As filed with the Securities and Exchange Commission on November 8, 2018

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Commission File Number 001-14951 
 ____________________________________________________________

LOGO2016A14.JPG
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States
 
52-1578738
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer identification number)
 
 
 
1999 K Street, N.W., 4th Floor,
Washington, D.C.
 
20006
(Address of principal executive offices)
 
(Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes         x                                No            o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes         x                                 No           o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o Smaller reporting company
o
 
 
Emerging growth company

o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes         o                                 No            x
As of November 1, 2018, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301  shares of Class B voting common stock, and 9,137,550 shares of Class C non-voting common stock.






Table of Contents
PART I  - Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I

Item 1.
Financial Statements


3



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
436,152

 
$
302,022

Investment securities:
 

 
 

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

 
2,215,405

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

 
45,032

Total Investment Securities
2,269,034

 
2,260,437

Farmer Mac Guaranteed Securities:
 

 
 

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

 
5,471,914

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

 
2,126,274

Total Farmer Mac Guaranteed Securities
8,024,611

 
7,598,188

USDA Securities:
 

 
 

Trading, at fair value
10,237

 
13,515

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

 
2,117,850

Total USDA Securities
2,154,111

 
2,131,365

Loans:
 

 
 

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

 
3,873,755

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

 
1,399,827

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

 
5,266,786

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

 
139

Financial derivatives, at fair value
8,007

 
7,093

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

 
155,278

Guarantee and commitment fees receivable
40,178

 
39,895

Deferred tax asset, net

 
2,048

Prepaid expenses and other assets
45,236

 
29,023

Total Assets
$
18,474,034

 
$
17,792,274

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
7,378,927

 
$
8,089,826

Due after one year
8,419,424

 
7,432,790

Total notes payable
15,798,351

 
15,522,616

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

 
1,404,945

Financial derivatives, at fair value
17,841

 
26,599

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

 
75,402

Guarantee and commitment obligation
38,597

 
38,400

Accounts payable and accrued expenses
260,753

 
14,096

Deferred tax liability, net
4,586

 

Reserve for losses
2,147

 
2,070

Total Liabilities
17,696,443

 
17,084,128

Commitments and Contingencies (Note 6)


 


Equity:
 

 
 

Preferred stock:
 

 
 

Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding
58,333

 
58,333

Series B, par value $25 per share, 3,000,000 shares authorized, issued and outstanding
73,044

 
73,044

      Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding
73,382

 
73,382

Common stock:
 

 
 

Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding
1,031

 
1,031

Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding
500

 
500

Class C Non-Voting, $1 par value, no maximum authorization, 9,137,500 shares and 9,087,670 shares outstanding, respectively
9,138

 
9,088

Additional paid-in capital
118,183

 
118,979

Accumulated other comprehensive income, net of tax
64,001

 
51,085

Retained earnings
379,979

 
322,704

Total Equity
777,591

 
708,146

Total Liabilities and Equity
$
18,474,034

 
$
17,792,274

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



4



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
15,123

 
$
9,223

 
$
38,681

 
$
24,834

Farmer Mac Guaranteed Securities and USDA Securities
76,870

 
54,350

 
213,479

 
146,978

Loans
50,622

 
40,924

 
145,671

 
117,349

Total interest income
142,615

 
104,497

 
397,831

 
289,161

Total interest expense
97,557

 
64,935

 
265,611

 
172,797

Net interest income
45,058

 
39,562

 
132,220

 
116,364

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

 
39,292

 
132,128

 
115,130

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

 
3,314

 
10,470

 
10,630

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

 
661

 
(688
)
 
2,530

(Losses)/gains on trading securities
(3
)
 

 
24

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

 
89

 

 
89

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

 
(7
)
 
784

Other income
365

 
203

 
1,259

 
890

Non-interest income
4,439

 
4,299

 
11,058

 
14,839

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

 
5,987

 
20,367

 
18,986

General and administrative
4,350

 
3,890

 
13,878

 
11,611

Regulatory fees
625

 
625

 
1,875

 
1,875

Real estate owned operating costs, net

 

 
16

 
23

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

 
77

 
60

Non-interest expense
11,650

 
10,616

 
36,213

 
32,555

Income before income taxes
37,748

 
32,975

 
106,973

 
97,414

Income tax expense
7,979

 
11,193

 
21,749

 
33,103

Net income
29,769

 
21,782

 
85,224

 
64,311

Less: Net loss attributable to non-controlling interest

 

 

 
165

Net income attributable to Farmer Mac
29,769

 
21,782

 
85,224

 
64,476

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

 
$
18,487

 
$
75,338

 
$
54,590

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

 
$
1.74

 
$
7.07

 
$
5.16

Diluted earnings per common share
$
2.46

 
$
1.71

 
$
7.01

 
$
5.06

Common stock dividends per common share
$
0.58

 
$
0.36

 
$
1.74

 
$
1.08

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


5



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Net income
$
29,769

 
$
21,782

 
$
85,224

 
$
64,311

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

 
19,283

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

 
253

 
12,038

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

 
10,826

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

 
879

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

 
7,037

Comprehensive income
20,360

 
20,149

 
98,113

 
71,348

Less: comprehensive loss attributable to non-controlling interest

 

 

 
165

Comprehensive income attributable to Farmer Mac
$
20,360

 
$
20,149

 
$
98,113

 
$
71,513

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


6



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Other
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid-In
 
Comprehensive
 
Retained
 
Non-controlling
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income/(Loss)
 
Earnings
 
Interest
 
Equity
 
(in thousands)
Balance as of December 31, 2016
8,400

 
$
204,759

 
10,539

 
$
10,539

 
$
118,655

 
$
33,758

 
$
275,714

 
$
222

 
$
643,647

Net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac

 

 

 

 

 

 
64,476

 

 
64,476

Attributable to non-controlling interest

 

 

 

 

 

 

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

 

 

 

 

 
7,037

 

 

 
7,037

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock

 

 

 

 

 

 
(9,886
)
 

 
(9,886
)
Common stock

 

 

 

 

 

 
(11,435
)
 

 
(11,435
)
Issuance of Class C Common Stock

 

 
74

 
74

 
228

 

 

 

 
302

Stock-based compensation cost

 

 

 

 
2,597

 

 

 

 
2,597

Other stock-based award activity

 

 

 

 
(2,350
)
 

 

 

 
(2,350
)
Redemption of interest in subsidiary

 

 

 

 

 

 

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

 
$
204,759

 
10,613

 
$
10,613

 
$
119,130

 
$
40,795

 
$
318,869

 
$

 
$
694,166

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
8,400

 
$
204,759

 
10,619

 
$
10,619

 
$
118,979

 
$
51,085

 
$
322,704

 
$

 
$
708,146

Cumulative effect from change in hedge accounting

 

 

 

 

 
27

 
471

 

 
498

Balance as of January 1, 2018
8,400

 
$
204,759

 
10,619

 
$
10,619

 
$
118,979

 
$
51,112

 
$
323,175

 
$

 
$
708,644

Net income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to Farmer Mac

 

 

 

 

 

 
85,224

 

 
85,224

Other comprehensive income, net of tax

 

 

 

 

 
12,889

 

 

 
12,889

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock

 

 

 

 

 

 
(9,886
)
 

 
(9,886
)
Common stock

 

 

 

 

 

 
(18,534
)
 

 
(18,534
)
Issuance of Class C Common Stock

 

 
50

 
50

 
7

 

 

 

 
57

Stock-based compensation cost

 

 

 

 
1,882

 

 

 

 
1,882

Other stock-based award activity

 

 

 

 
(2,685
)
 

 

 

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

 
$
204,759

 
10,669

 
$
10,669

 
$
118,183

 
$
64,001

 
$
379,979

 
$

 
$
777,591

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


7



FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
85,224

 
$
64,311

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Net amortization of deferred gains, premiums, and discounts on loans, investments, Farmer Mac Guaranteed Securities, and USDA Securities
713

 
1,701

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

 
17,078

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

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

 
(784
)
Total provision for losses
169

 
1,294

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

 
1,170

Deferred income taxes
1,750

 
1,910

Other

 
11

Stock-based compensation expense
1,882

 
2,597

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

 
54,919

Net change in:
 
 
 
Interest receivable
18,537

 
12,678

Guarantee and commitment fees receivable
(86
)
 
226

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

 
12,104

Other liabilities
(1,898
)
 
435

Net cash provided by operating activities
252,225

 
157,309

Cash flows from investing activities:
 

 
 

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

 
895,497

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

 
787,743

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

 
368,826

Proceeds from sale of available-for-sale investment securities

 
5,089

Proceeds from sale of Farmer Mac Guaranteed Securities
305,391

 
404,246

Proceeds from sale of real estate owned
116

 
6,464

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

 
 

Proceeds from issuance of discount notes
30,946,426

 
40,262,122

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

 
7,160,298

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

 
235

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

 
1,721,472

Net increase in cash and cash equivalents
134,130

 
101,535

Cash and cash equivalents at beginning of period
302,022

 
265,229

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

 
$
366,764

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



8



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

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted as permitted by SEC rules and regulations. The December 31, 2017 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2017 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2017 consolidated financial statements of Farmer Mac and subsidiaries included in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 8, 2018. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three months ended September 30, 2018.

