 
(603
)
 
2,913

 
2,561

Non-interest income/(loss)
4,049

 
32

 

 
3,086

 
(603
)
 
2,400

 
8,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of allowance for loan losses
1,583

 

 

 

 

 

 
1,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of reserve for losses
974

 

 

 

 

 

 
974

Other non-interest expense
(3,914
)
 
(764
)
 
(830
)
 
(492
)
 
(2,830
)
 

 
(8,830
)
Non-interest expense (4)
(2,940
)
 
(764
)
 
(830
)
 
(492
)
 
(2,830
)
 

 
(7,856
)
Core earnings before income taxes
10,512

 
3,427

 
2,123

 
9,851

 
727

 
(4,676
)
(5)
21,964

Income tax (expense)/benefit
(3,679
)
 
(1,200
)
 
(743
)
 
(3,447
)
 
13,803

 
1,634

 
6,368

Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends
6,833

 
2,227

 
1,380

 
6,404

 
14,530

 
(3,042
)
(5)
28,332

Preferred stock dividends

 

 

 

 
(2,308
)
 

 
(2,308
)
Non-controlling interest - preferred stock dividends

 

 

 

 
(5,819
)
 

 
(5,819
)
Segment core earnings
$
6,833

 
$
2,227

 
$
1,380

 
$
6,404

 
$
6,403

 
$
(3,042
)
(5)
$
20,205

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,387,899

 
$
1,721,003

 
$
1,022,421

 
$
5,115,147

 
$
4,423,632

 
$

 
$
14,670,102

Total on- and off-balance sheet program assets at principal balance
5,310,664

 
1,710,335

 
1,012,313

 
6,039,230

 


 

 
14,072,542

(1)
Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts and interest income related to securities purchased under agreements to resell.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which are included in " (Losses)/gains on financial derivatives and hedging activities " on the consolidated financial statements. Includes reconciling adjustments for interest expense related to securities sold, not yet purchased.
(3)
Includes interest income and interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased, respectively; reconciling adjustments for the reclassification of expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets; and a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.




52


Core Earnings by Business Segment
For the Three Months Ended June 30, 2013
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Interest income (1)
$
16,046

 
$
13,157

 
$
8,981

 
$
19,329

 
$
5,471

 
$
(1,239
)
 
$
61,745

Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
(195
)
 


 


 


 


 
195

 

Interest expense (2)
(7,623
)
 
(8,649
)
 
(5,925
)
 
(13,352
)
 
(1,177
)
 
3,142

 
(33,584
)
Net effective spread
8,228

 
4,508

 
3,056

 
5,977

 
4,294

 
2,098

 
28,161

Guarantee and commitment fees
3,703

 
42

 

 
3,209

 

 
(195
)
 
6,759

Other income (3)
1,299

 
317

 

 

 
2,782

 
15,326

 
19,724

Non-interest income/(loss)
5,002

 
359

 

 
3,209

 
2,782

 
15,131

 
26,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of allowance for loan losses
529

 

 

 

 

 

 
529

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of reserve for losses
175

 


 


 


 


 

 
175

Other non-interest expense
(3,795
)
 
(708
)
 
(771
)
 
(441
)
 
(2,424
)
 

 
(8,139
)
Non-interest expense (4)
(3,620
)
 
(708
)
 
(771
)
 
(441
)
 
(2,424
)
 

 
(7,964
)
Core earnings before income taxes
10,139

 
4,159

 
2,285

 
8,745

 
4,652

 
17,229

(5)
47,209

Income tax (expense)/benefit
(3,549
)
 
(1,456
)
 
(800
)
 
(3,061
)
 
1,859

 
(6,029
)
 
(13,036
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends
6,590

 
2,703

 
1,485

 
5,684

 
6,511

 
11,200

(5)
34,173

Preferred stock dividends

 

 

 

 
(881
)
 

 
(881
)
Non-controlling interest - preferred stock dividends

 

 

 

 
(5,547
)
 

 
(5,547
)
Segment core earnings
$
6,590

 
$
2,703

 
$
1,485

 
$
5,684

 
$
83

 
$
11,200

(5)
$
27,745

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
1,925,419

 
$
1,659,134

 
$
1,091,561

 
$
5,083,860

 
$
3,175,977

 
$

 
$
12,935,951

Total on- and off-balance sheet program assets at principal balance
4,917,489

 
1,667,170

 
1,049,920

 
5,960,939

 


 

 
13,595,518

(1)
Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which are included in " (Losses)/gains on financial derivatives and hedging activities " on the consolidated financial statements.
(3)
Includes reconciling adjustments for the reclassification of expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



53


Core Earnings by Business Segment
For the Six Months Ended June 30, 2014
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Interest income (1)
$
37,936

 
$
26,266

 
$
14,525

 
$
35,021

 
$
10,420

 
$
(12,675
)
 
$
111,493

Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
(1,044
)
 

 

 

 

 
1,044

 

Interest expense (2)
(21,958
)
 
(18,323
)
 
(9,582
)
 
(21,092
)
 
(2,118
)
 
(4,155
)
 
(77,228
)
Net effective spread
14,934

 
7,943

 
4,943

 
13,929

 
8,302

 
(15,786
)
 
34,265

Guarantee and commitment fees
7,716

 
49

 

 
6,200

 

 
(1,044
)
 
12,921

Other income/(expense) (3)
373

 
36

 

 

 
(1,174
)
 
(3,493
)
 
(4,258
)
Non-interest income/(loss)
8,089

 
85

 

 
6,200

 
(1,174
)
 
(4,537
)
 
8,663

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of allowance for loan losses
1,010

 

 

 

 

 

 
1,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of reserve for losses
873

 

 

 

 

 

 
873

Other non-interest expense
(7,466
)
 
(1,495
)
 
(1,607
)
 
(937
)
 
(5,171
)
 

 
(16,676
)
Non-interest expense (4)
(6,593
)
 
(1,495
)
 
(1,607
)
 
(937
)
 
(5,171
)
 

 
(15,803
)
Core earnings before income taxes
17,440

 
6,533

 
3,336

 
19,192

 
1,957

 
(20,323
)
(5)
28,135

Income tax (expense)/benefit
(6,103
)
 
(2,288
)
 
(1,168
)
 
(6,717
)
 
16,676

 
7,109

 
7,509

Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends
11,337

 
4,245

 
2,168

 
12,475

 
18,633

 
(13,214
)
(5)
35,644

Preferred stock dividends

 

 

 

 
(3,260
)
 

 
(3,260
)
Non-controlling interest - preferred stock dividends

 

 

 

 
(11,366
)
 

 
(11,366
)
Segment core earnings
$
11,337

 
$
4,245

 
$
2,168

 
$
12,475

 
$
4,007

 
$
(13,214
)
(5)
$
21,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,387,899

 
$
1,721,003

 
$
1,022,421

 
$
5,115,147

 
$
4,423,632

 
$

 
$
14,670,102

Total on- and off-balance sheet program assets at principal balance
5,310,664

 
1,710,335

 
1,012,313

 
6,039,230

 


 

 
14,072,542

(1)
Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts and interest income related to securities purchased under agreements to resell.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which are included in " (Losses)/gains on financial derivatives and hedging activities " on the consolidated financial statements. Includes reconciling adjustments for interest expense related to securities sold, not yet purchased.
(3)
Includes interest income and interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased, respectively; reconciling adjustments for the reclassification of expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets; and a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.


54


Core Earnings by Business Segment
For the Six Months Ended June 30, 2013
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Interest income (1)
$
31,462

 
$
26,498

 
$
17,970

 
$
38,627

 
$
11,205

 
$
(2,519
)
 
$
123,243

Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
(375
)
 

 

 

 

 
375

 

Interest expense (2)
(14,776
)
 
(17,296
)
 
(11,731
)
 
(26,787
)
 
(2,471
)
 
6,349

 
(66,712
)
Net effective spread
16,311

 
9,202

 
6,239

 
11,840

 
8,734

 
4,205

 
56,531

Guarantee and commitment fees
7,374

 
75

 
948

 
5,349

 

 
(375
)
 
13,371

Other income/(expense) (3)
1,894

 
517

 

 

 
2,220

 
20,926

 
25,557

Non-interest income/(loss)
9,268

 
592

 
948

 
5,349

 
2,220

 
20,551

 
38,928

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of allowance for loan losses
99

 

 

 

 

 

 
99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(571
)
 

 

 

 

 

 
(571
)
Other non-interest expense
(7,599
)
 
(1,457
)
 
(1,573
)
 
(900
)
 
(4,945
)
 

 
(16,474
)
Non-interest expense (4)
(8,170
)
 
(1,457
)
 
(1,573
)
 
(900
)
 
(4,945
)
 

 
(17,045
)
Core earnings before income taxes
17,508

 
8,337

 
5,614

 
16,289

 
6,009

 
24,756

(5)
78,513

Income tax (expense)/benefit
(6,128
)
 
(2,918
)
 
(1,965
)
 
(5,701
)
 
3,624

 
(8,664
)
 
(21,752
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends
11,380

 
5,419

 
3,649

 
10,588

 
9,633

 
16,092

(5)
56,761

Preferred stock dividends

 

 

 

 
(1,732
)
 

 
(1,732
)
Non-controlling interest - preferred stock dividends

 

 

 

 
(11,094
)
 

 
(11,094
)
Segment core earnings/(losses)
$
11,380

 
$
5,419

 
$
3,649

 
$
10,588

 
$
(3,193
)
 
$
16,092

(5)
$
43,935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
1,925,419

 
$
1,659,134

 
$
1,091,561

 
$
5,083,860

 
$
3,175,977

 
$

 
$
12,935,951

Total on- and off-balance sheet program assets at principal balance
4,917,489

 
1,667,170

 
1,049,920

 
5,960,939

 
 
 

 
13,595,518

(1)
Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts.
(2)
Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which are included in " (Losses)/gains on financial derivatives and hedging activities " on the consolidated financial statements.
(3)
Includes reconciling adjustments for the reclassification of expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(4)
Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.
(5)
Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



55



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial information included in this report is consolidated to include the accounts of Farmer Mac and its two subsidiaries – Farmer Mac Mortgage Securities Corporation and Farmer Mac II LLC. Farmer Mac II LLC is a Delaware limited liability company that operates substantially all of Farmer Mac's USDA Guarantees line of business – primarily the acquisition of USDA Securities. The business operations of Farmer Mac II LLC began in January 2010. Since then, Farmer Mac has operated only that part of the USDA Guarantees line of business that involves the issuance of Farmer Mac Guaranteed Securities backed by USDA Securities to investors other than Farmer Mac or Farmer Mac II LLC. Although Farmer Mac II LLC may issue securities in these transactions, Farmer Mac II LLC does not guarantee any USDA Securities it holds or any Farmer Mac Guaranteed Securities issued by Farmer Mac or Farmer Mac II LLC.

This discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 13, 2014, except for Items 1, 7, and 8, which have been amended by Farmer Mac's Current Report on Form 8-K filed on June 6, 2014 (the "Segment Recast 8-K").


FORWARD-LOOKING STATEMENTS

Some statements made in this report, and in particular in this Management's Discussion & Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to Farmer Mac's future financial results, business prospects, and business developments.  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. These statements typically are accompanied by, and identified with, terms such as "anticipates," "believes," "expects," "intends," "should," and similar phrases.  The following management's discussion and analysis includes forward-looking statements addressing Farmer Mac's:
 
prospects for earnings;
prospects for growth in business volume;
trends in net interest income and net effective spread;
trends in portfolio credit quality, delinquencies, and provisions for losses;
trends in expenses;
trends in investment securities;
prospects for asset impairments and allowance for losses;
changes in capital position; and
other business and financial matters.

Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties.  Various factors or events could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under "Risk Factors" in Part I, Item 1A of Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on


56

Table of Contents

March 13, 2014 and in Part II, Item 1A of Farmer Mac's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 filed with the SEC on May 12, 2014, and uncertainties regarding:
 
the availability to Farmer Mac and Farmer Mac II LLC of debt and equity financing and, if available, the reasonableness of rates and terms;
legislative or regulatory developments that could affect Farmer Mac or its sources of business, including but not limited to developments related to the implementation of agricultural policies and programs resulting from the recently enacted Agricultural Act of 2014 (referred to as the 2014 Farm Bill), including the elimination of direct payments to agricultural producers by the USDA and increased federal subsidies for enhanced crop insurance programs;
fluctuations in the fair value of assets held by Farmer Mac and Farmer Mac II LLC;
the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the secondary market provided by Farmer Mac;
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
the impact of economic conditions, including the effects of drought and other weather-related conditions and fluctuations in agricultural real estate values, on agricultural mortgage lending and borrower repayment capacity;
developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving government-sponsored enterprises, including Farmer Mac;
changes in the level and direction of interest rates, which could, among other things, affect the value of collateral securing Farmer Mac's agricultural mortgage loan assets; and
volatility in commodity prices relative to costs of production and/or export demand for U.S. agricultural products.

In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report.  Furthermore, Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements that may be made to reflect new information or any future events or circumstances, except as otherwise mandated by the U.S. Securities and Exchange Commission (the "SEC"). The discussion below is not necessarily indicative of future results.




57

Table of Contents

Critical Accounting Policies and Estimates

The preparation of Farmer Mac's consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented.  Actual results could differ from those estimates.  The critical accounting policies that are both important to the portrayal of Farmer Mac's financial condition and results of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance for losses, (2) fair value measurement, and (3) other-than-temporary impairment. For a discussion of these critical accounting policies and the related use of estimates and assumptions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in the Segment Recast 8-K.

Overview

During second quarter 2014, Farmer Mac's net effective spread improved $2.6 million compared to first quarter 2014. Farmer Mac's credit performance metrics also improved during the quarter, resulting in a $2.6 million release from Farmer Mac's total allowance for losses primarily due to a declining balance in its ethanol portfolio. Farmer Mac also introduced a cash management and liquidity initiative during second quarter 2014 to position itself for eligibility to participate in the the Federal Reserve's reverse repurchase facility. That initiative resulted in Farmer Mac significantly increasing the size of its investments in repurchase agreements (repos) during the quarter and an $11.6 million tax benefit from capital loss carryforwards that previously had a full valuation allowance against them. For more information about this cash management and liquidity initiative and its effect on interest expense, unrealized trading gains, and tax benefits, see "—Cash Management and Liquidity Initiative."

Net Income and Core Earnings

Farmer Mac's net income attributable to common stockholders for second quarter 2014 was $20.2 million , compared to $27.7 million for second quarter 2013 . The decrease compared to the previous year quarter was mostly attributable to the effects of unrealized fair value changes on financial derivatives and hedged assets, which was a $3.1 million after-tax loss in second quarter 2014, compared to a $11.0 million after-tax gain in second quarter 2013. Also contributing to the decrease were smaller gains on sales of investment securities of $2.9 million (offset by capital loss carryforwards), an increase in preferred stock dividend payments of $1.4 million , increases in operating expenses of $0.6 million after-tax, and smaller gains on sales of REO of $0.6 million after-tax. The higher preferred stock dividend payments primarily related to the issuance of Series B preferred stock during first quarter 2014. The decrease was offset in part by federal income tax benefits of $11.6 million (related to the cash management and liquidity initiative established in second quarter 2014) and $1.2 million after-tax in releases from the allowance for losses.
Farmer Mac's non-GAAP core earnings for second quarter 2014 were $23.2 million , compared to $16.5 million in second quarter 2013 and $11.0 million in first quarter 2014. The increase in core earnings compared to second quarter 2013 was primarily attributable to the aforementioned tax benefits and releases from the allowance for losses, as well as an increase in net effective spread of $0.2 million after-tax. The increase was offset in part by the aforementioned smaller gains on sales of investment securities, an increase in preferred stock dividend payments, increases in operating expenses, and smaller gains on sales of REO. The increase in core earnings compared to first quarter 2014 was primarily attributable to the same tax benefits mentioned above (net increase of $10.7 million), releases from the allowance for losses of $2.1 million after-tax, and an increase in net effective spread of $1.7 million after-tax. The


58

Table of Contents

increase in core earnings was partially offset by the increase in preferred stock dividend payments of $1.4 million and increases in operating expenses of $0.6 million after-tax. For more information about Farmer Mac's use of core earnings, a non-GAAP measure, see "—Results of Operations."

Farmer Mac's net effective spread was $26.3 million ( 84 basis points) in second quarter 2014 , compared to $26.1 million ( 87 basis points) in second quarter 2013 and $23.7 million (75 basis points) in first quarter 2014. The decrease in net effective spread in basis points compared to second quarter 2013 was primarily attributable to repayments during the second half of 2013 and the first half of 2014 of Farm & Ranch loans that had higher historical spreads than the remaining loans in the portfolio. The increase in net effective spread compared to first quarter 2014 was due to the expiration of legacy funding related to early refinancing of AgVantage securities and the recasting of certain Rural Utilities loans in first quarter 2014, an increase in spreads on recently refinanced assets, seasonally lower loan repayments typical for the second quarter of the year, and net growth in Farm & Ranch loans.

Business Volume

Farmer Mac added $590.2 million of new business volume during second quarter 2014. The new business volume included purchases of AgVantage securities in an aggregate amount of $300.8 million and Farm & Ranch loan purchases of $159.1 million . Taking into account maturities and paydowns on existing assets, Farmer Mac's outstanding business volume was $14.1 billion as of June 30, 2014 , a decrease of $35.7 million from March 31, 2014 (attributable to maturities of AgVantage securities during second quarter 2014 in excess of AgVantage new business and refinancings), an increase of $122.2 million from December 31, 2013 , and an increase of $477.0 million compared to June 30, 2013.

Capital

Farmer Mac strengthened its capital position through the issuance of $75.0 million of fixed-to-floating rate, non-cumulative perpetual preferred stock (the "Series C Preferred Stock") during second quarter 2014, adding to the issuance of $75.0 million of fixed-rate, non-cumulative perpetual preferred stock (the "Series B Preferred Stock") during first quarter 2014. In second quarter 2014, Farmer Mac purchased $6.0 million of FALConS from certain holders. As of June 30, 2014 , Farmer Mac's core capital level was $750.3 million , $317.7 million above the minimum capital requirement.  As of December 31, 2013 , Farmer Mac's core capital level was $590.7 million , which was $192.2 million above the minimum capital requirement. As a result of the enhancement of Farmer Mac's Tier 1 capital position through issuances of the Series B Preferred Stock and the Series C Preferred Stock, Farmer Mac II LLC intends to redeem all $250.0 million of the outstanding Farmer Mac II LLC Preferred Stock, which does not constitute a Tier 1 capital-eligible security, on March 30, 2015, the initial redemption date, with the proceeds of the recent preferred stock offerings and cash on hand. Farmer Mac does not currently anticipate that any further issuance of preferred stock will be needed to fund the planned redemption of the Farmer Mac II LLC Preferred Stock.



59

Table of Contents

Credit Quality

Farmer Mac continues to maintain very favorable credit metrics. During second quarter 2014, Farmer Mac reduced its allowance for losses by $2.6 million , primarily related to a significant decrease in the balance of its ethanol portfolio due to loan maturities and prepayments. As of June 30, 2014 , Farmer Mac's 90-day delinquencies were $25.9 million ( 0.49 percent of the Farm & Ranch portfolio), down from $28.3 million ( 0.55 percent of the Farm & Ranch portfolio) as of December 31, 2013 , and $33.9 million ( 0.69 percent of the Farm & Ranch portfolio) as of June 30, 2013 .

Cash Management and Liquidity Initiative

Farmer Mac introduced a cash management and liquidity initiative in second quarter 2014 to diversify its short term investment alternatives and potentially position itself for eligibility to participate in the Federal Reserve's reverse repurchase facility. This initiative involved establishing a significant term repurchase agreement ("repo") investment, as well as an associated financing liability. As of June 30, 2014, this resulted in $1.6 billion of term repo assets, presented as “securities purchased under agreements to resell,” and $1.7 billion of related liabilities, presented as “securities sold, not yet purchased” in Farmer Mac’s balance sheet. The initiative also produced an $11.6 million tax benefit (from capital loss carryforwards that previously had a full valuation allowance against them), recorded as a reduction to income tax expense, as well as interest expense and fair value gains associated with the securities sold, not yet purchased financing in Farmer Mac's income statement.

Farmer Mac is authorized to hold certain types of investments for the purposes of complying with liquidity requirements, risk management, and managing surplus short-term funds, among other things. Farmer Mac must maintain at all times a liquidity reserve sufficient to fund at least 90 days of the principal portion of maturing obligations and other borrowings. The first 15 days of liquidity of those 90 days must be covered by “Level 1” instruments that may consist of cash, overnight money market instruments (including repurchase agreements secured exclusively by other Level 1 instruments), and other high-quality short term investments. Accordingly, Farmer Mac typically maintains significant balances of cash and cash equivalents and historically has invested in government and prime money market funds as a way to hold portions of its cash equivalents in a cost-effective manner that would reduce the financing expense of its short-term investments.

Over the past several years, the SEC has been considering the reform of the regulations that govern money market mutual funds. Some of these proposed reforms caused Farmer Mac to evaluate whether money market funds should remain one of Farmer Mac's preferred alternatives for short-term investments. Specifically, in June 2013 the SEC proposed amendments to money market fund regulations to require institutional prime money market funds to mark their shares to fair value each day and operate with a floating net asset value (NAV) and to require non-government money market funds to adopt liquidity fees and temporary suspensions of redemptions, known as “gates,” to reduce redemptions in times of stress in the financial markets. At that time, Farmer Mac determined that if those amendments were adopted as proposed, Farmer Mac's decision to continue to invest in institutional prime money market funds and non-government money market funds would likely change because such funds would no longer serve as one of its best short-term investment alternatives. Farmer Mac therefore sought to diversify its short-term investment alternatives, recognizing that a floating NAV could raise significant operational implications and the potential daily fluctuation in value and that the imposition of the proposed liquidity fees and gates could adversely affect liquidity at the time it was most needed. In July 2014, the SEC approved amendments to money market fund regulations that were substantially similar to the money market


60

Table of Contents

regulations proposed in June 2013, and money market funds will be required to comply with these new rules within two years after the effective date of the rules. Consequently, Farmer Mac has concluded that institutional prime money market funds and certain non-government money market funds will no longer be one of its best short-term investment alternatives and, as a result, is continuing to seek to diversify its short-term investment alternatives. In particular, Farmer Mac expects that direct investments in repurchase agreements, a form of collateralized lending, will be a central and growing component of its short-term investment strategy.