Principles of Consolidation

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



9



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



Table 1.1
 
Consolidation of Variable Interest Entities
 
As of September 30, 2018
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost
$
1,483,135

 
$

 
$

 
$

 
$

 
$
1,483,135

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

 

 

 

 

 
1,486,733

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

 
28,117

 

 

 

 
28,117

      Maximum exposure to loss (3)

 
27,861

 

 

 

 
27,861

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)

 

 

 

 
924,099

 
924,099

        Maximum exposure to loss (3) (4)

 

 

 

 
924,494

 
924,494

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

 
346,689

 

 

 

 
634,283

(1)  
Includes borrower remittances of $3.6 million . The borrower remittances had not been passed through to third party investors as of September 30, 2018 .
(2)  
Includes $0.3 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
(3)  
Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(4)  
Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(5)  
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.



10



 
Consolidation of Variable Interest Entities
 
As of December 31, 2017
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost
$
1,399,827

 
$

 
$

 
$

 
$

 
$
1,399,827

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

 

 

 

 

 
1,404,945

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

 
30,300

 

 

 

 
30,300

      Maximum exposure to loss (3)

 
29,980

 

 

 

 
29,980

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value (4)

 

 

 

 
783,964

 
783,964

        Maximum exposure to loss (3) (4)

 

 

 

 
783,916

 
783,916

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

 
254,217

 

 

 

 
587,728

(1)  
Includes borrower remittances of $5.1 million , which have not been passed through to third party investors as of December 31, 2017.
(2)  
Includes $0.3 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business.
(3)  
Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
(4)  
Includes auction-rate certificates, asset-backed securities, and GSE-guaranteed mortgage-backed securities.
(5)  
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.


(a)
Statements of Cash Flows 

The following table sets forth information regarding certain cash and non-cash transactions for the nine months ended September 30, 2018 and 2017:


Table 1.2

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

 
5,261

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

 
404,246

Consolidation of Farm & Ranch Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties
199,764

 
277,307

Purchases of securities - traded not yet settled
248,600

 
9,987






11



(b)
Earnings Per Common Share

Basic earnings per common share ("EPS") is based on the weighted-average number of shares of common stock outstanding.  Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights ("SARs"), and non-vested restricted stock awards.  The following schedule reconciles basic and diluted EPS for the three and nine months ended September 30, 2018 and 2017:

Table 1.3
 
For the Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
(in thousands, except per share amounts)
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
26,474

 
10,668

 
$
2.48

 
$
18,487

 
10,605

 
$
1.74

Effect of dilutive securities (1)
 

 
 

 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock

 
76

 
(0.02
)
 

 
210

 
(0.03
)
Diluted EPS
$
26,474

 
10,744

 
$
2.46

 
$
18,487

 
10,815

 
$
1.71

(1)  
For the three months ended September 30, 2018, 10,122 SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 24,657 stock options and SARs for the three months ended September 30, 2017. For the three months ended September 30, 2018 and 2017, contingent shares of non-vested restricted stock of 13,138 and 32,892 , respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.

 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
Net
Income
 
Weighted-Average Shares
 
$ per
Share
 
(in thousands, except per share amounts)
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
75,338

 
10,650

 
$
7.07

 
$
54,590

 
10,586

 
$
5.16

Effect of dilutive securities (1)
 

 
 

 
 
 
 
 
 
 
 
Stock options, SARs and restricted stock

 
93

 
(0.06
)
 

 
208

 
(0.10
)
Diluted EPS
$
75,338

 
10,743

 
$
7.01

 
$
54,590

 
10,794

 
$
5.06

(1)  
For the nine months ended September 30, 2018, 15,437 SARs were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive, compared to 33,440 stock options and SARs for the nine months ended September 30, 2017. For the nine months ended September 30, 2018 and 2017, contingent shares of non-vested restricted stock of 13,138 and 32,892 , respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions had not yet been met.


(c)
Comprehensive Income

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



12



The following table presents the changes in accumulated other comprehensive income ("AOCI"), net of tax, by component for the three and nine months ended September 30, 2018 and 2017:

Table 1.4

 
As of September 30, 2018
 
As of September 30, 2017
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Cash Flow Hedges
 
Total
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Cash Flow Hedges
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
15,882

 
$
45,979

 
$
11,549

 
$
73,410

 
$
(1,276
)
 
$
42,104

 
$
1,600

 
$
42,428

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

 
2,662

 
(7,285
)
 
2,298

 

 
(97
)
 
2,201

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

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

 
(9,409
)
 
(577
)
 
(1,221
)
 
165

 
(1,633
)
Ending Balance
$
5,180

 
$
44,759

 
$
14,062

 
$
64,001

 
$
(1,853
)
 
$
40,883

 
$
1,765

 
$
40,795

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

 
$
4,525

 
$
51,085

 
$
(14,387
)
 
$
45,752

 
$
2,393

 
$
33,758

Cumulative effect from change in hedge accounting

 

 
27

 
27

 

 

 

 

Adjusted Beginning Balance
(1,676
)
 
48,236

 
4,552

 
51,112

 
(14,387
)
 
45,752

 
2,393

 
33,758

Other comprehensive income/(loss) before reclassifications
10,450

 

 
9,493

 
19,943

 
20,711

 

 
(1,522
)
 
19,189

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

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

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

 
(3,477
)
 
9,510

 
12,889

 
12,534

 
(4,869
)
 
(628
)
 
7,037

Ending Balance
$
5,180

 
$
44,759

 
$
14,062

 
$
64,001

 
$
(1,853
)
 
$
40,883

 
$
1,765

 
$
40,795





13



The following table presents other comprehensive income activity, the impact on net income of amounts reclassified from each component of AOCI, and the related tax impact for the three and nine months ended September 30, 2018 and 2017:

Table 1.5

 
For the Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding (losses)/gains on available-for-sale-securities
$
(12,590
)
 
$
(2,643
)
 
$
(9,947
)
 
$
3,536

 
$
1,238

 
$
2,298

Less reclassification adjustments included in:
 
 
 
 
 
 

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

 

 

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

 

 

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

 

 

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

 
$
708

 
$
2,662

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

 
141

 
262

Total
$
3,181

 
$
668

 
$
2,513

 
$
253

 
$
88

 
$
165

Other comprehensive (loss)/income
$
(11,909
)
 
$
(2,500
)
 
$
(9,409
)
 
$
(2,512
)
 
$
(879
)
 
$
(1,633
)
(1)  
Relates to the amortization of unrealized gains on hedged items prior to the application of fair value hedge accounting.
(2)  
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities.
(3)  
Relates to the amortization of unrealized gains or losses prior to the reclassification of these securities from available-for-sale to held-to-maturity. The amortization of unrealized gains or losses reported in AOCI for held-to-maturity securities will be offset by the amortization of the premium or discount created from the transfer into held-to-maturity securities, which occurred at fair value. These unrealized gains or losses will be recorded over the remaining life of the security with no impact on future net income.
(4)  
Relates to the recognition of unrealized gains and losses on cash flow hedges recorded in AOCI.



14



 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
Before Tax
 
Provision (Benefit)
 
After Tax
 
(in thousands)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale-securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale-securities
$
13,227

 
$
2,777

 
$
10,450

 
$
31,863

 
$
11,152

 
$
20,711

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

 

 

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

 

 

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

 

 

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

 
$
1,822

 
$
6,856

 
$
19,283

 
$
6,749

 
$
12,534

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

 
$
2,524

 
$
9,493

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

 
4

 
17

 
1,376

 
482

 
894

Total
$
12,038

 
$
2,528

 
$
9,510

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

 
$
3,427

 
$
12,889

 
$
10,826

 
$
3,789

 
$
7,037

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



(d) New Accounting Standards

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, " Leases (Topic 842) ," which provides new guidance intended to improve financial reporting about leasing transactions. The ASU requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASU also requires new disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac’s financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU 2016-13, " Financial Instruments—Credit Losses (Topic 326)," which will require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Entities will be required to use forward-looking information to form their credit loss estimates.  The ASU will also require enhanced disclosures to help users of financial statements better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.  The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019.   Early adoption will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Farmer Mac is


15



currently developing its accounting policy, planning for changes to its loss estimation methodologies and evaluating the impact that the new guidance will have on its consolidated financial statements. That impact will primarily be from the new requirement to recognize all expected losses rather than just incurred losses as of the reporting date. 

In March 2017, the FASB issued ASU 2017-08, " Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, " which shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

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

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which removes or modifies certain disclosures and adds new disclosures. The new requirements are designed to improve the effectiveness of disclosures in the notes to the financial statements. Farmer Mac does not expect that adoption of the new guidance will have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

In August 2018, the FASB issued ASU 2018-15, " Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, " which requires the application of the same criteria for capitalization of implementation costs as for an arrangement that has a software license. Additionally, the new guidance prescribes the balance sheet, income statement, and cash flows classifications of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. Farmer Mac does not expect that adoption of this guidance will have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

(e)
Reclassifications

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



16



2.
INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of September 30, 2018 and December 31, 2017:
 
Table 2.1

 
As of September 30, 2018
 
Amount Outstanding
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
19,700

 
$

 
$
19,700

 
$

 
$
(739
)
 
$
18,961

Floating rate asset-backed securities
30,266

 
(143
)
 
30,123

 
18

 
(85
)
 
30,056

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

 
1,616

 
1,337,754

 
1,196

 
(2,476
)
 
1,336,474

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

 

 
400

 
22

 

 
422

Fixed rate U.S. Treasuries
843,362

 
(4,031
)
 
839,331

 

 
(1,242
)
 
838,089

Total available-for-sale
2,229,866

 
(2,558
)
 
2,227,308

 
1,236

 
(4,542
)
 
2,224,002

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

 

 
45,032

 
843

 

 
45,875

Total investment securities
$
2,274,898

 
$
(2,558
)
 
$
2,272,340

 
$
2,079

 
$
(4,542
)
 
$
2,269,877

(1)  
During second quarter 2018, the remaining premium of an interest-only security was fully amortized because the issuer called the security upon full prepayment of the underlying mortgage loan that collateralized the security.


 
As of December 31, 2017
 
Amount Outstanding
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
19,700

 
$

 
$
19,700

 
$

 
$
(886
)
 
$
18,814

Floating rate asset-backed securities
34,462

 
(154
)
 
34,308

 
22

 
(120
)
 
34,210

Floating rate Government/GSE guaranteed mortgage-backed securities
1,289,123

 
2,217

 
1,291,340

 
2,215

 
(3,368
)
 
1,290,187

Fixed rate GSE guaranteed mortgage-backed securities (1)
451

 
2,138

 
2,589

 
2,230

 

 
4,819

Fixed rate senior agency debt
100,000

 

 
100,000

 

 
(49
)
 
99,951

Fixed rate U.S. Treasuries
770,852

 
(1,836
)
 
769,016

 

 
(1,592
)
 
767,424

Total available-for-sale
2,214,588

 
2,365

 
2,216,953

 
4,467

 
(6,015
)
 
2,215,405

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

 

 
45,032

 
532

 

 
45,564

Total investment securities
$
2,259,620

 
$
2,365

 
$
2,261,985

 
$
4,999

 
$
(6,015
)
 
$
2,260,969

(1)  
Fair value includes $4.3 million of an interest-only security with a notional amount of $143.7 million .

Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the three and nine months ended September 30, 2018 . During the three and nine months ended September 30, 2017, Farmer Mac received proceeds of $5.1 million from the sale of securities from its available-for-sale portfolio, resulting in gross realized gains of $0.1 million .



17



As of September 30, 2018 and December 31, 2017, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2

 
As of September 30, 2018
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
18,961

 
$
(739
)
Floating rate asset-backed securities

 

 
20,080

 
(85
)
Floating rate Government/GSE guaranteed mortgage-backed securities
508,554

 
(1,285
)
 
179,870

 
(1,191
)
Fixed rate U.S. Treasuries
703,306

 
(1,164
)
 
134,782

 
(78
)
Total
$
1,211,860

 
$
(2,449
)
 
$
353,693

 
$
(2,093
)

 
As of December 31, 2017
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$

 
$

 
$
18,814

 
$
(886
)
Floating rate asset-backed securities

 

 
23,145

 
(120
)
Floating rate Government/GSE guaranteed mortgage-backed securities
292,522

 
(2,337
)
 
221,641

 
(1,031
)
Fixed rate U.S. Treasuries
742,442

 
(1,572
)
 
24,983

 
(20
)
Fixed rate senior agency debt

 

 
99,951

 
(49
)
Total
$
1,034,964

 
$
(3,909
)
 
$
388,534

 
$
(2,106
)

The unrealized losses presented above are principally due to a general widening of market spreads and an increase in the levels of interest rates from the dates of acquisition to September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017 , all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+." The unrealized losses were on 107 and 91  individual investment securities as of September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018 , 45  of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $2.1 million . As of December 31, 2017 , 51  of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $2.1 million .  Securities in unrealized loss positions for 12 months or longer have a fair value as of September 30, 2018 that is, on average, approximately 99.4 percent of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of maturity or changes in credit spreads. Accordingly, Farmer Mac has concluded that none of the


18



unrealized losses on these available-for-sale investment securities are other-than-temporary impairment as of September 30, 2018 and December 31, 2017.

As of September 30, 2018 , Farmer Mac owned $45.0 million of held-to-maturity investment securities at amortized cost with a fair value of $45.9 million and a weighted average yield of 3.3 percent . As of December 31, 2017, Farmer Mac owned $45.0 million of held-to-maturity investment securities at amortized cost with a fair value of $45.6 million and a weighted average yield of 2.5 percent . Farmer Mac did not own any trading investment securities as of September 30, 2018 and December 31, 2017.

The amortized cost, fair value, and weighted-average yield of available-for-sale investment securities by remaining contractual maturity as of September 30, 2018 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 September 30, 2018
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
807,395

 
$
806,214

 
1.24%
Due after one year through five years
277,030

 
277,382

 
2.52%
Due after five years through ten years
508,970

 
508,629

 
2.46%
Due after ten years
633,913

 
631,777

 
2.65%
Total
$
2,227,308

 
$
2,224,002

 
2.08%



19



3.
FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of September 30, 2018 and December 31, 2017:

Table 3.1

 
As of September 30, 2018
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
2,039,471

 
$
(282
)
 
$
2,039,189

 
$
441

 
$
(22,500
)
 
$
2,017,130

Farmer Mac Guaranteed USDA Securities
27,862

 
256

 
28,118

 
134

 

 
28,252

Total Farmer Mac Guaranteed Securities
2,067,333

 
(26
)
 
2,067,307

 
575

 
(22,500
)
 
2,045,382

USDA Securities
2,086,842

 
57,032

 
2,143,874

 
1

 
(86,529
)
 
2,057,346

Total held-to-maturity
$
4,154,175

 
$
57,006

 
$
4,211,181

 
$
576

 
$
(109,029
)
 
$
4,102,728

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
6,014,252

 
$
(195
)
 
$
6,014,057

 
$
12,112

 
$
(68,865
)
 
$
5,957,304

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
9,857

 
$
728

 
$
10,585

 
$
19

 
$
(367
)
 
$
10,237


 
As of December 31, 2017
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
2,096,754

 
$
(779
)
 
$
2,095,975

 
$
2,011

 
$
(11,429
)
 