In a repo, an entity sells a high quality asset such as a U.S. Treasury security from its portfolio to a counterparty such as Farmer Mac and simultaneously makes a commitment to repurchase that same asset at a specified price at a specific time in the future. The effective result of this is that the counterparty, Farmer Mac in this case, is lending money to the first entity and is secured by the asset that is sold. Repos are generally considered one of the safest and most liquid investment products, which is why they are categorized as a “Level 1” instrument for purposes of Farmer Mac’s liquidity regulations.

If short-term interest rates increase as many expect, cost-effective alternative short-term investments to certain government and prime money market funds, such as repos, will become even more important to Farmer Mac. In consideration of the expected future importance to Farmer Mac of repo transactions, Farmer Mac enhanced its repo investment capabilities during late 2013 and early 2014 and built the necessary operational and process control infrastructure to support these capabilities. Once this was accomplished, starting in second quarter 2014, Farmer Mac decided to significantly increase the size of its repo investment activity as part of a strategy to better position itself to apply for acceptance to participate in the fixed-rate, full-allotment overnight reverse repurchase facility (the “RRP Facility”) of the Federal Reserve Bank of New York, if and when the Federal Reserve invites new applicants. Approved participants in the RRP Facility are eligible to make short-term loans to the Federal Reserve on a secured basis by entering into repo transactions with the Federal Reserve’s trading desk secured by U.S. Treasury securities. Farmer Mac believes that participation in the RRP Facility would provide Farmer Mac with key benefits including:

diversifying Farmer Mac’s short-term investment alternatives by providing a cost-effective alternative to other sources of short-term investments that can be utilized in significant size and that is likely to be available even in times of stress in the financial markets; and
reducing Farmer Mac’s counterparty risk compared to the typical commercial counterparty risk inherent in similar transactions with non-governmental entities.

Although the Federal Reserve is not currently accepting applications for the RRP Facility, government-sponsored enterprises (GSEs) like Farmer Mac are eligible participants for the RRP Facility, and the Federal Reserve has previously accepted other GSEs to participate. However, the Federal Reserve limits the total number of participants in the RRP Facility, so the application process for eligibility to participate in the facility has been competitive. The Federal Reserve’s prior eligibility criteria for GSE applicants to the RRP Facility included requirements for maintaining a minimum amount of outstanding repo agreements of $1 billion or more for the three months preceding the application date. Farmer Mac believes that the eligibility requirements could become more stringent with the next round of applications given the competition for the limited amount of remaining counterparty positions available for the RRP Facility, and there is no assurance that the Federal Reserve will approve an applicant that has satisfied any stated minimum eligibility requirements.



61

Table of Contents

To increase the likelihood that Farmer Mac would be in a position to meet or exceed all of the eligibility requirements if the Federal Reserve decides to accept new applications for the RRP facility, Farmer Mac determined that it needed to significantly expand the amount of its repo agreements outstanding. Farmer Mac concluded that it would be advisable to have significantly more than $1 billion of repo agreements outstanding to be competitive in the expected future RRP Facility application process, which will require Farmer Mac to distinguish itself as a significant participant in the repo market and satisfy any other minimum eligibility requirements prescribed by the Federal Reserve.

In furtherance of this strategy, Farmer Mac increased the size of its repo investment activity to $1.6 billion during second quarter 2014. The increased repo investments were executed in a series of smaller transactions with terms ranging from overnight to up to 90 days and primarily financed by immediately selling the securities delivered as collateral under the terms of the repo investments. Those securities, which are effectively “borrowed” and must be returned to the counterparty on the maturity date of the repo transaction upon payment of the negotiated repurchase amount, are high-coupon, premium-priced U.S. Treasury securities with approximately twelve to twenty-four months remaining to maturity. The cash proceeds from the sale of those securities effectively funds Farmer Mac’s investment in the related repo investment. Funding of the repo investments through the sale of the borrowed collateral provides a flexible financing source that can be unwound at any time by covering the position, as opposed to debt financing that would remain outstanding for its full term. Farmer Mac intends to reinvest these term repos as they mature throughout 2014 and maintain the related financing position for most of 2014 to further enhance its position to apply to the RRP Facility. To maximize cash liquidity across the end of fourth quarter 2014, Farmer Mac expects to close these term repo positions as they mature throughout fourth quarter 2014 by purchasing the U.S. Treasury securities sold, not yet purchased in the open market and delivering them to the repo counterparties, which will also liquidate the related liability. Farmer Mac will then evaluate the amount of repo investment activity it believes is appropriate going forward in 2015.

During the term of the repo investments, Farmer Mac is obligated to remit substitute interest payments in connection with the borrowed U.S. Treasury securities to the counterparties of the repo transactions. Before closing out these positions, Farmer Mac will carry its liability for the securities sold, not yet purchased at fair value, with changes in fair value being included in earnings. As Farmer Mac closes out the positions of the securities sold, not yet purchased in fourth quarter 2014, it expects to recognize capital gains for federal income tax purposes based on the difference between the sales and purchase prices of the U.S. Treasury securities. Farmer Mac expects to recognize capital gains on these positions because all of the Treasury securities that are being sold are currently trading at a premium to their face amount as they bear an above-market coupon. This premium price is expected to decrease closer to par by the time Farmer Mac purchases and closes the securities sold, not yet purchased position, as interest coupons are paid on the securities and the maturity dates get closer. Consequently, Farmer Mac expects to cover its positions for less than the proceeds that it received when it sold the original securities to finance the transaction. On a pre-tax basis, Farmer Mac expects that the financing cost of this strategy will exceed the capital gains recognized for income tax purposes. However, on an after-tax basis, Farmer Mac expects to realize a significant net tax benefit associated with this strategy in 2014 because Farmer Mac has capital loss carryforwards that can be applied to offset the expected capital gains.

For both the three and six months ended June 30, 2014, Farmer Mac incurred a total of $7.8 million in interest expense related to the financing costs of this strategy. For both the three and six months ended June 30, 2014, Farmer Mac recognized unrealized gains of $7.8 million from the securities sold, not yet purchased. As of June 30, 2014, Farmer Mac recognized an $11.6 million tax benefit by reducing its valuation allowance against its deferred tax asset related to capital loss carryforwards.


62

Table of Contents


Farmer Mac estimates that the full-year, net economic benefit of the cash management and liquidity strategy described above will be approximately $8 million to $9 million in 2014, after netting the related incremental after-tax net financing costs over the term of this transaction with the tax benefit recognized in second quarter 2014. Farmer Mac estimates that the incremental after-tax financing expenses that will be incurred in the second half of 2014 related to this strategy will be $2 million. All of the estimates related to this strategy assume that interest rates remain constant. The interest expense, unrealized fair value changes, and the tax benefits of this strategy are included as part of core earnings, just as the investment portfolio losses that generated the related capital loss carryforwards were included in core earnings when the losses occurred in 2008 and 2009. The interest expense is excluded from net effective spread because the associated benefit is not similarly recorded in net effective spread, but rather through tax benefits.

Segment Reporting

After an evaluation of Farmer Mac's overall portfolio of product offerings and reportable segments, Farmer Mac's management determined that Farmer Mac's operations consist of four reportable operating segments effective January 1, 2014 – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit.

The Institutional Credit segment comprises Farmer Mac's guarantees of AgVantage securities related to general obligations of lenders that are secured by pools of eligible loans. Prior to January 1, 2014, AgVantage securities were included under either the Farm & Ranch or Rural Utilities line of business, as applicable, depending on the type of loans pledged to secure the AgVantage securities. Because the AgVantage product is priced differently and has different credit characteristics than the loans that Farmer Mac purchases or that underlie LTSPCs or non-AgVantage Farmer Mac Guaranteed Securities, Farmer Mac's management determined that AgVantage securities should be reported in a separate business segment. All prior period information has been recast to reflect the breakout of the Institutional Credit segment from both the Farm & Ranch and Rural Utilities segments. For more information on the change in Farmer Mac's reportable business segments, see Note 9 to the consolidated financial statements.

Results of Operations

Farmer Mac's net income attributable to common stockholders for second quarter 2014 was $20.2 million , or $1.78 per diluted common share, compared to $27.7 million , or $2.48 per diluted common share for second quarter 2013 . For the six months ended June 30, 2014 , Farmer Mac's net income attributable to common stockholders was $21.0 million , or $1.85 per diluted common share, compared to $43.9 million , or $3.93 per diluted common share, for the six months ended June 30, 2013 . Farmer Mac's non-GAAP core earnings were $23.2 million , or $2.05 per diluted share, for the three months ended June 30, 2014 , compared to $16.5 million , or $1.48 per diluted share, for the same period in 2013 . Farmer Mac's non-GAAP core earnings were $34.2 million , or $3.02 per diluted share, for the six months ended June 30, 2014 , compared to $27.8 million , or $2.49 per diluted share, for the same period in 2013 .

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics, and business trends. Core earnings principally differs from net income attributable to common stockholders by excluding the effects of fair value accounting guidance, which are not expected to have a cumulative net impact on financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to


63

Table of Contents

maturity, as is generally expected. Core earnings also differs from net income attributable to common stockholders by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of this non-GAAP measure is intended to be supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.
A reconciliation of Farmer Mac's net income attributable to common stockholders to core earnings is presented in the following table:



64

Table of Contents

Table 1
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
20,205

 
$
27,745

Less the after-tax effects of:
 
 
 

Unrealized (losses)/gains on financial derivatives and hedging activities
(3,053
)
 
11,021

Unrealized trading losses (1)
(46
)
 
(212
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(179
)
 
(564
)
Net effects of settlements on agency forward contracts
236

 
955

      Sub-total
(3,042
)
 
11,200

Core earnings
$
23,247

 
$
16,545

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread
$
26,349

 
$
26,063

Guarantee and commitment fees
6,916

 
6,954

Other (2)
(520
)
 
3,274

Total revenues
32,745

 
36,291

 
 
 
 
Credit related expenses:
 
 
 
Release of losses
(2,557
)
 
(704
)
REO operating expenses
59

 
259

Gains on sale of REO
(168
)
 
(1,124
)
Total credit related income
(2,666
)
 
(1,569
)
 
 
 
 
Operating expenses:
 
 
 
Compensation and employee benefits
4,889

 
4,571

General and administrative
3,288

 
2,715

Regulatory fees
594

 
594

Total operating expenses
8,771

 
7,880

 
 
 
 
Net earnings
26,640

 
29,980

Income tax (benefit)/expense (3)
(4,734
)
 
7,007

Non-controlling interest
5,819

 
5,547

Preferred stock dividends
2,308

 
881

Core earnings
$
23,247

 
$
16,545

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
2.13

 
$
1.53

  Diluted
2.05

 
1.48

Weighted-average shares:
 
 
 
  Basic
10,924

 
10,815

  Diluted
11,361

 
11,198

(1)
Excludes unrealized gains related to securities sold, not yet purchased of $7.8 million during the three months ended June 30, 2014.
(2)
Includes $7.8 million of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased and $7.8 million of unrealized gains on securities sold, not yet purchased during the three months ended June 30, 2014. Includes $3.1 million of realized gains from the sale of an available-for-sale investment security during the three months ended June 30, 2013.
(3)
Includes the reduction of $11.6 million of tax valuation allowance against capital loss carryforwards related to expected capital gains on securities sold, not yet purchased during the three months ended June 30, 2014. Includes the reduction of $1.1 million of tax valuation allowance against capital loss carryforwards related to realized gains from the sale of an available-for-sale investment security during the three months ended June 30, 2013.



65

Table of Contents

Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
21,018

 
$
43,935

Less the after-tax effects of:
 

 
 

Unrealized (losses)/gains on financial derivatives and hedging activities
(5,448
)
 
16,733

Unrealized trading gains/(losses) (1)
380

 
(76
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value (2)
(8,206
)
 
(1,182
)
Net effects of settlements on agency forward contracts
60

 
617

      Sub-total
(13,214
)
 
16,092

Core earnings
$
34,232

 
$
27,843

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread
$
50,051

 
$
52,326

Guarantee and commitment fees
13,965

 
13,746

Other (3)
(930
)
 
3,460

Total revenues
63,086

 
69,532

 
 
 
 
Credit related expenses:
 
 
 
(Release of)/provision for losses
(1,883
)
 
472

REO operating expenses
61

 
385

Gains on sale of REO
(165
)
 
(1,171
)
Total credit related income
(1,987
)
 
(314
)
 
 
 
 
Operating expenses:
 
 
 
Compensation and employee benefits
9,345

 
9,269

General and administrative
6,082

 
5,632

Regulatory fees
1,188

 
1,188

Total operating expenses
16,615

 
16,089

 
 
 
 
Net earnings
48,458

 
53,757

Income tax (benefit)/expense (4)
(400
)
 
13,088

Non-controlling interest
11,366

 
11,094

Preferred stock dividends
3,260

 
1,732

Core earnings
$
34,232

 
$
27,843

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
3.14

 
$
2.58

  Diluted
3.02

 
2.49

Weighted-average shares:
 
 
 
  Basic
10,906

 
10,776

  Diluted
11,354

 
11,179

(1)
Excludes unrealized gains related to securities sold, not yet purchased of $7.8 million during the six months ended June 30, 2014.
(2)
Includes $7.5 million related to the acceleration of premium amortization in first quarter 2014 due to significant refinancing activity in the Rural Utilities line of business.
(3)
Includes $7.8 million of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased and $7.8 million of unrealized gains on securities sold, not yet purchased during the six months ended June 30, 2014. Includes $3.1 million of realized gains from the sale of an available-for-sale investment security during the six months ended June 30, 2013.
(4)
Includes the reduction of $11.6 million of tax valuation allowance against capital loss carryforwards related to expected capital gains on securities sold, not yet purchased during the six months ended June 30, 2014. Includes the reduction of $1.1 million of tax valuation allowance against capital loss carryforwards related to realized gains from the sale of an available-for-sale investment security during the six months ended June 30, 2013.



66

Table of Contents

The following sections provide more detail regarding specific components of Farmer Mac's results of operations.

Net Interest Income .  Net interest income for the three and six months ended June 30, 2014 was $19.3 million and $34.3 million , respectively, compared to $28.2 million and $56.5 million , respectively, for the same periods during 2013. The decrease in net interest income in the first six months of 2014 compared to the first six months of 2013 was primarily attributable to the acceleration of amortization of $11.6 million in premiums associated with the recasting of certain Rural Utilities loans and $1.3 million of legacy financing costs associated with both the early refinancing of AgVantage securities and the recasting of certain Rural Utilities loans in first quarter 2014, interest expense of $7.8 million associated with securities purchased under agreements to resell and securities sold, not yet purchased (related to Farmer Mac's cash management and liquidity initiative as described under "—Cash Management and Liquidity Initiative"), as well as compression of asset spreads as compared to the first half of 2013. The legacy financing that was in place for the assets mentioned above expired at the end of first quarter 2014 and therefore the impact on net interest income from this extra financing cost and the premium amortization acceleration will not affect periods beyond first quarter 2014. The overall net interest yield was 52 basis points (81 basis points excluding the acceleration of amortization of premiums associated with refinanced AgVantage securities and the recast of certain Rural Utilities loans, and the interest expense associated with securities purchased under agreements to resell and securities sold, not yet purchased) for the six months ended June 30, 2014 , compared to 94 basis points for the six months ended June 30, 2013 .

The following table provides information regarding interest-earning assets and funding for the six months ended June 30, 2014 and 2013 .  The average balance of non-accruing loans is included in the average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the related income is accounted for on a cash basis.  Therefore, as the average balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly.  The average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities.  The interest income and expense associated with these trusts are shown in the net effect of consolidated trusts.  The lower average rate earned on cash and investments reflects a higher average balance due to positions in securities purchased under agreements to resell entered into in second quarter 2014 as part of Farmer Mac's recently established cash management and liquidity initiative and lower short-term market rates during the first six months of 2014 compared to the first six months of 2013 .  The lower average rate on loans, Farmer Mac Guaranteed Securities, and USDA Securities during the first half of 2014 is due to the decline in market rates reflected in the rates on loans acquired or reset during the past year and the acceleration of amortization in premiums associated with certain Rural Utilities loans. The lower average rate on notes payable within one year is consistent with general trends in average short-term rates during the period presented.  The downward trend in the average rate on notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower market rates. The upward trend in other-interest bearing liabilities represents positions in securities sold, not yet purchased entered into in second quarter 2014. For further information about Farmer Mac's cash management and liquidity initiative and securities purchased under agreements to resell and securities sold not yet purchased, see "—Cash Management and Liquidity Initiative."
   



67

Table of Contents

Table 2

  
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and investments (1)
$
3,290,497

 
$
10,338

 
0.63
%
 
$
2,810,275

 
$
11,205

 
0.80
%
Loans, Farmer Mac Guaranteed Securities and USDA Securities (2)
9,693,192

 
94,854

 
1.96
%
 
9,036,250

 
108,229

 
2.40
%
Total interest-earning assets
12,983,689

 
105,192

 
1.62
%
 
11,846,525

 
119,434

 
2.02
%
Funding:
 

 
 

 
 
 
 

 
 

 
 
Notes payable due within one year
4,727,444

 
3,697

 
0.16
%
 
4,478,091

 
4,182

 
0.19
%
Notes payable due after one year (3)
7,285,762

 
60,531

 
1.66
%
 
6,875,011

 
59,096

 
1.72
%
Other interest-bearing liabilities (4)
368,034

 
7,743

 
4.21
%
 

 

 
%
Total interest-bearing liabilities (5)
12,381,240

 
71,971

 
1.16
%
 
11,353,102

 
63,278

 
1.11
%
Net non-interest-bearing funding
602,449

 

 
 

 
493,423

 

 
 

Total funding
12,983,689

 
71,971

 
1.11
%
 
11,846,525

 
63,278

 
1.07
%
Net interest income/yield prior to consolidation of certain trusts
12,983,689

 
33,221

 
0.51
%
 
11,846,525

 
56,156

 
0.95
%
Net effect of consolidated trusts (6)
318,883

 
1,044

 
0.66
%
 
163,131

 
375

 
0.46
%
Adjusted net interest income/yield
$
13,302,572

 
$
34,265

 
0.52
%
 
$
12,009,656

 
$
56,531

 
0.94
%
(1)
Average balance includes $371.7 million of securities purchased under agreements to resell in 2014. Includes $0.1 million of interest expense related to securities purchased under agreements to resell in 2014.
(2)
Included $11.6 million related to the acceleration of premium amortization in first quarter 2014 due to significant refinancing activity in the Rural Utilities line of business. Excludes interest income of $6.3 million and $3.8 million in 2014 and 2013, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(3)
Includes current portion of long-term notes.
(4)
Represents securities sold, not yet purchased.
(5)
Excludes interest expense of $5.3 million and $3.4 million in 2014 and 2013, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(6)
Includes the effect of consolidated trusts with beneficial interests owned by third parties.





68

Table of Contents

The following table sets forth information regarding changes in the components of Farmer Mac's net interest income for the periods indicated.  For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume).  Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size.  The decreases in income due to changes in rate reflect the reset of variable rate investments and adjustable rate mortgages to lower rates, positions in securities purchased under agreements to resell with a slightly negative rate of return, the acceleration of premium amortization in first quarter 2014 due to significant refinancing activity in the Rural Utilities line of business, and the acquisition of new lower-yielding investments, loans, Farmer Mac Guaranteed Securities, and USDA Securities, as described above.  The increase in expense due to changes in rate reflects the interest expense associated with high coupon U.S. Treasury securities sold, but not yet purchased, partially offset by decreased cost of funding due to lower interest rates in the debt markets. The increases due to changes in volume reflect the increase in on-balance sheet assets during the first six months of 2014 compared to the first six months of 2013 .

Table 3

  
For the Six Months Ended June 30, 2014
Compared to Same Period 2013
 
Increase/(Decrease) Due to
 
Rate
 
Volume
 
Total
 
(in thousands)
Income from interest-earning assets:
 
 
 
 
 
Cash and investments (1)
$
(2,601
)
 
$
1,734

 
$
(867
)
Loans, Farmer Mac Guaranteed Securities and USDA Securities (2)
(20,834
)
 
7,459

 
(13,375
)
Total
(23,435
)
 
9,193

 
(14,242
)
Expense from other interest-bearing liabilities (3)
2,796

 
5,897

 
8,693

Change in net interest income prior to consolidation of certain trusts (4)
$
(26,231
)
 
$
3,296

 
$
(22,935
)
(1)
Includes $0.1 million of interest expense and an average balance of $371.7 million related to securities purchased under agreements to resell in 2014.
(2)
Includes $11.6 million related to the acceleration of premium amortization in first quarter 2014 due to significant refinancing activity in the Rural Utilities line of business.
(3)
Includes $7.7 million of interest expense and an average balance of $368.0 million related to securities sold, not yet purchased in 2014.
(4)
Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.

The net interest yield includes the amortization of premiums and discounts on assets consolidated at fair value and interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased. The net interest yield excludes the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedging relationships.  The following paragraphs describe the effects of these items on the net interest yield and the table below presents them as adjustments to reconcile to the net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net funding costs, including payments for income and expense related to derivative financial instruments that are not designated as hedging instruments in a hedge accounting relationship ("undesignated financial derivatives").

Farmer Mac uses interest rate swaps to manage its interest rate risk exposure by synthetically modifying the interest rate reset or maturity characteristics of certain assets and liabilities.  The accrual of the contractual amounts due on interest rate swaps designated in fair value hedge accounting relationships is included as an adjustment to the yield of the hedged item and is included in interest income. For interest rate swaps not designated in hedge accounting relationships, Farmer Mac records the income or expense related to the accrual of the contractual amounts due in "(Losses)/gains on financial derivatives and


69

Table of Contents

hedging activities" on the consolidated statements of operations.  Farmer Mac includes the accrual of the contractual amounts due for undesignated financial derivatives in its calculation of net effective spread.

Farmer Mac's net interest income and net interest yield include net expenses related to the amortization of premiums and discounts on assets consolidated at fair value. These premiums and discounts are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets. Farmer Mac excludes these amounts from net effective spread because they either do not reflect actual cash premiums paid for the assets at acquisition or are not expected to have an economic effect on Farmer Mac's financial performance if the assets are held to maturity, as is generally expected. Farmer Mac's net interest income also includes interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased. Farmer Mac excludes these amounts from net effective spread because their associated benefits are not similarly recorded in net effective spread, but rather through tax benefits.

The following table presents the net effective spread between Farmer Mac's interest-earning assets and its net funding costs.  This spread is measured by including income or expense related to undesignated financial derivatives (the income or expense related to financial derivatives designated in hedging relationships is already included in net interest income) and excluding the amortization of premiums and discounts on assets consolidated at fair value and the interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased. Farmer Mac's net effective spread was $26.3 million and $50.1 million for the three and six months ended June 30, 2014, respectively, compared to $26.1 million and $52.3 million for the same periods in 2013. In percentage terms, net effective spread for the three and six months ended June 30, 2014 was 0.84 percent and 0.79 percent , respectively, compared to 0.87 percent and 0.88 percent , respectively, for the same periods in 2013 . The contraction in net effective spread is primarily attributable to general contraction of asset spreads combined with the effect of early refinancing of AgVantage securities at lower market spreads and the recasting of certain Rural Utilities loans in first quarter 2014, as the original funding on the refinanced and recast assets remained in place through the end of first quarter 2014. See Note 9 to the consolidated financial statements for more information regarding net effective spread from Farmer Mac's individual business segments.

Table 4
  
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
Net interest income/yield prior to consolidation of certain trusts (1) (2)
$
18,760

 
0.60
 %
 
$
27,965

 
0.93
 %
 
$
33,221

 
0.53
 %
 
$
56,156

 
0.95
 %
Expense related to undesignated financial derivatives
(624
)
 
(0.02
)%
 
(3,142
)
 
(0.10
)%
 
(3,589
)
 
(0.06
)%
 
(6,349
)
 
(0.11
)%
Amortization of premiums on assets consolidated at fair value (2)
386

 
0.01
 %
 
1,240

 
0.04
 %
 
12,592

 
0.20
 %
 
2,519

 
0.04
 %
Interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased (3)
7,827

 
0.25
 %
 

 
 %
 
7,827

 
0.12
 %
 

 
 %
Net effective spread
$
26,349

 
0.84
 %
 
$
26,063

 
0.87
 %
 
$
50,051

 
0.79
 %
 
$
52,326

 
0.88
 %
(1)
For the three and six months ended June 30, 2014, net interest yield is adjusted to remove the average balance of $743.5 million and $371.7 million , respectively, related to securities purchased under agreements to resell.
(2)
Includes $11.6 million related to the acceleration of premium amortization in first quarter 2014 due to significant refinancing activity in the Rural Utilities line of business.
(3)
Includes $7.8 million of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased in 2014.



70

Table of Contents

Release of and Provision for Allowance for Loan Losses .  During the three and six months ended June 30, 2014 , Farmer Mac recorded net releases to its allowance for loan losses of $1.6 million and $1.0 million , respectively, and charge-offs of $0.1 million for the same periods. This is compared to net releases to its allowance for loan losses of $0.5 million and $0.1 million , respectively, and charge-offs of $0.1 million and $3.9 million , respectively, for the same periods in 2013 . The releases recorded during the three and six months ended June 30, 2014 were primarily related to a decrease in the general allowance for loan losses due to substantial paydowns of on-balance sheet ethanol-related Agricultural Storage and Processing loans, partially offset by an increase in the general allowance due to overall net volume growth. The releases recorded during second quarter 2013 were driven primarily by reductions in specific allowances as two loans previously reserved for were repaid. The charge-offs recorded in 2013 included a $3.6 million charge-off related to one ethanol loan that was foreclosed during first quarter 2013 and for which Farmer Mac recorded a partial recovery of $1.1 million upon sale of the REO property in second quarter 2013. As of June 30, 2014 , Farmer Mac's total allowance for loan losses was $5.8 million , compared to $6.9 million as of December 31, 2013 .  See "—Risk Management—Credit Risk – Loans and Guarantees."

Release of and Provision for Reserve for Losses .   During the three and six months ended June 30, 2014 , Farmer Mac recorded releases to its reserve for losses of $1.0 million and $0.9 million , respectively, compared to a release of $0.2 million and a provision of $0.6 million , respectively, for the same periods in 2013 .  The releases recorded during the three and six months ended June 30, 2014 were primarily attributable to paydowns of ethanol-related Agricultural Storage and Processing loans underlying LTSPCs. The provision recorded during the first six months of 2013 was attributable to increased estimated probable losses inherent in Farmer Mac's non-ethanol related Agricultural Storage and Processing loans due to a change in the loss assumptions for this commodity type. As of June 30, 2014 , Farmer Mac's reserve for losses was $5.6 million , compared to $6.5 million as of December 31, 2013 .  See "—Risk Management—Credit Risk – Loans and Guarantees."

Guarantee and Commitment Fees .  Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs, were $6.4 million and $12.9 million and for the three and six months ended June 30, 2014 , respectively, compared to $6.8 million and $13.4 million for the same periods in 2013 , respectively. The decrease in guarantee and commitment fees was primarily attributable to decreased guarantee fees on AgVantage securities and Farm & Ranch Guaranteed Securities.

Losses and Gains on Financial Derivatives and Hedging Activities .  The effect of unrealized and realized gains and losses on Farmer Mac's financial derivatives and hedging activities was net losses of $5.7 million and $13.3 million , respectively, for the three and six months ended June 30, 2014, compared to net gains of $15.0 million and $19.5 million , respectively, for the three and six months ended June 30, 2013. Farmer Mac has designated certain interest rate swaps in fair value hedge relationships.



71

Table of Contents

The components of gains and losses on financial derivatives and hedging activities for the three and six months ended June 30, 2014 and 2013 are summarized in the following table:

Table 5

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Unrealized gains/(losses) due to fair value changes:
 
 
 
 
 
 
 
Financial derivatives (1)
$
(799
)
 
$
17,535

 
$
(599
)
 
$
23,326

Hedged items
3,818

 
(14,729
)
 
6,568

 
(17,867
)
Gains on hedging activities
3,019

 
2,806

 
5,969

 
5,459

No hedge designation:
 
 
 
 
 
 
 
Unrealized (losses)/gains due to fair value changes
(7,715
)
 
14,149

 
(14,349
)
 
20,284

Realized:
 
 
 
 
 
 
 
Expense related to financial derivatives
(624
)
 
(3,142
)
 
(3,589
)
 
(6,349
)
Losses due to terminations or net settlements
(378
)
 
1,170

 
(1,307
)
 
83

(Losses)/gains on financial derivatives not designated in hedging relationships
(8,717
)
 
12,177

 
(19,245
)
 
14,018

(Losses)/gains on financial derivatives and hedging activities
$
(5,698
)
 
$
14,983

 
$
(13,276
)
 
$
19,477

(1)
Included in the assessment of hedge effectiveness at June 30, 2014 , but excluded from the amounts in the table, were losses of $2.9 million and $5.9 million for the three and six months ended June 30, 2014 , respectively, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the three and six months ended June 30, 2014 were gains of $0.1 million . The comparable amounts at June 30, 2013 were losses of and $3.0 million and $6.0 million for the three and six months ended June 30, 2013 , respectively, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, losses of $0.2 million and $0.5 million for the three and six months ended June 30, 2013 , respectively, attributable to hedge ineffectiveness.

Changes in the fair values of Farmer Mac's open derivative positions for both designated and undesignated hedges are captured in the table above in unrealized (losses)/gains due to fair value changes and are primarily the result of fluctuations in long-term interest rates. For financial derivatives designated in fair value hedges, changes in the fair values of the hedged items attributable to the hedged risk are also included in the table above in unrealized (losses)/gains due to fair value changes. The accrual of periodic cash settlements for interest paid or received from Farmer Mac's interest rate swaps that are not designated in hedging relationships is shown as expense related to financial derivatives.  Payments or receipts to terminate derivative positions or net cash settled forward sales contracts on the debt of other GSEs and U.S. Treasury futures that are not designated in hedging relationships are included in losses due to terminations or net settlements.    

Gains and Losses on Trading Securities .  During the three and six months ended June 30, 2014 , Farmer Mac recorded unrealized gains on trading securities of $7.7 million and $8.4 million , respectively, compared to unrealized losses of $0.3 million and $0.1 million during the same periods in 2013 , respectively. Of the total unrealized gains recognized during the three and six months ended June 30, 2014 , $7.8 million related to securities sold, not yet purchased as part of Farmer Mac's recently established cash management and liquidity initiative and $0.2 million of losses and $0.2 million of gains, respectively related to financial assets selected to be carried at fair value with changes in fair value included in earnings (the fair value option). During both the three and six months ended June 30, 2013, Farmer Mac recorded losses of $0.4 million related to assets accounted for under the fair value option. Farmer Mac has not elected to account for any financial assets under the fair value option since 2008.



72

Table of Contents

Gains on Sale of Available-for-Sale Investment Securities . During the three and six months ended June 30, 2014, Farmer Mac realized gains of $0.1 million and $0.2 million , respectively, compared to gains of $3.1 million in the three and six months ended June 30, 2013. The gains in 2013 primarily were the result of a sale of a mortgage-backed security from the available-for-sale investment portfolio.

Gains on Sale of Real Estate Owned . During the three and six months ended June 30, 2014, Farmer Mac realized gains of $0.2 million from the sale of real estate owned properties, compared to realized gains of $1.1 million and $1.2 million , respectively, for the three and six months ended June 30, 2013.

Other Income . Other income totaled $0.2 million and $0.3 million , respectively, for the three and six months ended June 30, 2014 , compared to $0.9 million and $2.0 million for the same periods in 2013. The decrease in other income in the first half of 2014 was primarily attributable to the collection, in 2013, of $0.4 million in late fees upon final payoff of a defaulted loan and the recognition in 2013 of $0.7 million of gains previously deferred in accumulated other comprehensive income related to fair value changes of certain available-for-sale securities contributed to Farmer Mac II LLC in 2010, and other miscellaneous items.

Compensation and Employee Benefits .   Compensation and employee benefits were $4.9 million and $9.3 million , respectively, for the three and six months ended June 30, 2014 , compared to $4.6 million and $9.3 million , respectively, during the same periods in 2013 . The increase in compensation and employee benefits in second quarter 2014 was due primarily to increased headcount and annual salary adjustments.

General and Administrative Expenses .   General and administrative expenses, including legal, audit, and consulting fees, were $3.3 million and $6.1 million , respectively, for the three and six months ended June 30, 2014 , compared to $2.7 million and $5.6 million , respectively, for three and six months ended June 30, 2013 . The increase in general and administrative expenses in the first half of 2014 compared to the first half of 2013 was primarily attributable to consulting fees associated with Farmer Mac's cash management and liquidity initiative and other miscellaneous consulting fees.

Regulatory Fees .   Regulatory fees (which consist of the fees paid to FCA) for both the three and six months ended June 30, 2014 and 2013 were $0.6 million and $1.2 million , respectively. FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2014 will be $2.4 million ($0.6 million per federal fiscal quarter), which will not be a material increase from the prior federal fiscal year.  After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.

Income Tax Benefit/Expense .  Income tax benefit totaled $6.4 million and $7.5 million , respectively, for the three and six months ended June 30, 2014 , compared to income tax expense of $13.0 million and $21.8 million , respectively, for the same periods in 2013 . The income tax benefit recorded in second quarter 2014 was primarily due to the reduction of $11.6 million in the valuation allowance against deferred tax assets resulting from expected capital gains on securities sold, not yet purchased. This tax benefit and lower pre-tax income accounted for the change in tax benefit/expense in the three and six month periods ended June 30, 2014 as compared to 2013. The consolidated tax benefit of the dividends declared on Farmer Mac II LLC Preferred Stock, which is presented as "Net income attributable to non-controlling interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis and the reduction of $11.6 million of valuation allowance against deferred tax assets resulting from expected capital gains on securities sold, not yet purchased, were the primary reasons Farmer Mac's


73

Table of Contents

effective tax rate was lower than the statutory federal rate of 35 percent. For further information about the impact on income taxes related to securities sold, not yet purchased, see "—Cash Management and Liquidity Initiative."
   
Farmer Mac carried a valuation allowance of $25.6 million as of June 30, 2014 and $37.9 million as of December 31, 2013 against the deferred tax assets arising primarily from capital loss carryforwards related to capital losses incurred during 2009 on Farmer Mac's investments in Fannie Mae preferred stock, Lehman Brothers Holdings Inc. senior debt securities, and other GSE preferred stock.  Because these losses were capital in nature, tax benefits can only be realized to the extent Farmer Mac would have offsetting capital gains.  For more information about income taxes see "Note 10 Income Taxes" in the consolidated financial statements in the Segment Recast 8-K.

Business Volume .  During second quarter 2014 , Farmer Mac added $590.2 million of new business volume. Specifically, Farmer Mac:
 
purchased $159.1 million of newly originated Farm & Ranch loans;
added $34.9 million of Farm & Ranch loans under LTSPCs;
purchased $90.8 million of USDA Securities;
purchased $4.7 million of Rural Utilities loans; and
purchased $300.8 million of AgVantage securities.

Farmer Mac's outstanding business volume was $14.1 billion as of June 30, 2014 , a decrease of $35.7 million from March 31, 2014 and an increase of $122.2 million from December 31, 2013 . The new business volume in second quarter 2014 included $295.8 million of AgVantage securities purchased from the National Rural Utilities Cooperative Finance Corporation ("CFC").
  
The following table sets forth purchases of non-delinquent eligible loans, new LTSPCs, and new guarantees during the periods indicated in the Farm & Ranch, USDA Guarantees, and Rural Utilities lines of business, as well as purchases of AgVantage securities in the Institutional Credit line of business:

Table 6

Farmer Mac New Purchases, Guarantees, and LTSPCs
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
159,116

 
$
226,135

 
$
351,523

 
$
386,022

LTSPCs
34,850

 
99,504

 
220,444

 
266,284

USDA Guarantees:
 
 
 
 
 
 
 
USDA Securities
90,785

 
110,897

 
158,769

 
233,084

Rural Utilities:
 
 
 
 
 
 
 
Loans
4,689

 
10,222

 
58,592

 
40,484

Institutional Credit:
 
 
 
 
 
 
 
AgVantage
300,775

 
200,000

 
529,465

 
625,000

Total purchases, guarantees, and LTSPCs
$
590,215

 
$
646,758

 
$
1,318,793

 
$
1,550,874




74

Table of Contents

The decrease in Farm & Ranch volume for the six months ended June 30, 2014 as compared to the same period in 2013 reflects a return to volume levels more consistent with historical trends, contrasted by higher demand in the first half of 2013 from borrowers seeking longer-term financing at fixed rates in a low interest rate environment. The decrease in USDA Securities volume was the result of more lenders retaining these guaranteed assets in their portfolio in the first half of 2014, which is also more consistent with historical trends, as compared with the higher purchases experienced in the first half of 2013. Rural Utilities loan volume remains low, with modest variances from period to period, due to reduced demand associated with slow historical economic growth and greater energy efficiency in recent years. The uneven distribution in quarterly AgVantage securities volume is primarily driven by the generally larger transaction sizes for that product and the fluctuating funding and liquidity needs of Farmer Mac's customer network.

The purchase price of non-delinquent eligible loans and portfolios is their respective fair value based on current market interest rates and Farmer Mac's target net yield. The purchase price includes an amount to compensate Farmer Mac for credit risk that is similar to the guarantee or commitment fees it receives for assuming credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs.  Based on market conditions, Farmer Mac either retains the loans it purchases or securitizes them and retains or sells Farmer Mac Guaranteed Securities backed by those loans.  Historically, Farmer Mac has retained the vast majority of loans it has purchased.  The weighted-average age of the Farm & Ranch non-delinquent eligible loans purchased and retained (excluding the purchases of defaulted loans) during both second quarter 2014 and 2013 was less than one year .  Of those loans, 39 percent and 52 percent had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 15.8 years and 14.9 years, respectively.

During second quarter 2014 and 2013 , Farmer Mac securitized loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities in the amount of $66.6 million and $10.8 million , respectively. Farmer Mac consolidates these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on the consolidated balance sheets. For the three and six months ended June 30, 2014 , $52.2 million and $107.6 million, respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank ("Zions"), which is a related party to Farmer Mac, compared to no sales and $17.1 million of sales for the three and six months ended June 30, 2013, respectively.

The following table sets forth information regarding the Farmer Mac Guaranteed Securities issued during the periods indicated:

Table 7

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities
$
66,554

 
$
10,849

 
$
129,305

 
$
35,891

AgVantage Securities
300,775

 
200,000

 
529,465

 
625,000

Total Farmer Mac Guaranteed Securities Issuances
$
367,329

 
$
210,849

 
$
658,770

 
$
660,891




75

Table of Contents

The following table sets forth information regarding outstanding volume in each of Farmer Mac's four lines of business as of the dates indicated:

Table 8

Outstanding Balances of Loans Held, Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed
 Securities and LTSPCs, AgVantage Securities, USDA Securities, and Farmer Mac Guaranteed USDA Securities
 
As of June 30, 2014
 
As of December 31, 2013
 
(in thousands)
On-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
Loans
$
1,955,207

 
$
1,875,958

Loans held in trusts:
 
 
 
Beneficial interests owned by third party investors
371,960

 
259,509

USDA Guarantees:
 
 
 
USDA Securities
1,672,998

 
1,645,806

Farmer Mac Guaranteed USDA Securities
20,675

 
21,089

Rural Utilities:
 
 
 
Loans
719,784

 
698,010

Loans held in trusts:
 
 
 
Beneficial interests owned by Farmer Mac
292,529

 
354,241

Institutional Credit:
 
 
 
AgVantage Securities
5,051,043

 
5,066,855

Total on-balance sheet
$
10,084,196

 
$
9,921,468

Off-balance sheet:
 

 
 

Farm & Ranch:
 

 
 

LTSPCs
$
2,279,121

 
$
2,261,862

Guaranteed Securities
704,376

 
765,751

USDA Guarantees:
 
 
 
Farmer Mac Guaranteed USDA Securities
16,662

 
20,222

Institutional Credit:
 
 
 
AgVantage Securities
988,187

 
981,009

Total off-balance sheet
$
3,988,346

 
$
4,028,844

Total
$
14,072,542

 
$
13,950,312




76

Table of Contents

The following table summarizes by maturity date the scheduled principal amortization of loans held, loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of June 30, 2014 :

Table 9
Schedule of Principal Amortization
 
Loans Held
 
Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs
 
 USDA Securities and Farmer Mac Guaranteed USDA Securities
 
Total
 
(in thousands)
2014
$
120,097

 
$
134,344

 
$
128,701

 
$
383,142

2015
172,424

 
254,323

 
121,758

 
548,505

2016
166,444

 
227,803

 
141,155

 
535,402

2017
167,896

 
219,744

 
115,290

 
502,930

2018
169,524

 
202,562

 
126,438

 
498,524

Thereafter
2,543,095

 
1,944,721

 
1,076,993

 
5,564,809

Total
$
3,339,480

 
$
2,983,497

 
$
1,710,335

 
$
8,033,312



Of the $14.1 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of June 30, 2014 , $6.0 billion were AgVantage securities included in the Institutional Credit line of business.  Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security.  Unlike business volume in the form of purchased loans, USDA Securities, and loans underlying LTSPCs and non-AgVantage Farmer Mac Guaranteed Securities, most AgVantage securities do not require periodic payments of principal based on amortization schedules and instead have fixed maturity dates when the secured general obligation is due.



77

Table of Contents

The following table summarizes by maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as of June 30, 2014 :

Table 10

AgVantage Balances by Year of Maturity
 
As of
 
June 30, 2014
 
(in thousands)
2014
$
390,820

2015
681,638

2016
1,334,415

2017
1,385,478

2018
790,478

Thereafter (1)
1,456,401

Total
$
6,039,230

(1) Includes various maturities ranging from 2019 to 2024.

The weighted-average remaining maturity of the outstanding $6.0 billion of AgVantage securities shown in the table above was 3.5 years as of June 30, 2014 .  As a general matter, if maturing AgVantage securities are not replaced by new AgVantage securities, either from the same issuer or from new business, or if the spread earned by Farmer Mac on new AgVantage securities that replace maturing AgVantage securities is lower than the spread earned on the maturing securities, Farmer Mac's income could be adversely affected.

As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90-days delinquent or in material non-monetary default at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet.  The purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed Securities is the current outstanding principal balance of the loan plus accrued and unpaid interest.  The purchase price for a defaulted loan purchased under an LTSPC is the then-current outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds as received.  The purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors affect expected loss, if any, on any loan so purchased. Farmer Mac did not purchase any delinquent loans during second quarter 2014. The weighted-average age of delinquent loans purchased during second quarter 2013 out of securitized pools and LTSPCs was 11.5 years during second quarter 2013 . See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."



78

Table of Contents

The following table presents Farmer Mac's purchases of defaulted loans underlying Farm & Ranch Guaranteed Securities and LTSPCs for the periods indicated:

Table 11

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
(in thousands)
Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by third party investors
$

 
$
5,935

 
$

 
$
6,038

Defaulted loans purchased underlying LTSPCs

 

 
440

 
37

Total loan purchases
$

 
$
5,935

 
$
440

 
$
6,075




Farmer Mac II LLC .   In January 2010, Farmer Mac contributed substantially all of the assets comprising the USDA Guarantees line of business (in excess of $1.1 billion ) to Farmer Mac's subsidiary, Farmer Mac II LLC.  The assets that Farmer Mac contributed to Farmer Mac II LLC consisted primarily of USDA Securities that had not been securitized by Farmer Mac but also included $35.0 million of Farmer Mac Guaranteed Securities.  Farmer Mac did not and will not guarantee the timely payment of principal and interest on the $1.1 billion of contributed USDA Securities.  The financial information presented in this report reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis.  Accordingly, Farmer Mac's reportable operating segments presented in this report will differ from the stand-alone financial statements of Farmer Mac II LLC.  Those separate financial statements are available on the website of Farmer Mac II LLC and are not incorporated by reference into this report.

The assets of Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.  As of June 30, 2014 , Farmer Mac II LLC held assets with a fair value of $1.7 billion , had debt outstanding to Farmer Mac of $383.0 million , had preferred stock outstanding with a liquidation preference of $250.0 million , and had $1.0 billion of common stock outstanding held by Farmer Mac. During second quarter 2014, Farmer Mac purchased $6.0 million of the outstanding trust securities, called Farm Asset-Linked Capital Securities or "FALConS," representing undivided beneficial ownership interests in shares of Farmer Mac II LLC Preferred Stock, from certain holders. For more information about the formation and operations of Farmer Mac II LLC and the features of the preferred stock issued by Farmer Mac II LLC in January 2010, see Notes 7 and 9 to the consolidated financial statements.