$
2,086,557

Farmer Mac Guaranteed USDA Securities
29,980

 
319

 
30,299

 
108

 
(73
)
 
30,334

Total Farmer Mac Guaranteed Securities
2,126,734

 
(460
)
 
2,126,274

 
2,119

 
(11,502
)
 
2,116,891

USDA Securities
2,055,050

 
62,800

 
2,117,850

 

 
(54,969
)
 
2,062,881

Total held-to-maturity
$
4,181,784

 
$
62,340

 
$
4,244,124

 
$
2,119

 
$
(66,471
)
 
$
4,179,772

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
5,496,569

 
$
(182
)
 
$
5,496,387

 
$
21,838

 
$
(46,311
)
 
$
5,471,914

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
12,966

 
$
922

 
$
13,888

 
$
28

 
$
(401
)
 
$
13,515





20



As of September 30, 2018 and December 31, 2017, unrealized losses on held-to-maturity and available-for-sale on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities were as follows:

Table 3.2

 
As of September 30, 2018
 
Held-to-Maturity and 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)
Held-to-maturity:
 
 
 
 
 
 
 
AgVantage
$
1,064,053

 
$
(11,558
)
 
$
814,058

 
$
(10,942
)
USDA Securities
38,879

 
(415
)
 
2,018,466

 
(86,114
)
Total held-to-maturity
$
1,102,932

 
$
(11,973
)
 
$
2,832,524

 
$
(97,056
)
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
AgVantage
$
2,367,859

 
$
(31,550
)
 
$
1,559,584

 
$
(37,315
)

 
As of December 31, 2017
 
Held-to-Maturity and 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)
Held-to-maturity:
 
 
 
 
 
 
 
AgVantage
$
1,304,160

 
$
(8,094
)
 
$
351,664

 
$
(3,335
)
Farmer Mac Guaranteed USDA Securities
24,721

 
(73
)
 

 

USDA Securities
451

 
(2
)
 
2,062,429

 
(54,967
)
Total held-to-maturity
$
1,329,332

 
$
(8,169
)
 
$
2,414,093

 
$
(58,302
)
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
AgVantage
$
1,273,965

 
$
(8,819
)
 
$
1,759,377

 
$
(37,492
)

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to September 30, 2018 and December 31, 2017, as applicable. In addition, the unrealized losses on the held-to-maturity USDA Securities as of both September 30, 2018 and December 31, 2017 reflect their increased cost basis resulting from their transfer to held-to-maturity as of October 1, 2016. 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. The unrealized losses from AgVantage securities were on 54 available-for-sale securities as of September 30, 2018 . There were 52 held-to-maturity AgVantage securities with an unrealized loss as of September 30, 2018 . The unrealized losses from AgVantage securities were on 36 available-for-sale securities as of December 31, 2017. There were unrealized losses from 23 held-to-maturity securities as of December 31, 2017 . As of September 30, 2018 , 17 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $37.3 million . As of December 31, 2017 , 16 available-for-sale AgVantage securities had been in a loss


21



position for more than 12 months with a total unrealized loss of $37.5 million . Farmer Mac has concluded that none of the unrealized losses on its held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities and available-for-sale Farmer Mac Guaranteed Securities are other-than-temporary impaired as of either September 30, 2018 or December 31, 2017.  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 nine months ended September 30, 2018 and 2017, 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 September 30, 2018 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 3.3

 
As of September 30, 2018
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
1,019,282

 
$
1,018,343

 
2.58
%
Due after one year through five years
2,664,743

 
2,652,381

 
2.95
%
Due after five years through ten years
777,186

 
751,727

 
3.14
%
Due after ten years
1,552,846

 
1,534,853

 
2.64
%
Total
$
6,014,057

 
$
5,957,304

 
2.84
%
 
As of September 30, 2018
 
Held-to-Maturity Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
750,013

 
$
745,474

 
2.10
%
Due after one year through five years
1,359,953

 
1,340,138

 
2.99
%
Due after five years through ten years
218,630

 
209,806

 
3.36
%
Due after ten years
1,882,585

 
1,807,310

 
3.54
%
Total
$
4,211,181

 
$
4,102,728

 
3.09
%

As of September 30, 2018 , Farmer Mac owned trading USDA Securities with an amortized cost of $10.6 million , a fair value of $10.2 million , and a weighted-average yield of 5.23 percent . As of December 31, 2017 , Farmer Mac owned trading USDA Securities with an amortized cost of $13.9 million , a fair value of $13.5 million , and a weighted-average yield of 5.33 percent .  



22




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, primarily classified as available-for-sale, to protect against fair value changes in the assets related to a benchmark interest rate (e.g., LIBOR). Other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt. Farmer Mac manages the interest rate risk related to loans it has committed to acquire, but has not yet permanently funded, 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.  The notional amounts of these contracts are determined based on a duration-matched hedge ratio between the hedged item and the hedge instrument. Gains or losses generated by these hedge transactions are expected to offset changes in funding costs. All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability.

Effective first quarter 2018, Farmer Mac adopted ASU 2017-12, " Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This ASU reduces the complexity of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and by requiring the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the income or expense effect from the hedged item. Upon the adoption of the ASU, Farmer Mac elected to retrospectively designate the hedged risk of its fair value hedges as the risk of changes in fair value resulting from changes in the benchmark interest rate component of the contractual coupon cash flows. Farmer Mac made this election for its fair value hedges designated upon the inception of the hedging instruments. For fair value hedges designated subsequent to the inception of the hedging instruments, Farmer Mac continues to designate the hedged risk as the risk of changes in fair value based on total contractual coupon cash flows. The adoption of the new guidance did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.


















23



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 September 30, 2018 and December 31, 2017 :

Table 4.1
  
As of September 30, 2018
  
 
 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Term (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
2,801,164

 
$
860

 
$
(4,493
)
 
2.04%
 
2.13%
 
 
 
10.39
Receive fixed non-callable
2,131,200

 
682

 
(4,796
)
 
2.20%
 
1.78%
 
 
 
1.74
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
389,500

 
4,429

 
(276
)
 
2.36%
 
2.57%
 
 
 
6.10
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
317,586

 
1,966

 
(8,065
)
 
3.69%
 
2.33%
 
 
 
6.48
Receive fixed non-callable
2,521,965

 

 

 
2.16%
 
1.99%
 
 
 
0.84
Basis swaps
1,529,000

 
233

 
(206
)
 
2.01%
 
2.07%
 
 
 
1.41
Treasury futures
12,700

 

 
(11
)
 
 
 
 
 
118.70

 
 
Credit valuation adjustment
 
 
(163
)
 
6

 
 
 
 
 
 
 
 
Total financial derivatives
$
9,703,115

 
$
8,007

 
$
(17,841
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 

 
46,841

 
 
 
 
 
 
 
 
Net amount
 
 
$
8,007

 
$
29,000

 
 
 
 
 
 
 
 


24



  
As of December 31, 2017
  
 
 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Term (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
2,086,347

 
$
5,240

 
$
(5,990
)
 
1.88%
 
1.40%
 
 
 
5.46
Receive fixed non-callable
1,559,700

 
110

 
(4,033
)
 
1.38%
 
1.45%
 
 
 
1.68
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
365,500

 
1,402

 
(138
)
 
2.16%
 
1.74%
 
 
 
5.84
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
345,333

 
339

 
(16,352
)
 
3.79%
 
1.40%
 
 
 
6.68
Receive fixed non-callable
3,409,916

 

 

 
1.25%
 
1.24%
 
 
 
0.92
Basis swaps
1,053,500

 
18

 
(106
)
 
1.33%
 
1.42%
 
 
 
0.91
Treasury futures
40,000

 

 
(36
)
 
 
 
 
 
123.96

 
 
Credit valuation adjustment
 
 
(16
)
 
56

 
 
 
 
 
 
 
 
Total financial derivatives
$
8,860,296

 
$
7,093

 
$
(26,599
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 

 
24,926

 
 
 
 
 
 
 
 
Net amount
 
 
$
7,093

 
$
(1,673
)
 
 
 
 
 
 
 
 

Changes in the fair values of financial derivatives not designated as cash flow or fair value hedges are reported in " Gains/(losses) on financial derivatives and hedging activities " in the consolidated statements of operations . For financial derivatives designated in fair value hedge relationships, changes in the fair values of the hedged items, which are primarily fixed rate AgVantage securities and fixed rate medium-term notes, related to the risk being hedged are reported in " Net interest income " in the consolidated statements of operations . Interest accruals on derivatives designated in fair value hedge relationships are also recorded in " Net interest income " in the consolidated statements of operations. For financial derivatives designated in cash flow hedge relationships, the unrealized gain or loss on the derivative is recorded in other comprehensive income. Because the hedging instrument is an interest rate swap and the hedged forecasted transactions are future interest payments on variable rate debt, amounts recorded in accumulated other comprehensive income are reclassified to " Total interest expense " in conjunction with the recognition of interest expense on the debt. As of September 30, 2018 , Farmer Mac expects to reclassify $1.9 million after tax from accumulated other comprehensive income to earnings over the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to September 30, 2018 . During the three and nine months ended September 30, 2018 and 2017 , there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it became probable that the original forecasted transaction would not occur.



25



The following table summarizes the net income/(expense) recognized in the consolidated statements of operations related to derivatives for the three and nine months ended September 30, 2018 and 2017 :

Table 4.2

 
For the Three Months Ended September 30, 2018
 
Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
 
Net Interest Income
 
Non-Interest Income
 
Total
 
Interest Income
Farmer Mac Guaranteed Securities and USDA Securities
 
Interest Income Loans
 
Total Interest Expense
 
Gains/(losses) on financial derivatives and hedging activities
 
 
(in thousands)
Total amounts presented in the consolidated statement of operations:
$
76,870

 
$
50,622

 
$
(97,557
)
 
$
628

 
$
30,563

Income/(expense) related to interest settlements on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives
1,272

 
(98
)
 
(2,702
)
 

 
(1,528
)
Recognized on hedged items
16,769

 
1,660

 
(9,821
)
 

 
8,608

Discount amortization recognized on hedged items

 

 
(177
)
 

 
(177
)
Income/(expense) related to interest settlements on fair value hedging relationships
$
18,041

 
$
1,562

 
$
(12,700
)
 
$

 
$
6,903

 
 
 
 
 
 
 
 
 
 
(Losses)/gains on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives
13,420

 
3,909

 
(1,188
)
 

 
16,141

Recognized on hedged items
(13,432
)
 
(4,062
)
 
2,404

 

 
(15,090
)
(Losses)/gains on fair value hedging relationships
$
(12
)
 
$
(153
)
 
$
1,216

 
$

 
$
1,051

 
 
 
 
 
 
 
 
 
 
Expense related to interest settlements on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest settlements reclassified from AOCI into net income on derivatives

 

 
189

 

 
189

Recognized on hedged items

 

 
(2,501
)
 

 
(2,501
)
Discount amortization recognized on hedged items

 

 
(2
)
 

 
(2
)
Expense recognized on cash flow hedges
$

 
$

 
$
(2,314
)
 
$

 
$
(2,314
)
 
 
 
 
 
 
 
 
 
 
Gains on financial derivatives not designated in hedge relationships:
 
 
 
 
 
 
 
 
 
Gains on interest rate swaps

 

 

 
3,267

 
3,267

Interest expense on interest rate swaps

 

 

 
(3,048
)
 
(3,048
)
Treasury futures

 

 

 
409

 
409

Gains on financial derivatives not designated in hedge relationships
$

 
$

 
$

 
$
628

 
$
628



26



 
For the Three Months Ended September 30, 2017
 
Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
 
Net Interest Income
 
Non-Interest Income
 
Total
 
 Interest Income Farmer Mac Guaranteed Securities and USDA Securities
 
Interest Income Loans
 
Total Interest Expense
 
Gains/(losses) on financial derivatives and hedging activities
 
 
(in thousands)
Total amounts presented in the consolidated statement of operations
$
54,350

 
$
40,924

 
$
(64,935
)
 
$
661

 
$
31,000

Income/(expense) related to interest settlements on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives
(2,267
)
 
(342
)
 
717

 

 
(1,892
)
Recognized on hedged items
11,986

 
947

 
(5,069
)
 

 
7,864

Discount amortization recognized on hedged items

 

 
(121
)
 

 
(121
)
Income/(expense) related to interest settlements on fair value hedging relationships
$
9,719

 
$
605

 
$
(4,473
)
 
$

 
$
5,851

 
 
 
 
 
 
 
 
 
 
Gains on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives (1)

 

 

 
1,576

 
1,576

Recognized on hedged items

 

 

 
166

 
166

Gains on fair value hedging relationships
$

 
$

 
$

 
$
1,742

 
$
1,742

 
 
 
 
 
 
 
 
 
 
Expense related to interest settlements on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest settlements reclassified from AOCI into net income on derivatives
$

 
$

 
$
(454
)
 
$

 
$
(454
)
Recognized on hedged items

 

 
(1,169
)
 

 
(1,169
)
Discount amortization recognized on hedged items

 

 
(1
)
 

 
(1
)
Losses recognized in income for hedge ineffectiveness

 

 

 
(191
)
 
(191
)
Expense recognized on cash flow hedges
$

 
$

 
$
(1,624
)
 
$
(191
)
 
$
(1,815
)
 
 
 
 
 
 
 
 
 
 
Losses on financial derivatives not designated in hedging relationships:
 
 
 
 
 
 
 
 
 
Gains on interest rate swaps
$

 
$

 
$

 
$
1,645

 
$
1,645

Interest expense on interest rate swaps

 

 

 
(2,676
)
 
(2,676
)
Agency forwards

 

 

 

 

Treasury futures

 

 

 
141

 
141

Losses on financial derivatives not designated in hedge relationships
$

 
$

 
$

 
$
(890
)
 
$
(890
)
(1)  
Included in the assessment of hedge effectiveness as of September 30, 2017 , but excluded from the amounts in the table, were losses of $1.6 million for the three months ended September 30, 2017 , attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amount recognized as hedge ineffectiveness for the three months ended September 30, 2017 were gains of $0.1 million .


27



 
For the Nine Months Ended September 30, 2018
 
Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
 
Net Interest Income
 
Non-Interest Income
 
Total
 
Interest Income
Farmer Mac Guaranteed Securities and USDA Securities
 
Interest Income Loans
 
Total Interest Expense
 
Gains/(losses) on financial derivatives and hedging activities
 
 
(in thousands)
Total amounts presented in the consolidated statement of operations:
$
213,479

 
$
145,671

 
$
(265,611
)
 
$
(688
)
 
$
92,851

Income/(expense) related to interest settlements on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives
465

 
(560
)
 
(5,315
)
 

 
(5,410
)
Recognized on hedged items
46,289

 
4,619

 
(28,633
)
 

 
22,275

Discount amortization recognized on hedged items

 

 
(534
)
 

 
(534
)
Income/(expense) related to interest settlements on fair value hedging relationships
$
46,754

 
$
4,059

 
$
(34,482
)
 
$

 
$
16,331

 
 
 
 
 
 
 
 
 
 
Gains/(losses) on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives
46,354

 
12,564

 
(13,565
)
 

 
45,353

Recognized on hedged items
(43,229
)
 
(13,106
)
 
16,733

 

 
(39,602
)
Gains/(losses) on fair value hedging relationships
$
3,125

 
$
(542
)
 
$
3,168

 
$

 
$
5,751

 
 
 
 
 
 
 
 
 
 
Expense related to interest settlements on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest settlements reclassified from AOCI into net income on derivatives

 

 
(21
)
 

 
(21
)
Recognized on hedged items

 

 
(6,611
)
 

 
(6,611
)
Discount amortization recognized on hedged items

 

 
(5
)
 

 
(5
)
Expense recognized on cash flow hedges
$

 
$

 
$
(6,637
)
 
$

 
$
(6,637
)
 
 
 
 
 
 
 
 
 
 
Losses on financial derivatives not designated in hedge relationships:
 
 
 
 
 
 
 
 
 
Gains on interest rate swaps

 

 

 
7,443

 
7,443

Interest expense on interest rate swaps

 

 

 
(8,903
)
 
(8,903
)
Treasury futures

 

 

 
772

 
772

Losses on financial derivatives not designated in hedge relationships
$

 
$

 
$

 
$
(688
)
 