Outlook   

Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools to help rural lenders meet the financing needs of their customers. While the pace of Farmer Mac's growth will depend on the capital and liquidity needs of lenders and the financing needs of their customers, Farmer Mac foresees opportunities for continued growth. More specifically, Farmer Mac believes that its Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business all have opportunities for growth, driven by several key factors:



79

Table of Contents

As agricultural lenders face increased equity capital requirements under new regulatory frameworks, or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac can provide relief for those institutions through loan purchases, guarantees, or LTSPCs.
As the overall economy recovers, rural utilities generally may experience an increase in demand for power, which can lead to more investment and borrowing needs in that industry.
As a result of targeted marketing efforts, Farmer Mac's lender network and customer base continues to expand, which may generate additional demand for Farmer Mac's products from new sources.

Farmer Mac believes that these growth opportunities will be important in replacing income earned on the loans and other assets as they mature, pay down, or are reinvested at lower spreads. Farmer Mac also currently owns in its liquidity investment portfolio $78.5 million par amount of preferred stock issued by CoBank that currently pays an 11 percent annual dividend, from which Farmer Mac earns approximately $7.7 million ($0.69 per diluted share in 2013 and $0.34 per diluted share for the six months ended June 30, 2014) annually in after-tax income. CoBank has the option to call these securities beginning in October 2014, and Farmer Mac believes that CoBank will do so. Farmer Mac expects to hold these securities until they are called.

Agricultural Sector . The agricultural sector includes many diverse industries that respond in different ways to changes in economic conditions. Those individual industries often are affected differently, sometimes positively and sometimes negatively, by prevailing domestic and global economic factors and regional weather conditions. This results in cycles where one or more industries may be under stress at the same time that others are not. In addition, borrowers that rely on non-farm sources of income as a significant percentage of overall income may experience stress associated with weakness in the general economy. The profitability of agricultural industries is also affected by commodity inventories and their associated market prices, which can vary largely as a result of weather patterns, access to water supply, and harvest conditions that may affect supply.

While agricultural land values have increased over the past several years, recent market activity suggests that land values may have moderated slightly and the volume of farmland sales has begun to decline. Decreasing commodity prices experienced in certain commodity sectors in recent months may not correlate with an equivalent decline in producers' operating expenses. Combined with potential increases in interest rates, these factors could put downward pressure on the discounted cash flow values of farmland, which could negatively affect farmland values. Farmer Mac believes that its portfolio remains sufficiently diversified, both geographically and by commodity, and has generally demonstrated historically high credit quality and low delinquency rates for the portfolio to endure reasonably foreseeable volatility in farmland values. Farmer Mac continues to closely monitor sector profitability, economic conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions. For Farm & Ranch loan purchases made in second quarter 2014, the weighted average original loan-to-value ratio was 45 percent . For a detailed discussion of the average unpaid loan balance for loans outstanding, weighted average original loan-to-value ratios, and weighted average current loan-to-value ratios for Farm & Ranch loans in Farmer Mac's portfolio as of June 30, 2014 , see "—Risk Management—Credit Risk – Loans and Guarantees."

The western part of the United States, including California, continues to experience drought conditions, with the water level in many California reservoirs at substantially less than their average year-to-date water storage levels. Though many farm irrigation districts received little or no water from the governing water authorities, the impact on individual farmers will vary due to alternative water sources the farmer


80

Table of Contents

may have in place. These alternative water sources include underground sources (well water) and any water that may have been “banked” by the farmer in years where water was more plentiful. Farmer Mac has not observed any material effect on its portfolio due to these drought conditions as of June 30, 2014, as borrower profitability continues to remain stable. However, any continuation of extreme or exceptional drought conditions beyond the 2014 water year could have an adverse effect on Farmer Mac’s delinquency rates or loss experience. This is particularly true in the permanent plantings sector, where the value of the related collateral is closely tied to the production value and capability of the permanent plantings, and in the dairy sector, which may experience increased feed costs as water is diverted away from hay acreage commonly relied upon by dairy producers and toward land supporting other agricultural commodities. Farmer Mac believes that it remains well-collateralized on loans in its Farm & Ranch line of business, including its permanent planting and dairy portfolios.

Farmer Mac also continues to monitor the establishment and evolution of legislation and regulations that affect farmers, ranchers, and rural lenders. Many federal agricultural policies previously in effect have been altered with the recent enactment of the Agricultural Act of 2014, including those affecting crop subsidies, crop insurance , and other aspects of agricultural production. Farmer Mac will continue to monitor the effects of these altered federal agricultural policies as the USDA engages in the process of promulgating regulations intended to implement the Agricultural Act of 2014.

Farmer Mac's marketing efforts directed towards the Farm & Ranch line of business focus on lenders that have demonstrated a commitment to agricultural lending based on their lending history. Farmer Mac directs its outreach efforts to these lenders through direct personal contact, which is facilitated through Farmer Mac's frequent participation in state and national banking conferences, its alliances with the American Bankers Association and the Independent Community Bankers of America, and its business relationships with members of the Farm Credit System. In connection with lenders' evolving financing needs in the Farm & Ranch line of business, Farmer Mac has experienced continuing stable demand for its longer-term fixed rate loan products, as well as recent demand for certain of its shorter-term floating rate loan products driven by a rise in interest rates. Demand for Farmer Mac's secondary market tools could also increase as rural lenders adapt to new and changing regulations, which may require lenders to obtain more liquidity and capital to continue their lending practices.

Farmer Mac continues to monitor developments in the ethanol industry and evaluate their potential impact on the overall performance of Farmer Mac's portfolio. The amount of ethanol loans in Farmer Mac's portfolio has significantly decreased in recent years both in dollar amount (declining to $34.8 million as of June 30, 2014 ) and as a percentage of portfolio volume (declining to 0.7 percent of the Farm & Ranch portfolio as of June 30, 2014 ) due to sizable paydowns on the unpaid principal balance of loans due to a recent upward trend in the profitability of the ethanol industry. As of December 31, 2013 and June 30, 2013 , the dollar amount of Farmer Mac's ethanol portfolio was $88.4 million ( 1.7 percent ) and $113.7 million ( 2.3 percent ), respectively. Farmer Mac had $27.2 million of undisbursed commitments on existing ethanol loans as of June 30, 2014 .

Rural Utilities Industry . Lower demand within the rural utilities industry has increased competition for Farmer Mac's customer base from lenders that are not eligible to, or for other reasons, do not participate in Farmer Mac's Rural Utilities line of business. The rural utilities industry may experience needs for financing over the next several years to make improvements in response to environmental and clean energy policies, and for refinancing USDA Rural Utilities Service loans. Domestic economic indicators also continue to show modest growth, and as the economy strengthens, Farmer Mac believes that demand for rural utilities loans may increase. Farmer Mac foresees opportunities for growth as industry demand


81

Table of Contents

increases, both in its Institutional Credit line of business (as rural electric cooperative lenders seek lower-cost financing alternatives), as well as its Rural Utilities line of business.

Balance Sheet Review

Assets .  Farmer Mac's total assets as of June 30, 2014 were $14.7 billion , compared to $13.4 billion as of December 31, 2013 .  The increase in total assets was primarily attributable to an increase in securities purchased under agreements to resell and net new purchases of Farm & Ranch loans and USDA Securities.

As of June 30, 2014 , Farmer Mac had $384.1 million of cash and cash equivalents, $1.6 billion of securities purchased under agreements to resell, and $2.3 billion of investment securities, compared to $749.3 million of cash and cash equivalents and $2.5 billion of investment securities as of December 31, 2013 . As of June 30, 2014 , Farmer Mac had $5.1 billion of Farmer Mac Guaranteed Securities, $1.7 billion of USDA Securities, and $3.3 billion of loans, net of allowance. This compares to $5.1 billion of Farmer Mac Guaranteed Securities, $1.6 billion of USDA Securities, and $3.2 billion of loans, net of allowance, as of December 31, 2013 .

Liabilities .  Farmer Mac's total liabilities increased to $13.9 billion as of June 30, 2014 from $12.8 billion as of December 31, 2013 .  The increase in liabilities was primarily attributable to an increase in securities sold, not yet purchased in connection with Farmer Mac's cash management and liquidity initiative. For further information about securities sold, not yet purchased, see "—Cash Management and Liquidity Initiative."

Equity .  As of June 30, 2014 , Farmer Mac had total equity of $772.3 million , comprised of stockholders' equity of $536.4 million and non-controlling interest – preferred stock of $235.9 million .  As of December 31, 2013 , Farmer Mac had total equity of $574.5 million , comprised of stockholders' equity of $332.6 million and non-controlling interest – preferred stock of $241.9 million .  The increase in total equity during the first half of 2014 was the result of the issuances of $75.0 million of Series B Preferred Stock in March 2014 and $75.0 million of Series C Preferred Stock in June 2014, and an increase in accumulated other comprehensive income due to increases in the fair value of available-for-sale securities. These increases in the fair value of available-for-sale securities were driven primarily by lower U.S. Treasury rates.

Off-Balance Sheet Arrangements 

Farmer Mac offers approved lenders two credit enhancement alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through each of the Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit lines of business; and (2) LTSPCs, which are available through the Farm & Ranch and Rural Utilities lines of business. For securitization trusts where Farmer Mac is the primary beneficiary, the trust assets and liabilities are included on Farmer Mac's consolidated balance sheet. For the remainder of these transactions, and in the event of deconsolidation, both of these alternatives result in the creation of off-balance sheet obligations for Farmer Mac. See Note 6 to the consolidated financial statements for further information regarding consolidation and Farmer Mac's off-balance sheet business activities.



82

Table of Contents

Risk Management

Credit Risk – Loans and Guarantees .   Farmer Mac is exposed to credit risk resulting from the inability of borrowers to repay their loans in conjunction with a deficiency in the value of the collateral relative to the outstanding balance of the loan and the costs of liquidation.  Farmer Mac is exposed to credit risk on:
 
loans held;
loans underlying Farmer Mac Guaranteed Securities; and
loans underlying LTSPCs.

Farmer Mac generally assumes 100 percent of the credit risk on loans held and loans underlying Farm & Ranch Guaranteed Securities, LTSPCs, and Rural Utilities Guaranteed Securities. Farmer Mac has direct credit exposure to loans in non-AgVantage transactions and indirect credit exposure to loans that secure AgVantage transactions, since they represent a general obligation of a lender secured by qualified loans.  The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is covered by the full faith and credit of the United States.  Farmer Mac believes that Farmer Mac and Farmer Mac II LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee.  As of June 30, 2014 , neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the USDA Guarantees line of business and does not expect that Farmer Mac or Farmer Mac II LLC will incur any such losses in the future.

Farmer Mac has established underwriting, collateral valuation, and documentation standards for agricultural real estate mortgage loans and rural utilities loans. Farmer Mac believes that these standards mitigate the risk of loss from borrower defaults and provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating and potential lenders.  These standards were developed on the basis of industry norms for agricultural real estate mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower, as well as the value of the collateral securing the loan.  Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions.  For more information about Farmer Mac's underwriting and collateral valuation standards, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" and "Business—Farmer Mac Lines of Business—Rural Utilities—Underwriting" in the Segment Recast 8-K.

Farmer Mac requires approved lenders to make representations and warranties regarding the conformity of eligible agricultural mortgage and rural utilities loans to Farmer Mac's standards, the accuracy of loan data provided to Farmer Mac, and other requirements related to the loans.  Sellers are responsible to Farmer Mac for breaches of those representations and warranties, and Farmer Mac has the ability to require a seller to cure, replace, or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac's decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac.  Farmer Mac has not required a seller to cure or repurchase a loan purchased by Farmer Mac for breach of a representation or warranty in the last three years. In addition to relying on the representations and warranties of lenders, Farmer Mac also underwrites all of the agricultural mortgage loans (other than rural housing and part-time farm mortgage loans) and rural utilities loans that it holds in its portfolio. For rural housing and part-time farm mortgage loans, Farmer Mac relies on representations and warranties from the seller that those loans conform to Farmer Mac's specified underwriting criteria without exception. For more information about Farmer Mac's loan eligibility requirements, see


83

Table of Contents

"Business—Farmer Mac Lines of Business—Farm & Ranch—Loan Eligibility" and "Business—Farmer Mac Lines of Business—Rural Utilities—Loan Eligibility" in the Segment Recast 8-K.

Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central servicers service loans in accordance with Farmer Mac's requirements.  Central servicers are responsible to Farmer Mac for serious errors in the servicing of those loans.  If a central servicer materially breaches the terms of its servicing agreement with Farmer Mac, such as failing to forward payments received or releasing collateral without Farmer Mac's consent, or experiences insolvency or bankruptcy, Farmer Mac has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by the central servicer. In addition, Farmer Mac can proceed against the central servicer in arbitration or exercise any remedies available to it under law. In the last three years, Farmer Mac has not exercised any remedies or taken any formal action against any central servicers. For more information about Farmer Mac's servicing requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Servicing" and "Business—Farmer Mac Lines of Business—Rural Utilities—Servicing" in the Segment Recast 8-K.

Farmer Mac's AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions and the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans.  As such, all AgVantage securities are secured by current loans representing at least 100 percent of the outstanding amount of these securities.  As of June 30, 2014 , Farmer Mac had not experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in the future. See "—Credit Risk – Institutional" for more information about Farmer Mac's credit risk on AgVantage securities.

Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative. As of June 30, 2014 , there were no delinquencies in Farmer Mac's portfolio of rural utilities loans, which includes rural utilities loans held and rural utilities loans underlying or securing Rural Utilities Guaranteed Securities. Farmer Mac's direct credit exposure to rural utilities loans as of June 30, 2014 was $1.01 billion , of which $991.5 million were loans to electric distribution cooperatives and $20.8 million were loans to G&T cooperatives. Farmer Mac also had indirect credit exposure to the rural utilities loans securing AgVantage securities and included in the Institutional Credit line of business, some of which are loans to G&T cooperatives. For more information, see "—Credit Risk – Institutional."

Farmer Mac maintains an allowance for loan losses to cover estimated probable losses on loans held and a reserve for losses to cover estimated probable losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.  The methodology that Farmer Mac uses to determine the level of its allowance for losses is described in Note 2(j) to the consolidated financial statements included in the Segment Recast 8-K. Management believes that this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.



84

Table of Contents

The following table summarizes the components of Farmer Mac's total allowance for losses for the three and six months ended June 30, 2014 and 2013 :

Table 12

 
June 30, 2014
 
June 30, 2013
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
7,410

 
$
6,569

 
$
13,979

 
$
7,967

 
$
6,285

 
$
14,252

Provision for losses
(1,583
)
 
(974
)
 
(2,557
)
 
(529
)
 
(175
)
 
(704
)
Charge-offs
(57
)
 

 
(57
)
 
(70
)
 

 
(70
)
Ending Balance
$
5,770

 
$
5,595

 
$
11,365

 
$
7,368

 
$
6,110

 
$
13,478

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
6,866

 
$
6,468

 
$
13,334

 
$
11,351

 
$
5,539

 
$
16,890

Provision for losses
(1,010
)
 
(873
)
 
(1,883
)
 
(99
)
 
571

 
472

Charge-offs
(86
)
 

 
(86
)
 
(3,884
)
 

 
(3,884
)
Ending Balance
$
5,770

 
$
5,595

 
$
11,365

 
$
7,368

 
$
6,110

 
$
13,478


Activity affecting the allowance for loan losses and reserve for losses is discussed in "—Results of Operations—Release of and Provision for Allowance for Loan Losses" and "—Results of Operations—Release of and Provision for Reserve for Losses." As of June 30, 2014 , Farmer Mac's allowances for losses totaled $11.4 million , or 21  basis points, of the outstanding principal balance of loans held for investment and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities, compared to $13.3 million , or 26  basis points, as of December 31, 2013 , and $13.5 million , or 27  basis points as of June 30, 2013 .

As of June 30, 2014 , Farmer Mac's 90-day delinquencies were $25.9 million ( 0.49 percent of the Farm & Ranch portfolio), compared to $28.3 million ( 0.55 percent of the Farm & Ranch portfolio) as of December 31, 2013 , and $33.9 million ( 0.69 percent of the Farm & Ranch portfolio) as of June 30, 2013 . When analyzing the overall risk profile of its program business, Farmer Mac takes into account more than the Farm & Ranch loan delinquency percentages provided above. The total program business includes AgVantage securities and rural utilities loans, neither of which have any delinquencies, and USDA Securities, which are backed by the full faith and credit of the United States. Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.18 percent of total program business as of June 30, 2014 , compared to 0.20 percent of total program business as of December 31, 2013 , and 0.25 percent as of June 30, 2013 .

As of June 30, 2014 , Farmer Mac's ethanol exposure, which includes loans held and loans subject to LTSPCs, was $34.8 million ( 0.7 percent of the Farm & Ranch portfolio) on 13  different plants, with an additional $27.2 million of undisbursed commitments.  As of June 30, 2014 , Farmer Mac had no ethanol loans that were 90-days delinquent.



85

Table of Contents

The following table presents historical information regarding Farmer Mac's 90-day delinquencies in the Farm & Ranch line of business compared to the principal balance of all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs:

Table 13
 
 
Outstanding Loans, Guarantees, and LTSPCs (1)
 
90-Day
Delinquencies
 
Percentage
 
(dollars in thousands)
As of:
 
 
 
 
 
June 30, 2014
$
5,310,664

 
$
25,911

 
0.49
%
March 31, 2014
5,293,975

 
29,437

 
0.56
%
December 31, 2013
5,163,080

 
28,296

 
0.55
%
September 30, 2013
5,035,748

 
33,042

 
0.66
%
June 30, 2013
4,917,489

 
33,922

 
0.69
%
March 31, 2013
4,782,609

 
39,663

 
0.83
%
December 31, 2012
4,747,289

 
33,263

 
0.70
%
September 30, 2012
4,402,957

 
40,797

 
0.93
%
June 30, 2012
4,403,212

 
47,026

 
1.07
%
(1)
Excludes loans pledged to secure AgVantage securities.

The 90-day delinquency measure includes loans 90 days or more past due as well as loans in foreclosure, loans restructured after delinquency, and non-performing loans where the borrower is in bankruptcy.

As of June 30, 2014 , Farmer Mac individually analyzed $32.1 million of the $89.2 million of recorded investment in impaired loans for collateral shortfalls against updated appraised values, other updated collateral valuations, or discounted values. For the remaining $57.1 million of impaired assets for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific allowances of $2.6 million for undercollateralized assets as of June 30, 2014 . Farmer Mac's non-specific or general allowances were $8.8 million as of June 30, 2014 .

Loans in the Farm & Ranch line of business are all secured by first liens on agricultural real estate. Accordingly, Farmer Mac's exposure on a loan is limited to the difference between (1) the total of the accrued interest, advances, and the principal balance of a loan and (2) the value of the property less the cost to sell. Measurement of that excess or shortfall is the best predictor and determinant of loss, compared to other measures that evaluate the efficiency of a particular farm operator.  Debt service ratios depend upon farm operator efficiency and leverage, which can vary widely within a geographic region, commodity type, or an operator's business and farming skills.  A loan's original loan-to-value ratio is one of many factors Farmer Mac considers in evaluating loss severity and is calculated by dividing the loan principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of loan origination or, when available, updated appraised value at the time of guarantee, purchase, or commitment.  Other factors include, but are not limited to, other underwriting standards, commodity and farming forecasts, and regional economic and agricultural conditions.

Loan-to-value ratios depend upon the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards.  As of June 30, 2014 and December 31, 2013 , the average unpaid loan balance for loans outstanding in the Farm & Ranch line of business (excluding loans that


86

Table of Contents

secured AgVantage securities) was $452,000 and $426,000 , respectively. For Farm & Ranch loan purchases made in second quarter 2014, the weighted average original loan-to-value ratio was 45 percent , compared to 44 percent in second quarter 2013. The weighted average original loan-to-value ratio (based on original appraised value that has not been indexed to provide a current market value or reflect amortization of loans) for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 48 percent as of June 30, 2014 and 49 percent as of December 31, 2013 . The weighted average current loan-to-value ratio (based on original appraised value but which reflects loan amortization since purchase) for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 43 percent as of June 30, 2014 , and 38 percent as of December 31, 2013 . The weighted-average original loan-to-value ratio for all 90-day delinquencies was 46 percent as of June 30, 2014 , and 45 percent as of December 31, 2013 .







87

Table of Contents

The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities and 90-day delinquencies as of June 30, 2014 by year of origination, geographic region, commodity/collateral type, and original loan-to-value ratio:

Table 14
Farm & Ranch 90-Day Delinquencies as of June 30, 2014
 
Distribution of Outstanding Loans, Guarantees, and LTSPCs
 
Outstanding Loans, Guarantees, and LTSPCs 
 
90-Day Delinquencies (1)
 
Percentage
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
 
 
Before 2001
6
%
 
$
292,601

 
$
2,004

 
0.68
%
2001
2
%
 
114,468

 
1,125

 
0.98
%
2002
2
%
 
139,165

 
525

 
0.38
%
2003
3
%
 
163,831

 
3,422

 
2.09
%
2004
4
%
 
187,826

 

 
%
2005
5
%
 
257,968

 
916

 
0.36
%
2006
5
%
 
256,788

 
4,758

 
1.85
%
2007
4
%
 
237,324

 
10,420

 
4.39
%
2008
6
%
 
304,255

 
1,350

 
0.44
%
2009
4
%
 
213,048

 
642

 
0.30
%
2010
6
%
 
323,889

 
749

 
0.23
%
2011
8
%
 
436,680

 

 
%
2012
16
%
 
835,275

 

 
%
2013
22
%
 
1,177,898

 

 
%
2014
7
%
 
369,648

 

 
%
Total
100
%
 
$
5,310,664

 
$
25,911

 
0.49
%
By geographic region (2):
 

 
 

 
 

 
 

Northwest
10
%
 
$
551,254

 
$
1,353

 
0.25
%
Southwest
32
%
 
1,716,331

 
8,485

 
0.49
%
Mid-North
35
%
 
1,834,187

 
800

 
0.04
%
Mid-South
12
%
 
622,183

 
2,644

 
0.42
%
Northeast
4
%
 
224,830

 
1,608

 
0.72
%
Southeast
7
%
 
361,879

 
11,021

 
3.05
%
Total
100
%
 
$
5,310,664

 
$
25,911

 
0.49
%
By commodity/collateral type:
 
 
 

 
 

 
 

Crops
53
%
 
$
2,832,785

 
$
6,289

 
0.22
%
Permanent plantings
17
%
 
906,802

 
11,339

 
1.25
%
Livestock
24
%
 
1,256,829

 
5,511

 
0.44
%
Part-time farm
3
%
 
158,226

 
2,772

 
1.75
%
Ag. Storage and processing (including ethanol facilities)
3
%
 
147,840

 

 
%
Other

 
8,182

 

 
%
Total
100
%
 
$
5,310,664

 
$
25,911

 
0.49
%
By original loan-to-value ratio:
 
 
 
 
 
 
 
0.00% to 40.00%
27
%
 
$
1,439,917

 
$
7,186

 
0.50
%
40.01% to 50.00%
22
%
 
1,160,478

 
13,451

 
1.16
%
50.01% to 60.00%
28
%
 
1,462,113

 
1,401

 
0.10
%
60.01% to 70.00%
20
%
 
1,107,922

 
2,762

 
0.25
%
70.01% to 80.00% (3)
2
%
 
106,556

 
1,111

 
1.04
%
80.01% to 90.00% (3)
1
%
 
33,678

 

 
%
Total
100
%
 
$
5,310,664

 
$
25,911

 
0.49
%
(1)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(2)
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(3)
Primarily part-time farm loans.