$
(688
)



28



 
For the Nine Months Ended September 30, 2017
 
Net Income/(Expense) Recognized in Consolidated Statement of Operations on Derivatives
 
Net Interest Income
 
Non-Interest Income
 
Total
 
 Interest Income Farmer Mac Guaranteed Securities and USDA Securities
 
Interest Income Loans
 
Total Interest Expense
 
Gains/(losses) on financial derivatives and hedging activities
 
 
(in thousands)
Total amounts presented in the consolidated statement of operations
$
146,978

 
$
117,349

 
$
(172,797
)
 
$
2,530

 
$
94,060

Income/(expense) related to interest settlements on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives
(8,251
)
 
(767
)
 
2,157

 

 
(6,861
)
Recognized on hedged items
34,212

 
2,045

 
(12,832
)
 

 
23,425

Discount amortization recognized on hedged items

 

 
(311
)
 

 
(311
)
Income/(expense) related to interest settlements on fair value hedging relationships
$
25,961

 
$
1,278

 
$
(10,986
)
 
$

 
$
16,253

 
 
 
 
 
 
 
 
 
 
Losses on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Recognized on derivatives (1)

 

 

 
(5,466
)
 
(5,466
)
Recognized on hedged items

 

 

 
4,750

 
4,750

Losses on fair value hedging relationships
$

 
$

 
$

 
$
(716
)
 
$
(716
)
 
 
 
 
 
 
 
 
 
 
Expense related to interest settlements on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest settlements reclassified from AOCI into net income on derivatives
$

 
$

 
$
(1,494
)
 
$

 
$
(1,494
)
Recognized on hedged items

 

 
(2,665
)
 

 
(2,665
)
Discount amortization recognized on hedged items

 

 
(3
)
 

 
(3
)
Losses recognized in income for hedge ineffectiveness

 

 

 
(365
)
 
(365
)
Expense recognized on cash flow hedges
$

 
$

 
$
(4,162
)
 
$
(365
)
 
$
(4,527
)
 
 
 
 
 
 
 
 
 
 
Gains on financial derivatives not designated in hedging relationships:
 
 
 
 
 
 
 
 
 
Gains on interest rate swaps
$

 
$

 
$

 
$
12,324

 
$
12,324

Interest expense on interest rate swaps

 

 

 
(8,318
)
 
(8,318
)
Agency forwards

 

 

 
(588
)
 
(588
)
Treasury futures

 

 

 
193

 
193

Gains on financial derivatives not designated in hedge relationships
$

 
$

 
$

 
$
3,611

 
$
3,611

(1)  
Included in the assessment of hedge effectiveness as of September 30, 2017 , but excluded from the amounts in the table, were gains of $0.7 million for the nine months ended September 30, 2017 , attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the nine months ended September 30, 2017 were zero .



29



The following table shows the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships as of September 30, 2018 and December 31, 2017:

Table 4.3

 
Hedged Items in Fair Value Relationship
 
Carrying Amount of Hedged Assets/(Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustments included in the Carrying Amount of the Hedged Assets/(Liabilities)
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value
$
2,514,978

 
$
1,928,220

 
$
(65,596
)
 
$
(22,853
)
Loans held for investment, at amortized cost
166,754

 
149,304

 
(13,150
)
 
(189
)
Notes Payable, due after one year (1)(2)
(2,057,594
)
 
(1,552,935
)
 
22,428

 
5,836

(1)  
Carrying amount represents amortized cost.
(2)  
Includes $0.4 million of hedging adjustments on a discontinued hedging relationship.

As of September 30, 2018 and December 31, 2017, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $94.6 million and $28.5 million , respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $4.4 million and $0.5 million as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 , Farmer Mac held no cash as collateral for its derivatives in net asset positions resulting in uncollateralized net asset positions of $4.4 million . As of December 31, 2017, Farmer Mac held no cash collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.5 million .

As of September 30, 2018 and December 31, 2017, 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 $50.1 million and $58.2 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 $6.4 million and $28.0 million as of September 30, 2018 and December 31, 2017, respectively.  Farmer Mac posted cash of $0 and $46.8 million of investment securities as of September 30, 2018 and posted cash of $0.1 million and $24.8 million investment securities as of December 31, 2017.  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. Any 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 September 30, 2018 and December 31, 2017, it could have been required to settle its obligations under the agreements or post additional collateral of none and $3.1 million , respectively. As of September 30, 2018 and December 31, 2017, 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.

For certain derivatives, Farmer Mac clears interest rate swaps through a clearinghouse, the Chicago Mercantile Exchange ("CME"). Farmer Mac posts initial and variation margin to this clearinghouse 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


30



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 $9.7 billion notional amount of interest rate swaps outstanding as of September 30, 2018 , $8.3 billion were cleared through the swap clearinghouse. Of Farmer Mac's $8.8 billion notional amount of interest rate swaps outstanding as of December 31, 2017, $7.9 billion were cleared through the swap clearinghouse.


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 September 30, 2018 and December 31, 2017 , Farmer Mac had no loans held for sale. The following table displays the composition of the loan balances as of September 30, 2018 and December 31, 2017 :

Table 5.1

 
As of September 30, 2018
 
As of December 31, 2017
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
(in thousands)
Farm & Ranch
$
2,937,484

 
$
1,483,135

 
$
4,420,619

 
$
2,798,906

 
$
1,399,827

 
$
4,198,733

Rural Utilities
962,702

 

 
962,702

 
1,076,291

 

 
1,076,291

Total unpaid principal balance (1)
3,900,186

 
1,483,135

 
5,383,321

 
3,875,197

 
1,399,827

 
5,275,024

Unamortized premiums, discounts, and other cost basis adjustments
(15,550
)
 

 
(15,550
)
 
(1,442
)
 

 
(1,442
)
Total loans
3,884,636

 
1,483,135

 
5,367,771

 
3,873,755

 
1,399,827

 
5,273,582

Allowance for loan losses
(5,378
)
 
(1,493
)
 
(6,871
)
 
(5,493
)
 
(1,303
)
 
(6,796
)
Total loans, net of allowance
$
3,879,258

 
$
1,481,642

 
$
5,360,900

 
$
3,868,262

 
$
1,398,524

 
$
5,266,786

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

Allowance for Losses

Farm & Ranch

Farmer Mac maintains an allowance for losses presented in two components on its consolidated balance sheets: (1) an allowance for loan losses to account for estimated probable losses on loans held, and (2) a reserve for losses to account for estimated probable losses on loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities).  Farmer Mac's total allowance for losses was $9.0 million as of September 30, 2018 and $8.9 million as of December 31, 2017 . See Note 6 for more information about off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs.  



31



The following is a summary of the changes in the total allowance for losses for the three and nine months ended September 30, 2018 and 2017:

Table 5.2
 
As of September 30, 2018
 
As of September 30, 2017
 
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
$
6,789

 
$
2,249

 
$
9,038

 
$
6,138

 
$
1,966

 
$
8,104

Provision for/(release of) losses
99

 
(102
)
 
(3
)
 
270

 
114

 
384

Charge-offs
(17
)
 

 
(17
)
 

 

 

Ending Balance
$
6,871

 
$
2,147

 
$
9,018

 
$
6,408

 
$
2,080

 
$
8,488

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
6,796

 
2,070

 
8,866

 
5,415

 
2,020

 
7,435

Provision for losses
92

 
77

 
169

 
1,234

 
60

 
1,294

Charge-offs
$
(17
)
 
$

 
$
(17
)
 
$
(241
)
 
$

 
$
(241
)
Ending Balance
$
6,871

 
$
2,147

 
$
9,018

 
$
6,408

 
$
2,080

 
$
8,488


During the three and nine months ended September 30, 2018 , Farmer Mac recorded a provision to its allowance for loan losses of $0.1 million and $0.1 million respectively. During those same periods, Farmer Mac also recorded a release of reserve for losses of $0.1 million and a provision to the reserve for losses of $0.1 million , respectively. The provisions for the allowance for loan losses recorded during the three and nine months ended September 30, 2018 were attributable to an increase in the balance of on-balance sheet Farm & Ranch loans, which was partially offset by a slight improvement in overall portfolio credit quality. The release of the reserve for losses recorded during third quarter 2018 was attributable to a decrease in the balance of loans underlying LTSPCs since second quarter 2018. The provision for the reserve for losses recorded during the nine months ended September 30, 2018 was attributable to an increase in the balance of loans underlying LTSPCs since December 31, 2017. The charge-off that Farmer Mac recorded during the three and nine months ended September 30, 2018 related to one loan that was foreclosed and transitioned to REO during third quarter 2018.

During third quarter 2017, Farmer Mac recorded net provisions to its allowance for loan losses and reserve for losses of $0.3 million and $0.1 million , respectively. The net provisions to the allowance for loan losses recorded during third quarter 2017 were primarily attributable to (1) an increase in the specific allowance for certain impaired on-balance sheet crop and permanent planting loans resulting from both an increase in the outstanding loan balance of such loans and downgrades in risk ratings on certain of those loans, and (2) an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans. The net provision to the reserve for losses recorded during third quarter 2017 was primarily attributable to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired Agricultural Storage and Processing loans underlying LTSPCs. Farmer Mac recorded no charge-offs to its allowance for loan losses during third quarter 2017.



32



The following tables present the changes in the total allowance for losses for the three and nine months ended September 30, 2018 and 2017 by commodity type:

Table 5.3

 
September 30, 2018
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,125

 
$
2,368

 
$
1,322

 
$
448

 
$
720

 
$
55

 
$
9,038

Provision for/(release of) losses
(99
)
 
40

 
148

 
50

 
(97
)
 
(45
)
 
(3
)
Charge-offs

 

 

 
(17
)
 

 

 
(17
)
Ending Balance
$
4,026

 
$
2,408

 
$
1,470

 
$
481

 
$
623

 
$
10

 
$
9,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
4,081

 
$
2,469

 
$
1,211

 
$
481

 
$
606

 
$
18

 
$
8,866

Provision for/(release of) losses
(55
)
 
(61
)
 
259

 
17

 
17

 
(8
)
 
169

Charge-offs

 

 

 
(17
)
 

 

 
(17
)
Ending Balance
$
4,026

 
$
2,408

 
$
1,470

 
$
481

 
$
623

 
$
10

 
$
9,018


 
September 30, 2017
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
3,735

 
$
2,164

 
$
1,234

 
$
397

 
$
558

 
$
16

 
$
8,104

Provision for/(release of) losses
115

 
162

 
35

 
4

 
72

 
(4
)
 
384

Ending Balance
$
3,850

 
$
2,326

 
$
1,269

 
$
401

 
$
630

 
$
12

 
$
8,488

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
3,365

 
$
1,723

 
$
1,375

 
$
405

 
$
533

 
$
34

 
$
7,435

Provision for/(release of) losses
713

 
603

 
(93
)
 
(4
)
 
97

 
(22
)
 
1,294

Charge-offs
(228
)
 

 
(13
)
 

 

 

 
(241
)
Ending Balance
$
3,850

 
$
2,326

 
$
1,269

 
$
401

 
$
630

 
$
12

 
$
8,488





33




The following tables present the unpaid principal balances of loans held and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and the related total allowance for losses by impairment method and commodity type as of September 30, 2018 and December 31, 2017 :

Table 5.4

  
As of September 30, 2018
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,428,763

 
$
860,870

 
$
678,456

 
$
309,235

 
$
10,824

 
$
4,542

 
$
4,292,690

Off-balance sheet
1,242,091

 
503,784

 
648,648

 
166,570

 
68,651

 
3,509

 
2,633,253

Total
$
3,670,854

 
$
1,364,654

 
$
1,327,104

 
$
475,805

 
$
79,475

 
$
8,051

 
$
6,925,943

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
63,726

 
$
33,948

 
$
22,729

 
$
7,526

 
$

 
$

 
$
127,929

Off-balance sheet
11,497

 
2,374

 
3,308

 
896

 

 
71

 
18,146

Total
$
75,223

 
$
36,322

 
$
26,037

 
$
8,422

 
$

 
$
71

 
$
146,075

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,492,489

 
$
894,818

 
$
701,185

 
$
316,761

 
$
10,824

 
$
4,542

 
$
4,420,619

Off-balance sheet
1,253,588

 
506,158

 
651,956

 
167,466

 
68,651

 
3,580

 
2,651,399

Total
$
3,746,077

 
$
1,400,976

 
$
1,353,141

 
$
484,227

 
$
79,475

 
$
8,122

 
$
7,072,018

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,047

 
$
955

 
$
765

 
$
300

 
$
9

 
$
4

 
$
4,080

Off-balance sheet
612

 
191

 
211

 
49

 
614

 
5

 
1,682

Total
$
2,659

 
$
1,146

 
$
976

 
$
349

 
$
623

 
$
9

 
$
5,762

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,112

 
$
1,207

 
$
361

 
$
111

 
$

 
$

 
$
2,791

Off-balance sheet
255

 
55

 
133

 
21

 

 
1

 
465

Total
$
1,367

 
$
1,262

 
$
494

 
$
132

 
$

 
$
1

 
$
3,256

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
3,159

 
$
2,162

 
$
1,126

 
$
411

 
$
9

 
$
4

 
$
6,871

Off-balance sheet
867

 
246

 
344

 
70

 
614

 
6

 
2,147

Total
$
4,026

 
$
2,408

 
$
1,470

 
$
481

 
$
623

 
$
10

 
$
9,018




34



  
As of December 31, 2017
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,344,821

 
$
794,478

 
$
635,768

 
$
269,337

 
$
13,023

 
$
9,030

 
$
4,066,457

Off-balance sheet
1,236,392

 
532,666

 
678,642

 
155,627

 
45,738

 
4,981

 
2,654,046

Total
$
3,581,213

 
$
1,327,144

 
$
1,314,410

 
$
424,964

 
$
58,761

 
$
14,011

 
$
6,720,503

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
67,828

 
$
38,180

 
$
17,766

 
$
7,858

 
$

 
$
644

 
$
132,276

Off-balance sheet
8,904

 
2,239

 
2,782

 
806

 

 
76

 
14,807

Total
$
76,732

 
$
40,419

 
$
20,548

 
$
8,664

 
$

 
$
720

 
$
147,083

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,412,649

 
$
832,658

 
$
653,534

 
$
277,195

 
$
13,023

 
$
9,674

 
$
4,198,733

Off-balance sheet
1,245,296

 
534,905

 
681,424

 
156,433

 
45,738

 
5,057

 
2,668,853

Total
$
3,657,945

 
$
1,367,563

 
$
1,334,958

 
$
433,628

 
$
58,761

 
$
14,731

 
$
6,867,586

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,104

 
$
1,101

 
$
738

 
$
287

 
$
44

 
$
11

 
$
4,285

Off-balance sheet
546

 
305

 
231

 
48

 
562

 
5

 
1,697

Total
$
2,650

 
$
1,406

 
$
969

 
$
335

 
$
606

 
$
16

 
$
5,982

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,207

 
$
1,006

 
$
172

 
$
126

 
$

 
$

 
$
2,511

Off-balance sheet
224

 
57

 
70

 
20

 

 
2

 
373

Total
$
1,431

 
$
1,063

 
$
242

 
$
146

 
$

 
$
2

 
$
2,884

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
3,311

 
$
2,107

 
$
910

 
$
413

 
$
44

 
$
11

 
$
6,796

Off-balance sheet
770

 
362

 
301

 
68

 
562

 
7

 
2,070

Total
$
4,081

 
$
2,469

 
$
1,211

 
$
481

 
$
606

 
$
18

 
$
8,866




35



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 September 30, 2018 and December 31, 2017 :

Table 5.5
  
As of September 30, 2018
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
14,815

 
$
848

 
$
10,431

 
$
2,036

 
$

 
$

 
$
28,130

Unpaid principal balance
14,851

 
851

 
10,456

 
2,041

 

 

 
28,199

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment (1)
60,250

 
35,389

 
15,550

 
6,368

 

 
71

 
117,628

Unpaid principal balance
60,372

 
35,471

 
15,581

 
6,381

 

 
71

 
117,876

Associated allowance
1,367

 
1,262

 
494

 
132

 

 
1

 
3,256

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
75,065

 
36,237

 
25,981

 
8,404

 

 
71

 
145,758

Unpaid principal balance
75,223

 
36,322

 
26,037

 
8,422

 

 
71

 
146,075

Associated allowance
1,367

 
1,262

 
494

 
132

 

 
1

 
3,256

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status (2)
$
28,098

 
$
23,090

 
$
7,859

 
$
4,291

 
$

 
$

 
$
63,338

(1)  
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $115.2 million ( 79 percent ) of impaired loans as of September 30, 2018 , which resulted in a specific allowance of $2.7 million .
(2)  
Includes $30.6 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.
  