88

Table of Contents

The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original balance for all Farm & Ranch loans purchased and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2014 by year of origination, geographic region, and commodity/collateral type.  The purpose of this information is to present information regarding losses relative to original Farm & Ranch purchases, guarantees, and commitments.

Table 15

Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of June 30, 2014
 
Cumulative Original Loans, Guarantees and LTSPCs
 
Cumulative Net Credit Losses
 
Cumulative Loss Rate
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
Before 2001
$
7,342,279

 
$
11,032

 
0.15
 %
2001
1,151,764

 
178

 
0.02
 %
2002
1,174,025

 
89

 
0.01
 %
2003
1,013,854

 
350

 
0.03
 %
2004
745,854

 
281

 
0.04
 %
2005
899,437

 
(184
)
 
(0.02
)%
2006
928,825

 
9,545

 
1.03
 %
2007
716,894

 
4,498

 
0.63
 %
2008
802,162

 
3,247

 
0.40
 %
2009
531,770

 
1,508

 
0.28
 %
2010
625,786

 

 
 %
2011
712,075

 

 
 %
2012
1,031,389

 

 
 %
2013
1,283,676

 

 
 %
2014
418,566

 

 
 %
Total
$
19,378,356

 
$
30,544

 
0.16
 %
By geographic region (1):
 

 
 

 
 

Northwest
$
2,631,896

 
$
7,402

 
0.28
 %
Southwest
6,842,631

 
9,051

 
0.13
 %
Mid-North
4,693,400

 
12,830

 
0.27
 %
Mid-South
2,117,463

 
(240
)
 
(0.01
)%
Northeast
1,517,021

 
169

 
0.01
 %
Southeast
1,575,945

 
1,332

 
0.08
 %
Total
$
19,378,356

 
$
30,544

 
0.16
 %
By commodity/collateral type:
 

 
 

 
 

Crops
$
8,614,949

 
$
4,281

 
0.05
 %
Permanent plantings
3,953,860

 
9,377

 
0.24
 %
Livestock
4,882,067

 
3,859

 
0.08
 %
Part-time farm
1,078,310

 
1,015

 
0.09
 %
Ag. Storage and processing (including ethanol facilities) (2)
701,380

 
12,012

 
1.71
 %
Other
147,790

 

 
 %
Total
$
19,378,356

 
$
30,544

 
0.16
 %
(1)
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(2)
Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction and, as of June 30, 2014 , approximately $27.2 million of the loans were not yet disbursed by the lender.


Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer Mac's exposure to loss on a given loan. Within most commodity groups, certain geographic areas allow greater economies of scale or proximity to markets than others and, consequently, may result in more


89

Table of Contents

successful operations within the commodity group. Certain geographic areas also offer better growing conditions and agricultural infrastructure than others and, consequently, may result in more versatile and more successful operators within a given commodity group.  Farmer Mac's board of directors has established policies regarding geographic and commodity concentration to maintain adequate diversification and measure concentration risk.

The following tables present concentrations of Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities by commodity type within geographic region and cumulative credit losses by origination year and commodity type:

Table 16

 
As of June 30, 2014
 
Farm & Ranch Concentrations by Commodity Type within Geographic Region
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Other
 
Total
 
(dollars in thousands)
By geographic region (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Northwest
$
276,850

 
$
84,721

 
$
162,079

 
$
12,979

 
$
14,625

 
$

 
$
551,254

 
5.2
%
 
1.6
%
 
3.1
%
 
0.2
%
 
0.3
%
 
%
 
10.4
%
Southwest
513,160

 
650,348

 
501,592

 
34,463

 
15,881

 
887

 
1,716,331

 
9.7
%
 
12.1
%
 
9.5
%
 
0.7
%
 
0.3
%
 
%
 
32.3
%
Mid-North
1,518,747

 
28,317

 
186,563

 
12,092

 
82,800

 
5,668

 
1,834,187

 
28.5
%
 
0.6
%
 
3.5
%
 
0.2
%
 
1.6
%
 
0.1
%
 
34.5
%
Mid-South
372,226

 
11,368

 
199,039

 
24,263

 
14,755

 
532

 
622,183

 
7.0
%
 
0.3
%
 
3.7
%
 
0.5
%
 
0.2
%
 
%
 
11.7
%
Northeast
66,480

 
24,578

 
69,568

 
53,093

 
10,939

 
172

 
224,830

 
1.3
%
 
0.5
%
 
1.3
%
 
1.0
%
 
0.2
%
 
%
 
4.3
%
Southeast
85,322

 
107,470

 
137,988

 
21,336

 
8,840

 
923

 
361,879

 
1.6
%
 
2.0
%
 
2.6
%
 
0.4
%
 
0.2
%
 
%
 
6.8
%
Total
$
2,832,785

 
$
906,802

 
$
1,256,829

 
$
158,226

 
$
147,840

 
$
8,182

 
$
5,310,664

 
53.3
%
 
17.1
%
 
23.7
%
 
3.0
%
 
2.8
%
 
0.1
%
 
100.0
%
(1)
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).





        


90

Table of Contents

Table 17

 
As of June 30, 2014

Cumulative Credit Losses/(Recoveries) by Origination Year and Commodity Type
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
(including ethanol
facilities)
 
Total
 
(in thousands)
By year of origination:
 
 
 
 
 
 
 
 
 
 
 
1995 and Prior
$
277

 
$
(79
)
 
$
(107
)
 
$

 
$

 
$
91

1996
(721
)
 
2,296

 
(73
)
 

 

 
1,502

1997
(397
)
 
2,785

 
(131
)
 

 

 
2,257

1998
(438
)
 
1,848

 
1,781

 

 

 
3,191

1999
(108
)
 
723

 
158

 
296

 

 
1,069

2000
7

 
1,907

 
1,049

 
(41
)
 

 
2,922

2001
45

 
1

 
132

 

 

 
178

2002

 

 

 
89

 

 
89

2003
309

 

 

 
41

 

 
350

2004

 

 
162

 
119

 

 
281

2005
(87
)
 
(263
)
 

 
166

 

 
(184
)
2006
1,616

 

 
40

 
201

 
7,688

 
9,545

2007
1,054

 
11

 
779

 
144

 
2,510

 
4,498

2008
2,626

 

 

 

 
621

 
3,247

2009
98

 
148

 
69

 

 
1,193

 
1,508

2010

 

 

 

 

 

2011

 

 

 

 

 

2012

 

 

 

 

 

2013

 

 

 

 

 

2014

 

 

 

 

 

Total
$
4,281

 
$
9,377

 
$
3,859

 
$
1,015

 
$
12,012

 
$
30,544


In Farmer Mac's experience, the degree to which the collateral is specialized or highly improved, such as permanent plantings and storage and processing facilities, is a more significant determinant of the probability of ultimate losses on a given loan than geographic location. The versatility of a borrower's operation (and in the case of persisting adverse economic conditions, the borrower's ability to switch commodity groups) will more likely result in profitability for the borrower and, consequently, a lower risk of decreased value for the underlying collateral. However, producers of agricultural commodities that require specialized or highly improved property are less able to adapt their operations when faced with adverse economic conditions. If adverse economic conditions persist for these commodities, not only might the borrower face a higher risk of default, but also the prospective sale value of the collateral is more likely to decrease and the related loan may become undercollateralized.  This analysis is consistent with corresponding commodity analyses, which indicate that Farmer Mac has experienced higher loss and collateral deficiency rates in permanent planting loans and Ag. Storage and Processing loans (including Farmer Mac's exposure to loans on ethanol plants) for which the collateral is typically highly improved and specialized. See "—Outlook."

Farmer Mac's methodologies for pricing its guarantee and commitment fees, managing credit risk, and providing adequate allowances for losses consider all of the foregoing factors and information.



91

Table of Contents

Credit Risk – Institutional .  Farmer Mac is exposed to credit risk arising from its business relationships with other institutions including:
 
issuers of AgVantage securities;
approved lenders and servicers; and
interest rate swap counterparties.

Each AgVantage security is a general obligation of an issuing institution that is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security, with some level of overcollateralization also required for AgVantage securities secured by Farm & Ranch loans.  Farmer Mac approves AgVantage counterparties and manages institutional credit risk related to those AgVantage counterparties by requiring them to meet Farmer Mac's standards for creditworthiness.  The required collateralization level is established at the time of issuance and does not change during the life of the security.  In AgVantage transactions, the corporate obligor is required to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to substitute an eligible loan that is current in payment to maintain the minimum required collateralization level.  In the event of a default on the general obligation, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing borrower payments of principal and interest. For a more detailed description of AgVantage securities, see "Business—Farmer Mac Lines of Business—Institutional Credit" in the Segment Recast 8-K.

The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by Farm & Ranch loans totaled $3.5 billion as of June 30, 2014 and December 31, 2013 . The unpaid principal balance of on-balance sheet AgVantage securities secured by Rural Utilities loans totaled $1.6 billion as of June 30, 2014 and $1.5 billion as of December 31, 2013 . In addition, the unpaid principal balance of outstanding off-balance sheet AgVantage transactions totaled $1.0 billion as of June 30, 2014 and December 31, 2013 .

The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of June 30, 2014 and December 31, 2013 :

Table 18

 
 
As of June 30, 2014
 
As of December 31, 2013
Counterparty
 
Balance
 
Credit Rating
 
Required Collateralization
 
Balance
 
Credit Rating
 
Required Collateralization
 
 
(dollars in thousands)
MetLife(1)
 
$
2,750,000

 
AA-
 
103%
 
$
2,750,000

 
AA-
 
103%
CFC
 
1,578,580

 
A
 
100%
 
1,538,214

 
A
 
100%
Rabo Agrifinance, Inc.
 
1,650,000

 
N/A
 
106%
 
1,700,000

 
N/A
 
106%
Rabobank N.A.
 
50,000

 
N/A
 
106%
 
50,000

 
N/A
 
106%
Other(2)
 
10,650

 
N/A
 
111% to 120%
 
9,650

 
N/A
 
111% to 120%
Total outstanding
 
$
6,039,230

 
 
 
 
 
$
6,047,864

 
 
 
 
(1)
Includes securities issued by Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut.
(2)
Consists of AgVantage securities issued by 3 different issuers as of June 30, 2014 and December 31, 2013 .


Farmer Mac manages institutional credit risk related to lenders and servicers by requiring those institutions to meet Farmer Mac's standards for creditworthiness.  Farmer Mac monitors the financial


92

Table of Contents

condition of those institutions by evaluating financial statements and bank credit rating agency reports.  For more information about Farmer Mac's lender eligibility requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac Lines of Business—Rural Utilities—Approved Lenders" in the Segment Recast 8-K.

Farmer Mac manages institutional credit risk related to its interest rate swap counterparties through collateralization provisions contained in each of its swap agreements that varies based on the market value of its swaps portfolio with each counterparty. In addition, Farmer Mac transacts interest rate swaps with multiple counterparties to ensure a more even distribution of institutional credit risk related to its swap transactions. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), mandatory clearing of certain interest rate derivative transactions became effective for Farmer Mac during second quarter 2013, and Farmer Mac has been able to use the clearing process for cleared swap transactions as another mechanism for managing its derivative counterparty risk. Credit risk related to interest rate swap contracts is discussed in "—Risk Management—Interest Rate Risk" and Note 4 to the consolidated financial statements.

Credit Risk Other Investments . As of June 30, 2014 , Farmer Mac had $384.1 million of cash and cash equivalents, $1.6 billion of securities purchased under agreements to resell related to Farmer Mac's recently established cash management and liquidity initiative, and $2.3 billion of investment securities. The management of the credit risk inherent in these investments is governed by Farmer Mac's internal policies as well as FCA regulations, which establish limitations on dollar amount, issuer concentration, and credit quality. Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the "Liquidity and Investment Regulations"). In addition to establishing a portfolio of highly liquid investments as an available source of cash, the goals of Farmer Mac's investment policies are designed to minimize Farmer Mac's exposure to financial market volatility, preserve capital, and support Farmer Mac's access to the debt markets.

The Liquidity and Investment Regulations and Farmer Mac's policies generally require each investment or issuer of an investment to be highly rated by a nationally recognized statistical rating organization ("NRSRO").  Investments in mortgage securities and asset-backed securities are required to have a rating in the highest NRSRO category. Corporate debt securities with maturities of no more than five years but more than three years are required to be rated in one of the two highest categories; corporate debt securities with maturities of three years or less are required to be rated in one of the three highest categories.  Some investments do not require a rating, such as U.S. Treasury securities and other obligations fully insured by the United States government or a government agency or diversified investment funds regulated under the Investment Company Act of 1940.  Investments in diversified investment funds are further limited to those funds that are holding only instruments approved for direct investment by Farmer Mac.

The Liquidity and Investment Regulations and Farmer Mac's policies also establish concentration limits, which are intended to limit exposure to any one counterparty. The Liquidity and Investment Regulations and Farmer Mac's policy limit Farmer Mac's total credit exposure to any single issuer of securities and uncollateralized financial derivatives to 25 percent of Farmer Mac's regulatory capital (as of June 30, 2014 , 25 percent of Farmer Mac's regulatory capital was $190.4 million ). This limitation is not applied to the obligations of the United States or to qualified investment funds. The limitation applied to the obligations of any GSE is 100 percent of Farmer Mac's regulatory capital. Farmer Mac's policy applicable to new investments limits Farmer Mac's total exposure to any single issuer of securities (other than GSEs and government agencies) and uncollateralized financial derivatives to 5 percent of Farmer Mac's


93

Table of Contents

regulatory capital. See "—Regulatory Matters" for more information on recent changes to the Liquidity and Investment Regulations.

Interest Rate Risk .  Farmer Mac is subject to interest rate risk on all assets retained on its balance sheet because of possible timing differences in the cash flows of the assets and related liabilities.  This risk is primarily related to loans held, Farmer Mac Guaranteed Securities, and USDA Securities due to the ability of borrowers to prepay their loans before the scheduled maturities, thereby increasing the risk of asset and liability cash flow mismatches.  Cash flow mismatches in a changing interest rate environment can reduce the earnings of Farmer Mac if assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments when Farmer Mac's funding costs cannot be correspondingly reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-cost debt. As discussed below, Farmer Mac manages this interest rate risk by funding assets purchased with liabilities matching the duration and cash flow characteristics of the assets purchased.

The goal of interest rate risk management at Farmer Mac is to create and maintain a portfolio that generates stable earnings and value across a variety of interest rate environments. Farmer Mac's primary strategy for managing interest rate risk is to fund asset purchases with liabilities that have similar duration and cash flow characteristics so that they will perform similarly as interest rates change. To match these characteristics, Farmer Mac issues discount notes and both callable and non-callable medium-term notes across a spectrum of maturities. Farmer Mac issues callable debt to offset the prepayment risk associated with some loans. By using a blend of liabilities that includes callable debt, the interest rate sensitivities of the liabilities tend to increase or decrease as interest rates change in a manner similar to changes in the interest rate sensitivities of the assets. Farmer Mac also uses financial derivatives to better match the durations of Farmer Mac's assets and liabilities, thereby reducing overall interest rate sensitivity.

Taking into consideration the prepayment provisions and the default probabilities associated with its loan assets, Farmer Mac uses prepayment models to project and value cash flows associated with these assets.  Because borrowers' behaviors in various interest rate environments may change over time, Farmer Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience and adjusts and refines the models as necessary to improve the precision of subsequent prepayment forecasts.

In certain cases, yield maintenance provisions and other prepayment penalties contained in agricultural mortgage and rural utilities loans reduce, but do not eliminate, prepayment risk.  Those provisions require borrowers to make an additional payment when they prepay their loans, thus compensating Farmer Mac for the shortened duration of the prepaid loan.  As of June 30, 2014 , 2 percent of the total outstanding balance of loans in the Farm & Ranch line of business where Farmer Mac either owned the loan or the beneficial interest in the underlying loan had yield maintenance provisions and 1 percent had other forms of prepayment protection (together covering 4 percent of all loans with fixed interest rates).  Of the Farm & Ranch loans purchased in second quarter 2014 , none had yield maintenance or another form of prepayment protection. As of June 30, 2014 , none of the USDA Securities had yield maintenance provisions; however, 7 percent contained prepayment penalties.  Of the USDA Securities purchased in second quarter 2014 , 3 percent contained various forms of prepayment penalties.  As of June 30, 2014 , 62 percent of the rural utilities loans owned by Farmer Mac had yield maintenance provisions.  Of the rural utilities loans purchased in second quarter 2014 , 89 percent had yield maintenance provisions.  As of June 30, 2014 , substantially all of the rural utilities loans held in trusts where Farmer Mac owned the beneficial interest in the underlying loan had yield maintenance provisions.



94

Table of Contents

Farmer Mac's purchases of eligible loan assets expose Farmer Mac to interest rate risk arising primarily from uncertainty as to when the borrowers will repay the outstanding principal balance on the related loans. Generally, the values of Farmer Mac's eligible loan assets, and the debt issued to fund these assets, increase when interest rates decline, and their values decrease as interest rates rise. Furthermore, changes in interest rates may affect loan prepayment rates which may, in turn, affect durations and values of the loans. Declining interest rates generally increase prepayment rates, which shortens the duration of these assets, while rising interest rates tend to slow loan prepayments, thereby extending the duration of the loans.

Farmer Mac is also subject to interest rate risk on loans that Farmer Mac has committed to acquire (other than delinquent loans through LTSPCs) but has not yet purchased.  When Farmer Mac commits to purchase those loans, it is exposed to interest rate risk between the time it commits to purchase the loans and the time it either:
 
sells Farmer Mac Guaranteed Securities backed by the loans; or
issues debt to retain the loans in its portfolio.

Farmer Mac manages the interest rate risk related to these loans, and any related Farmer Mac Guaranteed Securities or debt issuance, through the use of forward sale contracts on the debt of other GSEs and futures contracts involving U.S. Treasury securities.  Farmer Mac uses forward sale contracts on GSE securities to reduce its interest rate exposure to changes in both U.S. Treasury rates and spreads on Farmer Mac debt and certain Farmer Mac Guaranteed Securities. Issuing debt to fund the loans as investments does not fully eliminate interest rate risk due to the possible timing differences in the cash flows of the assets and related liabilities, as discussed above.

Farmer Mac's $384.1 million of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities. As of June 30, 2014 , $2.2 billion of the $ 2.3 billion of investment securities ( 95 percent ) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. Those securities are funded with effectively floating rate debt that closely matches the rate adjustment dates of the associated investments. As of June 30, 2014 , Farmer Mac had outstanding discount notes of $3.9 billion , medium-term notes that mature within one year of $2.4 billion , and medium-term notes that mature after one year of $5.4 billion .

The cash management and liquidity initiative undertaken by Farmer Mac during second quarter 2014 did not have a material impact on Farmer Mac's interest rate risk profile. The repurchase agreements entered into during second quarter 2014 constitute assets with short-term maturities and, therefore, they exhibit minimal interest rate sensitivity. Additionally, Farmer Mac's repo investment activity is funded through the sale of borrowed collateral, and this collateral must be returned upon the maturity of the repurchase agreements. As a result, the maturities of the assets and liabilities associated with this initiative are effectively matched, and the inclusion of these repurchase agreements in Farmer Mac’s portfolio does not have a material impact on its interest rate risk.

Recognizing that interest rate sensitivity may change with the passage of time and as interest rates change, Farmer Mac assesses this exposure on a regular basis and, if necessary, readjusts its portfolio of assets and liabilities by:
 
purchasing assets in the ordinary course of business;


95

Table of Contents

refunding existing liabilities; or
using financial derivatives to alter the characteristics of existing assets or liabilities.
 
Farmer Mac uses a variety of metrics to quantify and manage its interest rate risk. These metrics include sensitivity to interest rate movements of market value of equity ("MVE") and net interest income ("NII") as well as duration gap analysis. MVE represents management's estimate of the present value of all future cash flows from on- and off-balance sheet assets, liabilities, and financial derivatives, discounted at current interest rates and appropriate spreads. However, MVE is not indicative of the market value of Farmer Mac as a going concern because these market values are theoretical and do not reflect future business activities. MVE sensitivity analysis is used to measure the degree to which the market values of Farmer Mac's assets and liabilities change for a given change in interest rates. Because this analysis evaluates the impact of interest rate movements on the value of all future cash flows, this measure provides an evaluation of Farmer Mac's long-term interest rate risk.

Farmer Mac's NII is the difference between the yield on its interest-earning assets and its funding costs. Farmer Mac's NII may be affected by changes in market interest rates resulting from timing differences between maturities and re-pricing characteristics of assets and liabilities. The direction and magnitude of any such effect depends on the direction and magnitude of the change in interest rates as well as the composition of Farmer Mac's portfolio. The NII forecast represents an estimate of the net interest income that Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, NII sensitivity statistics provide a shorter-term view of Farmer Mac's interest rate sensitivity.

Duration is a measure of a financial instrument's sensitivity to small changes in interest rates. Duration gap is the difference between the estimated durations of Farmer Mac's assets and liabilities. Because duration is a measure of market value sensitivity, duration gap summarizes the extent to which estimated market value sensitivities for assets and liabilities are matched. Duration gap provides a relatively concise measure of the interest rate risk inherent in Farmer Mac's outstanding book of business.

A positive duration gap denotes that the duration of Farmer Mac's assets is greater than the duration of its liabilities. A positive duration gap indicates that the market value of Farmer Mac's assets is more sensitive to small interest rate movements than is the market value of its liabilities. Conversely, a negative duration gap indicates that Farmer Mac's assets are less sensitive to small interest rate movements than are its liabilities.

Each of the metrics is produced using asset/liability models and is derived based on management's best estimates of such factors as projected interest rates, interest rate volatility, and prepayment speeds. Accordingly, these metrics should be understood as estimates rather than precise measurements. In addition, actual results may differ to the extent there are material changes to Farmer Mac's portfolio or changes in strategies undertaken to mitigate unfavorable sensitivities to interest rate changes.



96

Table of Contents

The following schedule summarizes the results of Farmer Mac's MVE and NII sensitivity analysis as of June 30, 2014 and December 31, 2013 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:

Table 19

 
 
Percentage Change in MVE from Base Case
Interest Rate Scenario
 
June 30, 2014
 
December 31, 2013
+100 basis points
 
1.6
 %
 
(2.2
)%
-25 basis points
 
(1.2
)%
 
0.1
 %

 
 
Percentage Change in NII from Base Case
Interest Rate Scenario
 
June 30, 2014
 
December 31, 2013
+100 basis points
 
5.4
 %
 
2.2
 %
-25 basis points
 
(13.5
)%
 
(8.1
)%


Farmer Mac's board of directors has established policies and procedures regarding MVE and NII sensitivity. These policies include the measurement of MVE and NII sensitivity to more severe decreasing interest rate scenarios that are consistent in magnitude with the increasing interest rate scenarios. However, given the low interest rate environment, such rate scenarios produce negative interest rates, and, as a result, do not produce results that are meaningful. Consequently, Farmer Mac measures and reports MVE and NII sensitivity to a down 25 basis point interest rate shock.

As of June 30, 2014 , Farmer Mac's effective duration gap was minus 1.5 months , compared to 0.3 months as of December 31, 2013 .  The preferred stock issued by Farmer Mac during the first and second quarters of 2014 lengthened the duration of Farmer Mac's liabilities, while the year-to-date decrease in longer-term interest rates decreased the duration of the Farmer Mac's assets. As a result, Farmer Mac's duration gap moved from being slightly positive to being slightly negative. Farmer Mac's overall interest rate sensitivity remains relatively low and at manageable levels.

The economic effects of financial derivatives are included in Farmer Mac's MVE, NII, and duration gap analyses.  Farmer Mac enters into the following financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of assets, future cash flows, credit exposure, and debt issuance, not for trading or speculative purposes:
 
"pay-fixed" interest rate swaps, in which Farmer Mac pays fixed rates of interest to, and receives floating rates of interest from, counterparties;
"receive-fixed" interest rate swaps, in which Farmer Mac receives fixed rates of interest from, and pays floating rates of interest to, counterparties; and
"basis swaps," in which Farmer Mac pays variable rates of interest based on one index to, and receives variable rates of interest based on another index from, counterparties.

As of June 30, 2014 , Farmer Mac had $6.5 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to twenty-five years, of which $1.4 billion were pay-fixed interest rate swaps, $4.2 billion were receive-fixed interest rate swaps, and $0.9 billion were basis swaps.



97

Table of Contents

Farmer Mac enters into interest rate swap contracts to adjust the characteristics of its debt to match more closely the cash flow and duration characteristics of its loans and other assets, thereby reducing interest rate risk and often times deriving an overall lower effective cost of borrowing than would otherwise be available to Farmer Mac in the conventional debt market.  Specifically, interest rate swaps synthetically convert the variable cash flows related to the forecasted issuance of short-term debt into effectively fixed rate medium-term notes that match the anticipated duration and interest rate characteristics of the corresponding assets.  Farmer Mac evaluates the overall cost of using the swap market as a funding alternative and uses interest rate swaps to manage specific interest rate risks for specific transactions. Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available-for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e., LIBOR).

Farmer Mac has used callable interest rate swaps (in conjunction with the issuance of short-term debt) as an alternative to callable medium-term notes with equivalently structured maturities and call options.  The call options on the swaps are designed to match the prepayment options on those assets without prepayment protection.  The blended durations of the swaps are also designed to match the duration of the related assets over their estimated lives.  If the assets prepay, the swaps can be called and the short-term debt repaid; if the assets do not prepay, the swaps remain outstanding and the short-term debt is rolled over, effectively providing fixed rate callable funding over the lives of the related assets.  Thus, the economics of the assets are closely matched to the economics of the interest rate swap and funding combination.

As discussed in Note 4 to the consolidated financial statements, all financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives are reported in " (Losses)/gains on financial derivatives and hedging activities " in the consolidated statements of operations . For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items related to the risk being hedged are also reported in " (Losses)/gains on financial derivatives and hedging activities " in the consolidated statements of operations . For financial derivatives designated in cash flow hedging relationships, changes in fair value of the hedged items related to the risk being hedged are reported in " Accumulated other comprehensive income/(loss), net of tax " in the consolidated balance sheets.  All of Farmer Mac's financial derivative transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty.  As of June 30, 2014 , Farmer Mac had uncollateralized net exposures of $1.8 million to three counterparties. As of December 31, 2013 , Farmer Mac had uncollateralized net exposures of $3.0 million to three counterparties.




98

Table of Contents

Liquidity and Capital Resources

Farmer Mac regularly accesses the capital markets for liquidity, and Farmer Mac has maintained access to the capital markets at favorable rates throughout 2013 and during the first half of 2014. Assuming continued access to the capital markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to manage unanticipated disruptions in its access to the capital markets. That plan involves borrowing through repurchase agreement arrangements and the sale of liquid assets. In accordance with the new calculation prescribed by the final rule recently adopted by FCA revising the Liquidity and Investment Regulations, which became effective on April 30, 2014, Farmer Mac is required to maintain a minimum of 90 days of liquidity and use a different methodology for calculating the available days of liquidity. In accordance with the methodology prescribed by those regulations, Farmer Mac maintained an average of 165  days of liquidity during second quarter  2014 and had 168  days of liquidity as of June 30, 2014 . Farmer Mac does not expect that this change in regulation requiring a minimum of 90 days of liquidity, instead of 60 days, will have a material effect on its operations or financial condition. For more information about this final rule, see "—Regulatory Matters."

Debt Issuance .  Farmer Mac funds its purchases of eligible loan assets and investment assets primarily by issuing debt obligations of various maturities through a network of dealers in the public capital markets.  Farmer Mac works to enhance its funding operations by undertaking extensive debt investor relations initiatives, including conducting non-deal roadshows with institutional investors, making periodic dealer sales force presentations, and speaking at fixed income investor conferences throughout the United States. Debt obligations issued by Farmer Mac include discount notes and fixed and floating rate medium-term notes, including callable notes. Farmer Mac also issues discount notes and medium-term notes to obtain funds to finance investment activities, transaction costs, guarantee payments, and LTSPC purchase obligations.  

Farmer Mac's board of directors has authorized the issuance of up to $15.0 billion of discount notes and medium-term notes (of which $11.7 billion was outstanding as of June 30, 2014 ), subject to periodic review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac invests the proceeds of its debt issuances in purchases of loans, Farmer Mac Guaranteed Securities, and investment assets in accordance with policies established by its board of directors and subject to regulations established by FCA.

Liquidity .  The funding and liquidity needs of Farmer Mac's lines of business are driven by the purchase and retention of eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities (including AgVantage securities); the maturities of Farmer Mac's discount notes and medium-term notes; and payment of principal and interest on Farmer Mac Guaranteed Securities.  Farmer Mac's primary sources of funds to meet these needs are the proceeds of its debt issuances, fees for its guarantees and commitments, net effective spread, loan repayments, and maturities of AgVantage securities.
 
Farmer Mac may use a combination of pay-fixed interest rate swaps and receive-fixed interest rate swaps to mitigate its exposure to interest rate risk and monitors the effects of actual and potential fair value changes on its regulatory capital surplus. From time to time, Farmer Mac uses pay-fixed interest rate swaps, combined with a planned series of discount note or short-term floating rate medium-term note issuances, as an alternative source of effectively fixed rate funding. While the swap market may provide favorable effectively fixed rates, interest rate swap transactions expose Farmer Mac to the risk of future variability of its own issuance spreads versus corresponding LIBOR rates. If the spreads on the Farmer


99

Table of Contents

Mac discount notes or short-term floating rate medium-term notes were to deteriorate relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets. Conversely, if the rates on the Farmer Mac discount notes or short-term floating rate medium-term notes were to improve relative to LIBOR, Farmer Mac would benefit from a commensurate increase on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets.

Farmer Mac maintains cash, cash equivalents (including U.S. Treasury securities and other short-term money market instruments), and other investment securities that can be drawn upon for liquidity needs.  The following table presents these assets as of June 30, 2014 and December 31, 2013 :

Table 20

 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Cash and cash equivalents
$
384,123

 
$
749,313

Investment securities:
 

 
 

Guaranteed by U.S. Government and its agencies
1,388,315

 
1,084,187

Guaranteed by GSEs
627,705

 
946,737

Preferred stock issued by GSEs
82,425

 
83,161

Corporate debt securities
93,835

 
195,591

Asset-backed securities
124,563

 
174,399

Total
$
2,700,966

 
$
3,233,388


Farmer Mac's asset-backed investment securities include callable, highly rated auction-rate certificates ("ARCs"), the interest rates on which are reset through an auction process, most commonly at intervals of 28 days, or at formula-based floating rates as set forth in the related transaction documents in the event of a failed auction.  These formula-based floating rates, which may at times reset to zero, are intended to preserve the underlying principal balance of the securities and avoid overall cash shortfalls.  Accordingly, payments of accrued interest may be delayed and are ultimately subject to cash availability. Beginning in mid-February 2008, there were widespread failures of the auction mechanism designed to provide regular liquidity to these types of securities.  Consequently, Farmer Mac has not sold any of its ARCs into the auctions since that time.  All ARCs held by Farmer Mac are collateralized entirely by pools of Federal Family Education Loan Program ("FFELP") guaranteed student loans that are backed by the full faith and credit of the United States.  Farmer Mac continues to believe that the credit quality of these securities is high, based on the underlying collateralization and the securities' ratings.  To date, Farmer Mac has received all interest due on ARCs it holds and expects to continue to do so. Farmer Mac does not believe that the auction failures will affect Farmer Mac's liquidity or its ability to fund its operations or make dividend payments.  All ARCs held by Farmer Mac are callable by the issuers at par at any time.

The carrying value of Farmer Mac's ARCs investments was $55.0 million as of June 30, 2014 , compared to $65.3 million as of December 31, 2013 . During second quarter 2014, Farmer Mac received proceeds of $12.1 million upon the sale of an ARC security resulting in a realized loss of $0.4 million, reflecting a price of 97 percent of par.  As of June 30, 2014 , Farmer Mac's carrying value of its ARCs was 89 percent of par.  The discounted carrying value reflects uncertainty regarding the ability to obtain par in the absence of any active market trading. See Note 8 to the consolidated financial statements for more information on the carrying value of ARCs.



100

Table of Contents

Capital . Farmer Mac is subject to the following statutory and regulatory capital requirements – minimum, critical, and risk-based. Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement. The minimum capital requirement is expressed as a percentage of on-balance sheet assets and off-balance sheet obligations. The critical capital requirement is equal to one-half of the minimum capital amount. Farmer Mac's statutory charter does not specify the required level of risk-based capital but directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters. Certain enforcement powers are given to FCA depending on Farmer Mac's compliance with these capital standards. As of June 30, 2014, Farmer Mac was in compliance with its statutory and regulatory capital requirements. See Note 7 to the consolidated financial statements for more information about Farmer Mac's capital position and see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards" in the Segment Recast 8-K for more information on the statutory and regulatory capital requirements applicable to Farmer Mac.

In accordance with FCA's rule on capital planning that became effective on January 3, 2014 and as part of its capital plan submitted in compliance with this rule, Farmer Mac has adopted a policy for maintaining a sufficient level of "Tier 1" capital (consisting of retained earnings, paid-in-capital, common stock, qualifying preferred stock, and accumulated other comprehensive income allocable to investments not included in one of the four operating lines of business) and imposing restrictions on Tier 1-eligible dividends and employee (including officer) bonus payments in the event that Tier 1 capital falls below specified thresholds. For more information on Farmer Mac's capital adequacy policy and on FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards" in the Segment Recast 8-K. As of June 30, 2014, Farmer Mac was in compliance with its capital adequacy policy.

Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC, though it does not constitute a Tier 1 capital-eligible security. In an effort to increase Farmer Mac's Tier 1 capital, as defined under Farmer Mac's capital plan, Farmer Mac issued the Series B Preferred Stock and Series C Preferred Stock in first and second quarter 2014, respectively. As a result, Farmer Mac II LLC intends to redeem all of the outstanding Farmer Mac II LLC Preferred Stock on March 30, 2015, the initial redemption date, at a cash redemption price equal to the liquidation preference with the proceeds of the recent preferred stock offerings and cash on hand. Farmer Mac does not currently anticipate that any further issuance of preferred stock will be needed to fund the planned redemption of the Farmer Mac II LLC Preferred Stock. In addition, prior to the initial redemption date on March 30, 2015, Farmer Mac or an affiliated third party may purchase the FALConS, representing undivided beneficial ownership interests in 250,000 shares of Farmer Mac II LLC Preferred Stock, from time to time in the open market, in privately negotiated transactions or through a public tender offer, and, subject to favorable market conditions, may seek to do so. In May 2014, Farmer Mac purchased $6.0 million of FALConS from certain holders. For more information on the Farmer Mac II LLC Preferred Stock, see "Business—Financing—Equity Issuance—Non-Controlling Interest in Farmer Mac II LLC" in the Segment Recast 8-K. For more information on Farmer Mac's capital plan, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards" in the Segment Recast 8-K.



101

Table of Contents

Regulatory Matters

The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets. Certain provisions of the Dodd-Frank Act, including those regarding derivatives, corporate governance, and executive compensation, apply to Farmer Mac. Farmer Mac does not expect that any of the final rules that have been passed or that are anticipated to be passed under the Dodd-Frank Act will have a material effect on Farmer Mac's business activities and operations or financial condition. Farmer Mac will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expects to be able to adapt successfully to any new applicable legislative and regulatory requirements.

On October 10, 2013, FCA adopted a final rule to revise the Liquidity and Investment Regulations governing the management of liquidity risk at Farmer Mac. The final rule adopted by FCA increases the minimum days-of-liquidity requirement for Farmer Mac's liquidity reserve from 60 to 90 days of maturing obligations, and also requires progressively higher-quality liquid assets to meet progressively shorter time intervals of obligations within the new 90-day minimum period. This rule was published in the Federal Register on November 1, 2013 and became effective on April 30, 2014. Farmer Mac does not expect its compliance with the final rule on liquidity management to materially affect Farmer Mac's operations or financial condition. The final rule adopted on October 10, 2013 complements the final rule published by FCA on November 5, 2012 amending the Liquidity and Investment Regulations to address investment eligibility and management. FCA also has sought public comment regarding the use of credit ratings in the Liquidity and Investment Regulations, in accordance with the Dodd-Frank Act, for purposes of a final rule to be published at a later date.

On February 25, 2014, FCA published in the Federal Register an advance notice of proposed rulemaking (the "ANPRM") seeking public comment on Farmer Mac's board governance and standards of conduct, including director election procedures, director fiduciary duties, conflicts of interest, and risk governance. Farmer Mac submitted comments on the ANPRM to FCA on April 28, 2014.


Other Matters

Common Stock Dividends . For each of first and second quarter in 2014, Farmer Mac paid a quarterly dividend of $0.14 per share on all classes of its common stock. For each quarter in 2013, Farmer Mac paid a quarterly dividend of $0.12 per share on all classes of its common stock. Farmer Mac's ability to declare and pay dividends on common stock could be restricted if it fails to comply with applicable capital requirements. See "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards—Enforcement Levels" in the Segment Recast 8-K.

Preferred Stock Dividends . For each of first and second quarter 2014 and the last three quarters of 2013, Farmer Mac paid a quarterly dividend of $0.3672 per share on its Series A Preferred Stock. Farmer Mac's Series B Preferred Stock was issued on March 25, 2014, and the initial dividend of $0.105 per share (for the period from, but not including, the issuance date through and including April 17, 2014) was paid on the regularly scheduled payment date of April 17, 2014, and a quarterly dividend of $0.4297 was paid on the regularly scheduled payment date of July 17, 2014. No dividends have been paid on Farmer Mac's currently outstanding Series C Preferred Stock, which was issued on June 20, 2014. For first quarter 2013, Farmer Mac paid a quarterly dividend of $2.36 per share on its retired Series C Preferred Stock issued in 2008 and 2009. The retired Series C Preferred Stock was retired and redeemed on January 17,


102

Table of Contents

2013 with the proceeds from the issuance of the Series A Preferred Stock. Farmer Mac's ability to declare and pay dividends on preferred stock could be restricted if it fails to comply with applicable capital requirements. See Note 7 to the consolidated financial statements for more information on the terms of the Farmer Mac's currently outstanding preferred stock and the retired Series C Preferred Stock.

Non-controlling Interest-Preferred Stock Dividends . For each of first and second quarter 2014 and for each quarter during 2013, Farmer Mac II LLC paid a quarterly dividend of $22.1875 per share on the Farmer Mac II Preferred Stock. Farmer Mac's net income attributable to non-controlling interest totaled $5.8 million and $11.4 million , respectively, for the three and six months ended June 30, 2014 compared to $5.5 million and $11.1 million , respectively, for the three and six months ended June 30, 2013. These amounts represent the dividends paid on the Farmer Mac II LLC Preferred Stock held by third parties. Farmer Mac's income tax expense is determined based on income before income taxes less the amount of these dividends.

Supplemental Information

The following tables present quarterly and annual information regarding purchases and repayments of loans, guarantees, and LTSPCs and outstanding loans, guarantees, and LTSPCs:

Table 21
Farmer Mac New Purchases, Guarantees, and LTSPCs
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
LTSPCs
 
USDA Securities
 
Loans
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
$
159,116

 
$
34,850

 
$
90,785

 
$
4,689

 
$
300,775

 
$
590,215

March 31, 2014
192,407

 
185,594

 
67,984

 
53,903

 
228,690

 
728,578

December 31, 2013
245,770

 
75,731

 
58,438

 
41,374

 
295,000

 
716,313

September 30, 2013
193,089

 
198,783

 
70,372

 
5,107

 
353,500

 
820,851

June 30, 2013
226,135

 
99,504

 
110,897

 
10,222

 
200,000

 
646,758

March 31, 2013
159,887

 
166,780

 
122,187

 
30,262

 
425,000

 
904,116

December 31, 2012
181,555

 
378,258

 
102,339

 
56,638

 
133,406

 
852,196

September 30, 2012
132,882

 
115,757

 
114,974

 
26,843

 
451,000

 
841,456

June 30, 2012
145,423

 
70,458

 
165,613

 
58,286

 
200,000

 
639,780

 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
824,881

 
540,798

 
361,894

 
86,965

 
1,273,500

 
3,088,038

December 31, 2012
570,346

 
744,110

 
484,651

 
166,117

 
984,406

 
2,949,630





103

Table of Contents

Table 22
Farmer Mac Repayments of Loans, Guarantees and LTSPCs, and USDA Guarantees
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
9,813

 
$
13,623

 
$
52,622

 
$
28,681

 
$

 
$
361,831

 
$
466,570

Unscheduled
45,094

 
13,575

 
42,550

 
38,465

 
19,622

 

 
159,306

June 30, 2014
$
54,907

 
$
27,198

 
$
95,172

 
$
67,146

 
$
19,622

 
$
361,831

 
$
625,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
41,587

 
$
24,430

 
$
48,157

 
$
29,319

 
$
23,744

 
$
176,268

 
$
343,505

Unscheduled
63,329

 
9,747

 
59,856

 
39,086

 
55,164

 

 
227,182

March 31, 2014
$
104,916

 
$
34,177

 
$
108,013

 
$
68,405

 
$
78,908

 
$
176,268

 
$
570,687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
6,729

 
$
24,367

 
$
36,063

 
$
17,463

 
$
6,897

 
$
303,087

 
$
394,606

Unscheduled
54,277

 
11,586

 
61,147

 
30,651

 

 

 
157,661

December 31, 2013
$
61,006

 
$
35,953

 
$
97,210

 
$
48,114

 
$
6,897

 
$
303,087

 
$
552,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
34,455

 
$
13,133

 
$
47,143

 
$
21,235

 
$
31,994

 
$
258,488

 
$
406,448

Unscheduled
84,889

 
12,232

 
81,761

 
39,514

 
5,259

 

 
223,655

September 30, 2013
$
119,344

 
$
25,365

 
$
128,904

 
$
60,749

 
$
37,253

 
$
258,488

 
$
630,103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
7,242

 
$
11,749

 
$
50,222

 
$
26,056

 
$

 
$
206,511

 
$
301,780

Unscheduled
46,479

 
17,682

 
57,385

 
65,776

 

 

 
187,322

June 30, 2013
$
53,721

 
$
29,431

 
$
107,607

 
$
91,832

 
$

 
$
206,511

 
$
489,102

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
34,014

 
$
28,453

 
$
37,262

 
$
29,918

 
$
22,509

 
$
77,925

 
$
230,081

Unscheduled
101,180

 
26,417

 
64,021

 
59,743

 

 

 
251,361

March 31, 2013
$
135,194

 
$
54,870

 
$
101,283

 
$
89,661

 
$
22,509

 
$
77,925

 
$
481,442

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
3,691

 
$
28,695

 
$
12,347

 
$
17,299

 
$

 
$
3,600

 
$
65,632

Unscheduled
43,414

 
35,655

 
91,679

 
68,687

 

 

 
239,435

December 31, 2012
$
47,105

 
$
64,350

 
$
104,026

 
$
85,986

 
$

 
$
3,600

 
$
305,067

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
25,076

 
$
13,918

 
$
22,173

 
$
21,357

 
$
24,260

 
$
251,801

 
$
358,585

Unscheduled
97,030

 
20,869

 
69,828

 
73,578

 
3,927

 

 
265,232

September 30, 2012
$
122,106

 
$
34,787

 
$
92,001

 
$
94,935

 
$
28,187

 
$
251,801

 
$
623,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
10,252

 
$
13,624

 
$
18,501

 
$
23,587

 
$
3,564

 
$
151,001

 
$
220,529

Unscheduled
85,241

 
13,295

 
44,239

 
92,481

 

 

 
235,256

June 30, 2012
$
95,493

 
$
26,919

 
$
62,740

 
$
116,068

 
$
3,564

 
$
151,001

 
$
455,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
82,440

 
$
77,702

 
$
170,690

 
$
94,672

 
$
61,400

 
$
846,011

 
$
1,332,915

Unscheduled
286,825

 
67,917

 
264,314

 
195,684

 
5,259

 

 
819,999

December 31, 2013
$
369,265

 
$
145,619

 
$
435,004

 
$
290,356

 
$
66,659

 
$
846,011

 
$
2,152,914

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
75,975

 
$
76,997

 
$
92,649

 
$
88,804

 
$
46,272

 
$
502,102

 
$
882,799

Unscheduled
302,364

 
93,765

 
271,444

 
293,445

 
3,927

 

 
964,945

December 31, 2012
$
378,339

 
$
170,762

 
$
364,093

 
$
382,249

 
$
50,199

 
$
502,102

 
$
1,847,744





104

Table of Contents

Table 23

Outstanding Balance of Farmer Mac Loans, Guarantees and LTSPCs, and USDA Guarantees
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
AgVantage
 
Total
 
(in thousands)
As of:
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
$
2,327,167

 
$
704,376

 
$
2,279,121

 
$
1,710,335

 
$
1,012,313

 
$
6,039,230

 
$
14,072,542

March 31, 2014
2,222,958

 
731,574

 
2,339,443

 
1,686,696

 
1,027,246

 
6,100,286

 
14,108,203

December 31, 2013
2,135,467

 
765,751

 
2,261,862

 
1,687,117

 
1,052,251

 
6,047,864

 
13,950,312

September 30, 2013
1,950,704

 
801,703

 
2,283,341

 
1,676,793

 
1,017,774

 
6,055,951

 
13,786,266

June 30, 2013
1,876,958

 
827,069

 
2,213,462

 
1,667,170

 
1,049,920

 
5,960,939

 
13,595,518

March 31, 2013
1,704,544

 
856,500

 
2,221,565

 
1,648,105

 
1,039,698

 
5,967,450

 
13,437,862

December 31, 2012
1,679,851

 
911,370

 
2,156,068

 
1,615,579

 
1,031,945

 
5,620,375

 
13,015,188

September 30, 2012
1,545,401

 
975,720

 
1,881,836

 
1,599,226

 
975,307

 
5,490,569

 
12,468,059

June 30, 2012
1,534,625

 
1,010,507

 
1,858,080

 
1,579,187

 
976,651

 
5,291,370

 
12,250,420



Table 24

Outstanding Balance of Loans Held,
On-Balance Sheet AgVantage Securities, and USDA Securities
 
Fixed Rate
 
5- to 10-Year ARMs & Resets
 
1-Month to 3-Year ARMs
 
Total Held in Portfolio
 
(in thousands)
As of:
 
 
 
 
 
 
 
June 30, 2014
$
4,955,560

 
$
1,881,625

 
$
3,247,011

 
$
10,084,196

March 31, 2014
4,890,979

 
1,834,352

 
3,304,094

 
10,029,425

December 31, 2013
4,980,500

 
1,827,744

 
3,113,224

 
9,921,468

September 30, 2013
4,970,420

 
1,802,255

 
2,924,785

 
9,697,460

June 30, 2013
4,714,119

 
1,871,225

 
2,964,004

 
9,549,348

March 31, 2013
4,670,617

 
1,797,456

 
2,883,474

 
9,351,547

December 31, 2012
4,483,454

 
1,803,866

 
2,648,103

 
8,935,423

September 30, 2012
4,904,265

 
1,213,588

 
2,473,086

 
8,590,939

June 30, 2012
5,035,743

 
1,259,568

 
2,063,490

 
8,358,801





105

Table of Contents

The following table presents the quarterly net effective spread by business segment:

Table 25

 
Net Effective Spread by Business Segment
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Net Effective Spread
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
$
7,820

 
1.64
%
 
$
4,159

 
0.99
%
 
$
2,953

 
1.16
%
 
$
7,257

 
0.57
%
 
$
4,160

 
0.57
%
 
$
26,349

 
0.84
%
March 31, 2014 (1)
7,114

 
1.53
%
 
3,784

 
0.91
%
 
1,990

 
0.73
%
 
6,672

 
0.53
%
 
4,142

 
0.56
%
 
23,702

 
0.75
%
December 31, 2013 (1)
10,113

 
2.20
%
 
4,022

 
0.97
%
 
2,379

 
0.89
%
 
6,210

 
0.49
%
 
4,420

 
0.58
%
 
27,144

 
0.85
%
September 30, 2013
7,980

 
1.86
%
 
4,505

 
1.09
%
 
2,974

 
1.12
%
 
6,205

 
0.49
%
 
4,117

 
0.57
%
 
25,781

 
0.83
%
June 30, 2013
8,228

 
2.08
%
 
4,508

 
1.12
%
 
3,056

 
1.14
%
 
5,977

 
0.48
%
 
4,294

 
0.63
%
 
26,063

 
0.87
%
March 31, 2013
8,083

 
2.20
%
 
4,694

 
1.17
%
 
3,183

 
1.20
%
 
5,863

 
0.50
%
 
4,440

 
0.61
%
 
26,263

 
0.90
%
December 31, 2012
7,936

 
2.24
%
 
4,718

 
1.21
%
 
3,154

 
1.22
%
 
5,970

 
0.52
%
 
4,682

 
0.61
%
 
26,460

 
0.91
%
September 30, 2012
8,317

 
2.49
%
 
4,375

 
1.13
%
 
3,260

 
1.29
%
 
6,096

 
0.55
%
 
5,208

 
0.66
%
 
27,256

 
0.95
%
June 30, 2012
8,980

 
2.78
%
 
4,398

 
1.16
%
 
2,995

 
1.22
%
 
5,954

 
0.56
%
 
4,881

 
0.67
%
 
27,208

 
0.99
%
(1)
First quarter 2014 includes the impact of spread compression in the Rural Utilities line of business from the early refinancing of loans (41 basis points). Fourth quarter 2013 includes the impact in net effective spread in the Farm & Ranch line of business of one-time adjustments for recovered buyout interest and yield maintenance (40 basis points in aggregate) and the impact of spread compression in the Rural Utilities line of business from the early refinancing of loans (26 basis points).





106

Table of Contents

The following table presents quarterly core earnings reconciled to net income attributable to common stockholders:
Table 26
Core Earnings by Quarter Ended
 
June 2014
 
March 2014
 
December 2013
 
September 2013
 
June 2013
 
March 2013
 
December 2012
 
September 2012
 
June 2012
 
 (in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net effective spread (1)
$
26,349

 
$
23,702

 
$
27,144

 
$
25,781

 
$
26,063

 
$
26,263

 
$
26,460

 
$
27,256

 
$
27,209

Guarantee and commitment fees
6,916

 
7,049

 
7,130

 
7,046

 
6,954

 
6,792

 
6,764

 
6,591

 
6,607

Other (2)
(520
)
 
(410
)
 
427

 
(466
)
 
3,274

 
186

 
393

 
384

 
(294
)
Total revenues
32,745

 
30,341

 
34,701

 
32,361

 
36,291

 
33,241

 
33,617

 
34,231

 
33,522

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit related (income)/expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Release of)/provision for losses
(2,557
)
 
674

 
12

 
(36
)
 
(704
)
 
1,176

 
1,157

 
94

 
174

REO operating expenses
59

 
2

 
3

 
35

 
259

 
126

 
47

 
66

 
15

(Gains)/losses on sale of REO
(168
)
 
3

 
(26
)
 
(39
)
 
(1,124
)
 
(47
)
 
(629
)
 
13

 
(262
)
Total credit related (income)/expense
(2,666
)
 
679

 
(11
)
 
(40
)
 
(1,569
)
 
1,255

 
575

 
173

 
(73
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
4,889

 
4,456

 
4,025

 
4,523

 
4,571

 
4,698

 
5,752

 
4,375

 
4,574

General and administrative
3,288

 
2,794

 
3,104

 
2,827

 
2,715

 
2,917

 
2,913

 
2,788

 
2,664

Regulatory fees
594

 
594

 
594

 
593

 
594

 
594

 
594

 
562

 
562

Total operating expenses
8,771

 
7,844

 
7,723

 
7,943

 
7,880

 
8,209

 
9,259

 
7,725

 
7,800

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
26,640

 
21,818

 
26,989

 
24,458

 
29,980

 
23,777

 
23,783

 
26,333

 
25,795

Income tax (benefit)/expense (3)
(4,734
)
 
4,334

 
5,279

 
6,263

 
7,007

 
6,081

 
5,914

 
6,682

 
6,627

Non-controlling interest
5,819

 
5,547

 
5,546

 
5,547

 
5,547

 
5,547

 
5,546

 
5,547

 
5,547

Preferred stock dividends
2,308

 
952

 
882

 
881

 
881

 
851

 
720

 
719

 
720

Core earnings
$
23,247

 
$
10,985

 
$
15,282

 
$
11,767

 
$
16,545

 
$
11,298

 
$
11,603

 
$
13,385

 
$
12,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciling items (after-tax effects):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses)/gains on financial derivatives and hedging activities
(3,053
)
 
(2,395
)
 
8,003

 
4,632

 
11,021

 
5,712

 
4,719

 
3,456

 
(14,035
)
Unrealized (losses)/gains on trading assets
(46
)
 
426

 
(50
)
 
(407
)
 
(212
)
 
136

 
1,778

 
(286
)
 
(2,006
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(179
)
 
(8,027
)
 
(10,864
)
 
(421
)
 
(564
)
 
(618
)
 
(4,534
)
 
(873
)
 
(901
)
Net effects of settlements on agency forwards
236

 
(176
)
 
114

 
(158
)
 
955

 
(338
)
 
(102
)
 
699

 
(250
)
Lower of cost or fair value adjustments on loans held for sale

 

 

 

 

 

 
(3,863
)
 

 

Net income/(loss) attributable to common stockholders
$
20,205

 
$
813

 
$
12,485

 
$
15,413

 
$
27,745

 
$
16,190

 
$
9,601

 
$
16,381

 
$
(4,291
)
(1)
The difference between first quarter 2014 and fourth quarter 2013 net effective spread was due to the impact of one-time adjustments for recovered buyout interest and yield maintenance of $1.8 million in fourth quarter 2013, $0.4 million associated with the early refinancing of AgVantage securities and the recasting of certain Rural Utilities loans, and a lower day count in first quarter 2014.
(2)
First quarter 2014 includes additional hedging costs of $0.6 million. Fourth quarter 2013 includes gains on the repurchase of debt of $1.5 million,
partially offset by realized losses on the sale of available-for-sale securities of $0.9 million and additional hedging costs of $0.2 million. Second quarter 2013 includes $3.1 million of realized gains from the sale of an available-for-sale investment security.
(3)
Second quarter 2014 reflects a reduction of $11.6 million of tax valuation allowance against capital loss carryforwards related to expected capital gains on securities sold, not yet purchased. First quarter 2014 and fourth quarter 2013 reflect a reduction in tax valuation allowance of $0.9 million and $2.1 million, respectively, associated with certain gains on investment portfolio assets. Second quarter 2013 includes the reduction of $1.1 million of tax valuation allowance against capital loss carryforwards related to realized gains from the sale of an available-for-sale investment security.


107

Table of Contents

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Farmer Mac is exposed to market risk from changes in interest rates.  Farmer Mac manages this market risk by entering into various financial transactions, including financial derivatives, and by monitoring and measuring its exposure to changes in interest rates.  See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" for more information about Farmer Mac's exposure to interest rate risk and its strategies to manage such risk.  For information regarding Farmer Mac's use of financial derivatives and related accounting policies, see Note 4 to the consolidated financial statements.

Item 4.
Controls and Procedures

(a) Management's Evaluation of Disclosure Controls and Procedures . Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its periodic filings under the Securities Exchange Act of 1934 (the “Exchange Act”), including this report, is recorded, processed, summarized, and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to Farmer Mac's management on a timely basis to allow decisions regarding required disclosure. Management, including Farmer Mac's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Farmer Mac's disclosure controls and procedures (as defined under Rules 13a‑15(e) and 15d‑15(e) of the Exchange Act) as of June 30, 2014 .
 
Farmer Mac carried out the evaluation of the effectiveness of its disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Farmer Mac's disclosure controls and procedures were effective as of June 30, 2014 .

(b) Changes in Internal Control Over Financial Reporting . There were no changes in Farmer Mac's internal control over financial reporting during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial reporting.



108


PART II

Item 1.
Legal Proceedings

None.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 13, 2014, and in Farmer Mac's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 12, 2014.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Farmer Mac is a federally chartered instrumentality of the United States and its debt and equity securities are exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933.
  
During second quarter 2014, the following transactions related to Farmer Mac's equity securities that were not registered under the Securities Act of 1933 and not otherwise reported on a Current Report on Form 8-K occurred:

Class C non-voting common stock . Under Farmer Mac's policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 176 shares of its Class C non-voting common stock on April 11, 2014 to the five directors who elected to receive stock in lieu of their cash retainers. Farmer Mac calculated the number of shares issued to the directors based on a price of $33.25 per share, which was the closing price of the Class C non-voting common stock on March 31, 2014 as reported by the New York Stock Exchange.

On April 21, 2014, Farmer Mac granted stock appreciation rights under its 2008 Omnibus Incentive Plan with respect to an aggregate of 58,000 shares of Class C non-voting common stock, at an exercise price of $35.60 per share, to seventeen employees as incentive compensation. On that same day, Farmer Mac also granted 1,549 shares of restricted stock to one employee under its 2008 Omnibus Incentive Plan. All of those shares of restricted stock will "cliff" vest three years after the grant date if the employee remains employed by Farmer Mac at that time.

Series C Preferred Stock . On June 20, 2014, Farmer Mac issued $75.0 million (3,000,000 shares) of its Series C Preferred Stock. The Series C Preferred Stock has a liquidation preference of $25.00 per share, for net cash proceeds to Farmer Mac of $73,520,250 ($75.0 million in gross proceeds less underwriting discount). BofA Merrill Lynch served as sole book-running manager for this transaction, and Compass Point Research & Trading, LLC, Sidoti & Company, LLC, and Sterne, Agee & Leach, Inc. served as co-managers. The Series C Preferred Stock was offered in reliance on an exemption from registration under Section 3(a)(2) of the Securities Act of 1933. The Series C Preferred Stock is not convertible or exchangeable into any other class or series of equity of Farmer Mac.

(b)
Not applicable.


109



(c)
None.

Item 3. Defaults Upon senior Securities

(a) None.

(b) None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.     Other Information

(a) None.

(b) None.




110

Table of Contents

Item 6. Exhibits

*
 
3.1
 
 
Title VIII of the Farm Credit Act of 1971, as most recently amended by the Food, Conservation and Energy Act of 2008 (Previously filed as Exhibit to Form 10-Q filed August 12, 2008).
*
 
3.2
 
 
Amended and Restated By-Laws of the Registrant (Previously filed as Exhibit 3.1 to Form 8-K filed June 9, 2014).
*
 
4.1
 
 
Specimen Certificate for Farmer Mac Class A Voting Common Stock (Previously filed as Exhibit 4.1 to Form 10-Q filed May 15, 2003).
*
 
4.2
 
 
Specimen Certificate for Farmer Mac Class B Voting Common Stock (Previously filed as Exhibit 4.2 to Form 10-Q filed May 15, 2003).
*
 
4.3
 
 
Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Previously filed as Exhibit 4.3 to Form 10-Q filed May 15, 2003).
*
 
4.4
 
 
Specimen Certificate for 5.875% Non-Cumulative Preferred Stock, Series A (Previously filed as Exhibit 4.4.1 to Form 10-Q filed May 9, 2013).
*
 
4.4.1
 
 
Certificate of Designation of Terms and Conditions of 5.875% Non-Cumulative Preferred Stock, Series A (Previously filed as Exhibit 4.1 to Form 8-A filed January 17, 2013).
*
 
4.5
 
 
Specimen Certificate for 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as Exhibit 4.5 to Form 10-Q filed May 12, 2014).
*
 
4.5.1
 
 
Certificate of Designation of Terms and Conditions of 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as Exhibit 4.1 to Form 8-A filed March 25, 2014).
**
 
4.6
 
 
Specimen Certificate for 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C.
*
 
4.6.1
 
 
Certificate of Designation of Terms and Conditions of 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.1 to Form 8-A filed June 20, 2014).
*†
 
10.1
 
 
Description of compensation arrangement between Farmer Mac and its directors (Previously filed as Exhibit 10.1 to Form 10-Q filed May 12, 2014).
*
 
21
 
 
List of the Registrant's subsidiaries (Previously filed as Exhibit 21 to Form 10-K filed March 16, 2010).
**
 
31.1
 
 
Certification of Registrant's principal executive officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**
 
31.2
 
 
Certification of Registrant's principal financial officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**
 
32
 
 
Certification of Registrant's principal executive officer and principal financial officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
 
101.INS
 
 
XBRL Instance Document.
**
 
101.SCH
 
 
XBRL Taxonomy Extension Schema Document.
**
 
101.CAL
 
 
XBRL Taxonomy Calculation Linkbase Document.
**
 
101.DEF
 
 
XBRL Taxonomy Definition Linkbase Document.
**
 
101.LAB
 
 
XBRL Taxonomy Label Linkbase Document.
**
 
101.PRE
 
 
XBRL Taxonomy Presentation Linkbase Document.

*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
Management contract or compensatory plan


111

Table of Contents

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

          /s/ Timothy L. Buzby
 
August 11, 2014
By:
Timothy L. Buzby
 
Date
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 

          /s/ R. Dale Lynch
 
August 11, 2014
By:
R. Dale Lynch
 
Date
 
Senior Vice President – Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
    





112

Established under the Laws of the United States Pursuant to an Act of Congress
 
Series C
Certificate No.
 
1
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
 
No. of Series C Shares
3,000,000  
         CUSIP No.: 313148 876
6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C
THIS CERTIFIES THAT Cede & Co. is the registered holder of 3,000,000 fully paid and non-assessable shares, par value $25.00 per share, of 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C of the Federal Agricultural Mortgage Corporation (hereinafter and on the reverse hereof referred to as the “ Corporation ”) transferable on the books and records of the Continental Stock Transfer & Trust Company (the “ Transfer Agent ”) in accordance with the applicable procedures of the Transfer Agent and the Depository Trust Company, a New York corporation (“ DTC ”).
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officers this 20 th day of June, 2014.

           SPECIMEN
     
President and Chief Executive Officer

            SPECIMEN
     
Senior Vice President – General Counsel
and Secretary
THE PREFERRED STOCK IS NOT A DEBT OR OBLIGATION OF, AND IS NOT GUARANTEED BY, THE UNITED STATES, THE FARM CREDIT ADMINISTRATION OR ANY FEDERAL AGENCY OR INSTRUMENTALITY OTHER THAN THE FEDERAL AGRICULTURAL MORTGAGE CORPORATION.
THE INFORMATION CONTAINED IN THIS CERTIFICATE IS A SUMMARY OF CERTAIN PROVISIONS OF TITLE VIII OF THE FARM CREDIT ACT OF 1971, AS AMENDED (THE “ACT”), WHICH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE THERETO.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND ARE BEING ISSUED PURSUANT TO THE EXEMPTION AFFORDED BY SECTION 3(a)(2) OF THE SECURITIES ACT. THEREFORE, THE





SECURITIES ARE NOT RESTRICTED SECURITIES AND ARE FREELY TRANSFERABLE.
THE HOLDER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS ENTITLED TO CERTAIN RIGHTS AND SUBJECT TO CERTAIN OBLIGATIONS, INCLUDING PROVISIONS RELATING TO REDEMPTION, LIQUIDATION PREFERENCES AND DIVIDEND RATE, AS SET FORTH IN THE CERTIFICATE OF DESIGNATION OF TERMS AND CONDITIONS OF 6.000 % FIXED-TO-FLOATING RATE NON-CUMULATIVE PREFERRED STOCK, SERIES C. THE SECURITIES EVIDENCED BY THIS CERTIFICATE SHALL NOT HAVE ANY PREEMPTIVE RIGHTS TO PURCHASE UNISSUED OR TREASURY SHARES OF THE CORPORATION.
THIS CERTIFICATE AND SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL BE SUBJECT TO THE PROVISIONS OF THE ACT, AND THE BYLAWS, RULES AND REGULATIONS OF THE CORPORATION, AND ALL AMENDMENTS THERETO, TO ALL OF WHICH THE HOLDER HEREOF BY ACCEPTANCE OF THIS CERTIFICATE ASSENTS.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK, INCLUDING ADDITIONAL PREFERRED STOCK DESIGNATED AS 6.000% FIXED-TO-FLOATING RATE NON-CUMULATIVE PREFERRED STOCK, SERIES C. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES, AND RELATIVE, PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, TO THE CORPORATION OR THE TRANSFER AGENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.







REVERSE OF SECURITY
1.
Designation, Par Value, Number of Shares, and Seniority
The class of preferred stock of Farmer Mac created hereby (the “Preferred Stock”) shall be designated “6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C,” shall have a par value of $25.00 per share and a liquidation preference of $25.00 per share, and shall consist of 3,000,000 shares. The Board of Directors, or a duly authorized committee thereof, shall be permitted to increase the authorized number of such shares at any time and from time to time. The Preferred Stock shall rank senior to the Class A Voting Common Stock, Class B Voting Common Stock, and Class C Non-Voting Common Stock of Farmer Mac (collectively, the “Common Stock”), and on parity with the outstanding 5.875% Non-Cumulative Preferred Stock, Series A and the outstanding 6.875% Non-Cumulative Preferred Stock, Series B of Farmer Mac, in each case to the extent provided in this Certificate.
2.
Dividends
(a) Subject to paragraphs (2) and (3) of Section 8.4(c) of the Farm Credit Act of 1971, as amended (12 U.S.C. §§ 2279aa-4(c)), holders of outstanding shares of the Preferred Stock shall be entitled to receive, ratably, when, as, and if declared by the Board of Directors, in its sole discretion, out of funds legally available for dividend payments, on a non-cumulative basis, quarterly cash dividends at a fixed rate of 6.000% per year of the liquidation preference of the Preferred Stock, or $1.50 per share of Preferred Stock per year from the original issue date to, and including, July 17, 2024, and thereafter, at a floating rate of three month U.S. dollar LIBOR on the applicable LIBOR Determination Date determined in the manner described below plus 3.26% per year of the liquidation preference of the Preferred Stock.
Dividends on the Preferred Stock shall be payable when, as, and if declared by the Board of Directors, on January 17, April 17, July 17, and October 17 of each year (each, a “Dividend Payment Date”), beginning on October 17, 2014. If a Dividend Payment Date is not a “Business Day,” the related dividend (if declared) shall be paid on the next Business Day, unless after July 17, 2024, such Dividend Payment Date falls in the next calendar month, in which case the Dividend Payment Date will be the immediately preceding day that is a Business Day, in each case with the same force and effect as though paid on the Dividend Payment Date without any adjustment to account for the period between such Dividend Payment Date and the date of the actual payment. For these purposes, “Business Day” means a day other than (i) a Saturday or Sunday, (ii) a day on which New York City banks are closed, or (iii) a day on which the offices of Farmer Mac are closed. The “Dividend Period” relating to a Dividend Payment Date shall be the period from, but not including, the preceding Dividend Payment Date (or from, but not including, June 20, 2014 in the case of the first Dividend Payment Date) (regardless of whether






or not a dividend was declared and paid for such previous Dividend Period) through and including the related Dividend Payment Date. Dividends payable on the Preferred Stock for any Dividend Period beginning prior to July 17, 2024 will be calculated on the basis of a 360-day year consisting of twelve 30-day months, and any dividends payable for Dividend Periods beginning after such date will be calculated on the basis of a 360-day year and the actual number of days elapsed in the Dividend Period.
For any Dividend Period commencing after July 17, 2024, three month U.S. dollar LIBOR will be determined by the calculation agent on the second London Business Day immediately preceding the first day of such Dividend Period (the “ LIBOR Determination Date ”) in the following manner:
Three month U.S. dollar LIBOR will be the offered rate per year for three-month deposits in U.S. dollars, beginning on the first day of such period, as that rate appears on Reuters screen LIBOR01 (or any successor or replacement page) as of approximately 11:00 A.M., London time, on the second London Business Day immediately preceding the first day of such Dividend Period.
If the rate described above does not so appear on the Reuters screen LIBOR01 (or any successor or replacement page), then three month U.S. dollar LIBOR will be determined on the basis of the rates, at approximately 11:00 A.M., London time, on the second London Business Day immediately preceding the first day of such Dividend Period, at which deposits of the following kind are offered to prime banks in the London interbank market by four major banks in that market selected by the calculation agent: three-month deposits in U.S. dollars, beginning on the first day of such Dividend Period, and in a Representative Amount. The calculation agent will request the principal London office of each of these banks to provide a quotation of its rate. If at least two quotations are provided, three month U.S. dollar LIBOR for the second London Business Day immediately preceding the first day of such Dividend Period will be the arithmetic mean of all such quotations.
If fewer than two of the requested quotations described above are provided, three month U.S. dollar LIBOR for the second London Business Day immediately preceding the first day of such Dividend Period will be the arithmetic mean of the rates for loans of the following kind to leading European banks quoted, at approximately 11:00 A.M., New York City time, on the second London Business Day immediately preceding the first day of such Dividend Period, by three major banks in New York City selected by the calculation agent: three-month loans of U.S. dollars, beginning on the first day of such Dividend Period, and in a Representative Amount.






If no quotation is provided as described above, then the calculation agent, after consulting such sources as it deems comparable to any of the foregoing quotations or display page, or any such source as it deems reasonable from which to estimate three month U.S. dollar LIBOR or any of the foregoing lending rates, shall determine three month U.S. dollar LIBOR for the second London Business Day immediately preceding the first day of such Dividend Period in its sole discretion.
The calculation agent’s determination of any dividend rate, and its calculation of the amount of dividends for any Dividend Period, will be on file at our principal offices, will be made available to any stockholder upon request, and will be final and binding, in the absence of manifest error. For purposes of this Section 2(a), (1) the term “Representative Amount” means an amount that, in the calculation agent’s judgment, is representative of a single transaction in U.S. dollars in the relevant market at the relevant time; (2) the term “London Business Day” means a day that is a Monday, Tuesday, Wednesday, Thursday, or Friday and is a day on which dealings in U.S. dollars are transacted in the London interbank market; (3) the term “Reuters screen” means the display on the Reuters 3000 Xtra service, or any successor or replacement page or service; and (4) the term “calculation agent” means Farmer Mac, or any successor appointed by Farmer Mac, acting as calculation agent.
Dividends shall be paid to holders of record of outstanding shares of the Preferred Stock as they appear in the books and records of Farmer Mac on the record date fixed by the Board of Directors, not to be earlier than 45 days nor later than 10 days preceding the applicable Dividend Payment Date. Notwithstanding any other provision hereof to the contrary, dividends on the Preferred Stock shall not be declared, paid, or set aside for payment to the extent such act would cause Farmer Mac to fail to comply with laws or regulations applicable thereto, including any applicable capital adequacy requirements.
If Farmer Mac redeems the Preferred Stock, any declared and unpaid dividends through and including the date of redemption shall be included in the redemption price of the shares redeemed and shall not be separately payable.
(b) No dividends shall be declared or paid or set apart for payment on the Common Stock or any other class or series of stock ranking junior to the Preferred Stock unless full dividends have been declared and paid for the then-current Dividend Period or set apart or ordered by our Board of Directors to be set apart for payment on the outstanding Preferred Stock in respect of the then-current Dividend Period. The foregoing dividend preference shall not in any way create any claim or right in favor of the holders of the Preferred Stock in the event that Farmer Mac shall not have declared or paid or set apart or the Board of Directors shall not have ordered to be set apart dividends on the Preferred Stock in respect of any prior Dividend Period. In the event that Farmer Mac shall not declare any one or more dividends or any part thereof on






the Preferred Stock, the holders of the Preferred Stock shall not have any claim in respect of such non-payment.
(c) Full dividends will not be declared or paid or set apart for payment on any outstanding class or series of stock issued by Farmer Mac of equal priority as to dividends as the Preferred Stock, including the outstanding 5.875% Non-Cumulative Preferred Stock, Series A and the outstanding 6.875% Non-Cumulative Preferred Stock, Series B of Farmer Mac, unless dividends on the Preferred Stock for the then-current Dividend Period are declared and paid or set apart for payment in full. The Board of Directors may, in its discretion, choose to declare and pay less than a full dividend on the Preferred Stock. In the event that the Board of Directors declares less than a full dividend on the Preferred Stock and/or any other outstanding class or series of stock of equal priority as to dividends as the Preferred Stock, including the outstanding 5.875% Non-Cumulative Preferred Stock, Series A and the outstanding 6.875% Non-Cumulative Preferred Stock, Series B of Farmer Mac, the Board of Directors shall declare dividends on the Preferred Stock and each such other class or series of outstanding stock, as applicable, on a proportional basis such that the amount of such dividends declared per share on the Preferred Stock and on each such other class or series of outstanding stock shall bear to each other the same ratio that full dividends per share for the then-current Dividend Period on the Preferred Stock and full dividends per share on each such other class or series of outstanding stock of equal priority as to dividends, bear to each other; provided, that, solely for purposes of calculating the ratio set forth in the foregoing sentence, the amount of full dividends per share for the then-current Dividend Period on the Preferred Stock and/or the full dividends per share on any such other class or series of outstanding stock of equal priority as to dividends, as applicable, shall be increased by the amount per share of dividends that have been declared but not paid in respect of such stock, if any.
(d) Notwithstanding any other provision of this Certificate, the Board of Directors, in its sole discretion, may choose to pay dividends on the Preferred Stock without the payment of any dividends on the Common Stock or any other outstanding class or series of stock ranking junior to the Preferred Stock with respect to the payment of dividends.
(e) No dividend shall be declared or paid or set apart for payment on any shares of the Preferred Stock if at the same time any arrears or default exists in the payment of dividends on the Preferred Stock or on any outstanding class or series of stock of Farmer Mac ranking senior to or (except as provided herein) on parity with the Preferred Stock with respect to the payment of dividends, including the outstanding 5.875% Non-Cumulative Preferred Stock, Series A and the outstanding 6.875% Non-Cumulative Preferred Stock, Series B of Farmer Mac. If and whenever dividends, having been declared, shall not have been paid in full, as aforesaid, on shares of the Preferred Stock and on the shares of any other class or series of stock of Farmer Mac ranking on parity with the Preferred Stock with respect to the payment of dividends, all






such dividends that have been declared on shares of the Preferred Stock and on the shares of any such other class or series shall be paid pro rata, so that the respective amounts of dividends paid per share on the Preferred Stock and on such other class or series shall in all cases bear to each other the same ratio that the respective amounts of dividends declared but unpaid per share on the shares of the Preferred Stock and on the shares of such other class or series bear to each other.
(f) Holders of shares of the Preferred Stock shall not be entitled to any dividends, whether payable in cash or in property, other than as herein provided and shall not be entitled to interest, or any sum in lieu of interest, on or in respect of any dividend payment.
(g) If Farmer Mac defaults on the payment of the equivalent of six quarters of declared dividends (regardless of whether such quarters are consecutive quarters), then the holders of the Preferred Stock will have the right to elect two observers to the Board of Directors.
3.
Optional Redemption
(a) The Preferred Stock shall not be redeemable before July 18, 2024. On that date and at any time thereafter, subject to the notice provisions set forth in Section 3(b) below and to any further limitations that may be imposed by law, Farmer Mac may redeem the Preferred Stock, in whole or in part, out of funds legally available therefor, at the redemption price of $25.00 per share plus an amount, determined in accordance with Section 2 above, equal to the amount of any declared and unpaid dividends through and including the date of redemption. If less than all of the outstanding shares of the Preferred Stock are to be redeemed, Farmer Mac shall select shares to be redeemed from the outstanding shares not previously called for redemption by lot or pro rata (as nearly as possible).
(b) In the event Farmer Mac shall redeem any or all of the Preferred Stock, Farmer Mac shall give notice of such redemption by first class mail, postage prepaid, mailed neither less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares of the Preferred Stock being redeemed, at such holder’s address as the same appears in the books and records of Farmer Mac; provided, that, if the Preferred Stock is held in book-entry form through DTC, Farmer Mac may give such notice in any manner permitted by DTC. Each such notice shall state the number of shares to be redeemed, the redemption price, the redemption date, and the procedures a holder must follow to submit its shares of Preferred Stock for redemption. Failure to duly give notice, or any defect in the notice, to any holder of the Preferred Stock shall not affect the validity of the proceedings for the redemption of shares of any other holder of the Preferred Stock being redeemed.
(c) If any redemption date is not a Business Day, payment of the redemption price may be made on the next Business Day with the same force and effect as if made on the redemption






date, and no interest, additional dividends or other sums will accrue on the amount payable from the redemption date to the next Business Day.
(d) Notice having been mailed as aforesaid, from and after the redemption date specified therein and upon payment of the consideration set forth in Section 3(a) above, said shares of the Preferred Stock shall no longer be deemed to be outstanding, and all rights of the holders thereof as holders of the Preferred Stock shall cease, with respect to shares so redeemed.
(e) Any shares of the Preferred Stock so redeemed shall, after such redemption, no longer have the status of issued or outstanding shares.
(f) The Preferred Stock shall not be subject to any mandatory redemption, sinking fund, or other similar provisions. In addition, holders of the Preferred Stock shall have no right to require redemption of any shares of the Preferred Stock.
4.
No Voting Rights
Except as set forth in Section 9, the shares of the Preferred Stock shall not have any voting powers, either general or special, or have any consent rights.
5.
No Conversion or Exchange Rights
The holders of shares of the Preferred Stock shall not have any right to convert such shares into or exchange such shares for any other class or series of stock or obligations of Farmer Mac.
6.
No Preemptive Rights
No holder of the Preferred Stock shall, as such holder, be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any new or additional issue of other shares, rights, options, or other securities of any class of Farmer Mac whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.
7.
Liquidation Rights and Preference
(a) Except as otherwise set forth herein, upon the voluntary or involuntary dissolution, liquidation, or winding up of Farmer Mac, after payment of or provision for the liabilities of Farmer Mac and the expenses of such dissolution, liquidation, or winding up, the holders of the outstanding shares of the Preferred Stock shall be entitled to receive out of the assets of Farmer Mac available for distribution to stockholders, before any payment or distribution shall be made on the Common Stock or any other class or series of stock of Farmer Mac ranking junior to the






Preferred Stock upon liquidation, the amount of $25.00 per share plus an amount, determined in accordance with Section 2 above, equal to the amount of any declared and unpaid dividends through and including the date of payment in respect of such dissolution, liquidation, or winding up. The holders of the outstanding shares of any class or series of stock of Farmer Mac ranking on parity with the Preferred Stock upon liquidation, including the outstanding 5.875% Non-Cumulative Preferred Stock, Series A and the outstanding 6.875% Non-Cumulative Preferred Stock, Series B of Farmer Mac, shall be entitled to receive out of the assets of Farmer Mac available for distribution to stockholders, before any such payment or distribution shall be made on the Common Stock or any other class or series of stock of Farmer Mac ranking junior to the Preferred Stock and to such parity stock upon dissolution, liquidation, or winding up, any corresponding preferential amount to which the holders of such parity stock may, by the terms thereof, be entitled; provided, however, that if the assets of Farmer Mac available for distribution to stockholders shall be insufficient for the payment in full of the aggregate amount to which the holders of the outstanding shares of the Preferred Stock and the holders of the outstanding shares of such parity stock shall be entitled to receive upon such dissolution, liquidation, or winding up of Farmer Mac as aforesaid, then, subject to paragraph (b) of this Section 7, all of the assets of Farmer Mac available for distribution to stockholders shall be distributed to the holders of outstanding shares of the Preferred Stock and to the holders of outstanding shares of such parity stock pro rata, so that the amounts so distributed to holders of the Preferred Stock and to holders of such classes or series of such parity stock, respectively, shall bear to each other the same ratio that the respective distributive amounts to which they are so entitled bear to each other. After the payment of the aforesaid amounts to which they are entitled, the holders of outstanding shares of the Preferred Stock and the holders of outstanding shares of any such parity stock shall not be entitled to any further participation in any distribution of assets of Farmer Mac. Solely for purposes of Section 8.4(e)(3) of the Farm Credit Act of 1971, as amended, the Preferred Stock shall be deemed to have a par value of $25.00 per share.
(b) Notwithstanding the foregoing, upon the dissolution, liquidation, or winding up of Farmer Mac, the holders of shares of the Preferred Stock then outstanding shall not be entitled to be paid any amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7 unless and until the holders of any classes or series of stock of Farmer Mac ranking senior to the Preferred Stock upon liquidation shall have been paid all amounts to which such classes or series are entitled pursuant to their respective terms.
(c) Neither the sale, lease, or exchange of all or substantially all of the property or business of Farmer Mac, nor the merger, consolidation, or combination of Farmer Mac into or with any other corporation or entity, shall be deemed to be a dissolution, liquidation, or winding up for the purpose of this Section 7.
8.
Additional Preferred Stock and Additional Classes or Series of Stock






The Board of Directors shall have the right at any time in the future to authorize, create, and issue, by resolution or resolutions, additional Preferred Stock or one or more additional classes or series of stock of Farmer Mac, and to determine and fix the distinguishing characteristics and the relative rights, preferences, privileges and other terms of the shares thereof. Any such class or series of stock may rank senior to, on parity with, or junior to the Preferred Stock as to dividends, upon liquidation, or otherwise.
9.
Amendments
Farmer Mac, by or under the authority of the Board of Directors, may amend, alter, supplement, or repeal any provision of this Certificate pursuant to the following terms and conditions:
(a) Without the consent of the holders of the Preferred Stock, Farmer Mac may amend, alter, supplement, or repeal any provision of this Certificate to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Certificate, provided that such action shall not materially and adversely affect the powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms, or conditions of the Preferred Stock.
(b) The consent of the holders of at least two-thirds of all of the shares of the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Preferred Stock shall vote together as a class, shall be necessary for authorizing, effecting, or validating the amendment, alteration, supplementation, or repeal of the provisions of this Certificate if such amendment, alteration, supplementation, or repeal would materially and adversely affect the powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms, or conditions of the Preferred Stock. Notwithstanding the foregoing sentence, the then-applicable dividend rate, the redemption price, or the liquidation preference of the Preferred Stock shall not be reduced without the unanimous consent of the holders of all shares of the Preferred Stock. Any increase in the amount of authorized or issued Preferred Stock, or the creation and issuance of any other class or series of stock of Farmer Mac, or the issuance of additional shares of any existing class or series of stock of Farmer Mac, whether ranking senior to, on parity with, or junior to the Preferred Stock as to dividends, liquidation rights, or otherwise, shall be deemed not to constitute such an amendment, alteration, supplementation, or repeal.
(c) Holders of the Preferred Stock shall be entitled to one vote per share on matters on which their consent is required pursuant to subparagraph (b) of this Section 9. Consents shall be effective when duly executed and delivered to Farmer Mac in accordance with the applicable






procedures of DTC. In connection with any meeting of such holders, the Board of Directors shall fix a record date, neither earlier than 60 days nor later than 10 days prior to the date of such meeting, and holders of record of shares of the Preferred Stock on such record date shall be entitled to notice of and to vote at any such meeting and any adjournment. The Board of Directors, or such person or persons as it may designate, may establish reasonable rules and procedures as to the solicitation of the consent of holders of the Preferred Stock at any such meeting or otherwise, which rules and procedures shall conform to the requirements of any national securities exchange on which the Preferred Stock may be listed at such time.
10.
Priority
Any stock of any class or series of Farmer Mac shall be deemed to rank:
(a) senior to shares of the Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of Farmer Mac, as the case may be, in preference or priority to the holders of shares of the Preferred Stock;
(b) on parity with shares of the Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates or amounts, dividend payment dates, or redemption or liquidation prices per share, if any, be different from those of the Preferred Stock, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of Farmer Mac, as the case may be, in proportion to their respective dividend rates or amounts or liquidation prices, without preference or priority, one over the other, as between the holders of such class or series and the holders of shares of the Preferred Stock; and
(c) junior to shares of the Preferred Stock, either as to dividends or upon liquidation, if such class or series shall be Common Stock, or if the holders of shares of the Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of Farmer Mac, as the case may be, in preference or priority to the holders of shares of such class or series.
11.
Notices
Any notice, demand, or other communication that by any provision of this Certificate is required or permitted to be given or served to or upon Farmer Mac shall be given or served in writing addressed (unless and until another address shall be published by Farmer Mac) to the Federal Agricultural Mortgage Corporation, 1999 K Street, N.W., 4th Floor, Washington, D.C. 20006, Attention: Senior Vice President—General Counsel and Secretary. Such notice, demand, or other communication to or upon Farmer Mac shall be deemed to have been sufficiently given






or made only upon actual receipt of a writing by Farmer Mac. Any notice, demand, or other communication that by any provision of this Certificate is required or permitted to be given or served by Farmer Mac hereunder may be given or served by being deposited first class, postage prepaid, in the United States mail addressed (1) to the holder as such holder’s name and address may appear at such time in the books and records of Farmer Mac or (2) if to a person or entity other than a holder of record of the Preferred Stock, to such person or entity at such address as appears to Farmer Mac to be appropriate at such time; provided that if the Preferred Stock is held in book-entry form through DTC, Farmer Mac may give such notice in any manner permitted by DTC. Such notice, demand, or other communication shall be deemed to have been sufficiently given or made, for all purposes, upon mailing.
12.
Miscellaneous
(a) Farmer Mac and any agent of Farmer Mac may deem and treat the holder of a share or shares of Preferred Stock, as shown in Farmer Mac’s books and records, as the absolute owner of such share or shares of Preferred Stock for the purpose of receiving payment of dividends in respect of such share or shares of Preferred Stock and for all other purposes whatsoever, and neither Farmer Mac nor any agent of Farmer Mac shall be affected by any notice to the contrary. All payments made to or upon the order of any such person shall be valid and, to the extent of the sum or sums so paid, effectual to satisfy and discharge liabilities for moneys payable by Farmer Mac on or with respect to any such share or shares of Preferred Stock.
(b) The shares of the Preferred Stock, when duly issued, shall be fully paid and non-assessable.
(c) Farmer Mac may at its option issue shares of Preferred Stock without certificates.
(d) For purposes of this Certificate, the term “Farmer Mac” means the Federal Agricultural Mortgage Corporation and any successor thereto by operation of law or by reason of a merger, consolidation, or combination.
(e) This Certificate and the respective rights and obligations of Farmer Mac and the holders of the Preferred Stock with respect to such Preferred Stock shall be construed in accordance with and governed by the laws of the United States, provided that the law of the District of Columbia shall serve as the federal rule of decision in all instances except where such law is inconsistent with Farmer Mac’s enabling legislation, its public purposes, or any provision of this Certificate.
(f) RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE PREFERRED STOCK BY OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE HOLDER (AND ALL OTHERS HAVING BENEFICIAL OWNERSHIP OF SUCH SHARE OR SHARES) OF ALL OF THE TERMS AND PROVISIONS OF THIS CERTIFICATE. NO SIGNATURE OR






OTHER FURTHER MANIFESTATION OF ASSENT TO THE TERMS AND PROVISIONS OF THIS CERTIFICATE SHALL BE NECESSARY FOR ITS OPERATION OR EFFECT AS BETWEEN FARMER MAC AND THE HOLDER (AND ALL SUCH OTHERS).






ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer     
Shares evidenced by the within Certificate unto:
    
(Insert assignee’s soc. sec. or tax I.D. no.)
    
    
    
    
(Print or type assignee’s name, address and zip code)
, and does hereby irrevocably constitute and irrevocably appoints:
    
    
    

agent to transfer the said Shares on the books of the Transfer Agent, with full power of substitution in the premises.
Dated:     
Signature:     
Signature Guarantee*:     
* Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Transfer Agent).




Exhibit 31.1
 
CERTIFICATION
 
I, Timothy L. Buzby, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation for the fiscal quarter ended June 30, 2014;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
Date: August 11, 2014
 

/s/ Timothy L. Buzby
 
Timothy L. Buzby
 
Chief Executive Officer
 






Exhibit 31.2
 
CERTIFICATION
 
I, R. Dale Lynch, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation for the fiscal quarter ended June 30, 2014;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
Date: August 11, 2014
 

/s/ R. Dale Lynch
 
R. Dale Lynch
 
Chief Financial Officer
 





Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation (the “Corporation”) for the quarterly period ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Timothy L. Buzby, Chief Executive Officer of the Corporation, and R. Dale Lynch, Chief Financial Officer of the Corporation, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.



/s/ Timothy L. Buzby
 
Timothy L. Buzby
 
Chief Executive Officer
 
 
 
 
/s/ R. Dale Lynch
 
R. Dale Lynch
 
Chief Financial Officer
 
 
 
 
Date:
August 11, 2014