As of December 31, 2017
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
14,417

 
$
3,272

 
$
11,171

 
$
1,953

 
$

 
$
644

 
$
31,457

Unpaid principal balance
14,418

 
3,273

 
11,172

 
1,953

 

 
644

 
31,460

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment (1)
62,309

 
37,143

 
9,376

 
6,710

 

 
76

 
115,614

Unpaid principal balance
62,314

 
37,146

 
9,376

 
6,711

 

 
76

 
115,623

Associated allowance
1,431

 
1,063

 
242

 
146

 

 
2

 
2,884

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
76,726

 
40,415

 
20,547

 
8,663

 

 
720

 
147,071

Unpaid principal balance
76,732

 
40,419

 
20,548

 
8,664

 

 
720

 
147,083

Associated allowance
1,431

 
1,063

 
242

 
146

 

 
2

 
2,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status (2)
$
27,630

 
$
25,701

 
$
5,333

 
$
4,929

 
$

 
$

 
$
63,593

(1)  
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $113.2 million ( 77 percent ) of impaired loans as of December 31, 2017 , which resulted in a specific allowance of $2.7 million .
(2)  
Includes $15.7 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.


36



The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2018 and 2017 :

Table 5.6

 
September 30, 2018
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
75,920

 
$
44,818

 
$
24,443

 
$
8,898

 
$


$
72

 
$
154,151

Income recognized on impaired loans
223

 
933

 
122

 
56

 

 

 
1,334

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
73,968

 
$
44,122

 
$
23,358

 
$
8,874

 
$

 
$
394

 
$
150,716

Income recognized on impaired loans
942

 
1,597

 
261

 
173

 

 

 
2,973


 
September 30, 2017
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
72,180

 
$
38,396

 
$
15,582

 
$
7,944

 
$

 
$
401

 
$
134,503

Income recognized on impaired loans
101

 
244

 
13

 
61

 

 

 
419

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
65,244

 
$
35,101

 
$
14,620

 
$
8,096

 
$

 
$
201

 
$
123,262

Income recognized on impaired loans
563

 
464

 
212

 
235

 

 

 
1,474



For the three and nine months ended September 30, 2018 , there were two Farm & Ranch loans to the same borrower that were restructured in a troubled debt restructuring ("TDR"). The recorded investment of these TDR loans was $10.9 million before and after the restructuring. As a result of the restructuring, $0.8 million of unpaid interest, late fees and other fees were capitalized. For the three months ended September 30, 2017, there were no TDRs. For the nine months ended September 30, 2017, the recorded investment of loans determined to be TDRs was $0.2 million both before and after restructuring. As of September 30, 2018 and 2017, there were no TDRs identified during the previous 12 months that were in default under the modified terms. The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial for the three and nine months ended September 30, 2018 and 2017.

In accordance with the terms of all LTSPCs, Farmer Mac acquires loans that are either 90 days or  120 days delinquent (depending on the provisions of the applicable agreement) upon the request of the counterparty. Subsequent to the purchase, these defaulted loans are treated as nonaccrual loans and, therefore, interest is accounted for on the cash basis. Any decreases in expected cash flows are recognized as impairment.



37



The following tables present information related to Farmer Mac's acquisition of defaulted loans for the three and nine months ended September 30, 2018 and 2017 and the outstanding balances and carrying amounts of all such loans as of September 30, 2018 and December 31, 2017:

Table 5.7

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
($ in thousands)
Unpaid principal balance at acquisition date:
 
 
 
 
 
 
 
Loans underlying LTSPCs
$
1,483

 
$

 
$
1,483

 
$
311

Loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities)
5,552

 
3,043

 
6,273

 
3,147

Total unpaid principal balance at acquisition date
7,035

 
3,043

 
7,756

 
3,458

Contractually required payments receivable
7,115

 
3,073

 
7,845

 
3,490

Impairment recognized subsequent to acquisition
26

 

 
26

 

Release of allowance for all outstanding acquired defaulted loans

 
29

 

 
171

 
 
 
 
 
 
 
 
Number of defaulted loans purchased
7

 
6

 
11

 
10


 
As of
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Outstanding balance
$
22,242

 
$
18,866

Carrying amount
21,481

 
17,691





38



Net credit losses and 90 -day delinquencies as of and for the periods indicated for loans held and loans underlying off-balance sheet securities representing interests in pools of eligible Farm & Ranch loans ("Farm & Ranch Guaranteed Securities") and LTSPCs are presented in the table below.  As of September 30, 2018 , there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.

Table 5.8

 
90-Day Delinquencies (1)
 
Net Credit (Recoveries)/Losses
 
As of
 
For the Nine Months Ended
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
On-balance sheet assets:
 
 
 
 
 
 
 
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
32,756

 
$
47,881

 
$
40

 
$
(520
)
Total on-balance sheet
$
32,756

 
$
47,881

 
$
40

 
$
(520
)
Off-balance sheet assets:
 

 
 
 
 

 
 

Farm & Ranch:
 

 
 
 
 

 
 

LTSPCs
$
4,789

 
$
563

 
$

 
$

Total off-balance sheet
$
4,789

 
$
563

 
$

 
$

Total
$
37,545

 
$
48,444

 
$
40

 
$
(520
)
(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, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

Of the $32.8 million of on-balance sheet loans reported as 90 -day delinquencies as of September 30, 2018 , $0.2 million were loans subject to "removal-of-account" provisions. Of the $47.9 million of on-balance sheet loans reported as 90 -day delinquencies as of December 31, 2017 , $0.3 million were loans subject to "removal-of-account" provisions.



39



Credit Quality Indicators

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 September 30, 2018 and December 31, 2017 :  

Table 5.9
  
As of September 30, 2018
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
2,355,938

 
$
847,666

 
$
652,715

 
$
302,243

 
$
10,824

 
$
4,542

 
$
4,173,928

Special mention (2)
72,974

 
13,204

 
25,729

 
6,992

 

 

 
118,899

Substandard (3)
63,577

 
33,948

 
22,741

 
7,526

 

 

 
127,792

Total on-balance sheet
$
2,492,489

 
$
894,818

 
$
701,185

 
$
316,761

 
$
10,824

 
$
4,542

 
$
4,420,619

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,131,413

 
$
455,135

 
$
600,128

 
$
161,671

 
$
67,287

 
$
2,870

 
$
2,418,504

Special mention (2)
70,511

 
36,062

 
37,305

 
786

 

 

 
144,664

Substandard (3)
51,664

 
14,961

 
14,523

 
5,009

 
1,364

 
710

 
88,231

Total off-balance sheet
$
1,253,588

 
$
506,158

 
$
651,956

 
$
167,466

 
$
68,651

 
$
3,580

 
$
2,651,399

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
3,487,351

 
$
1,302,801

 
$
1,252,843

 
$
463,914

 
$
78,111

 
$
7,412

 
$
6,592,432

Special mention (2)
143,485

 
49,266

 
63,034

 
7,778

 

 

 
263,563

Substandard (3)
115,241

 
48,909

 
37,264

 
12,535

 
1,364

 
710

 
216,023

Total
$
3,746,077

 
$
1,400,976

 
$
1,353,141

 
$
484,227

 
$
79,475

 
$
8,122

 
$
7,072,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
15,843

 
$
7,822

 
$
5,274

 
$
3,817

 
$

 
$

 
$
32,756

Off-balance sheet
1,146

 
1,518

 
1,489

 
636

 

 

 
4,789

90 days or more past due
$
16,989

 
$
9,340

 
$
6,763

 
$
4,453

 
$

 
$

 
$
37,545

(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.



40



  
As of December 31, 2017
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
2,274,912

 
$
771,600

 
$
617,527

 
$
260,854

 
$
13,023

 
$
9,030

 
$
3,946,946

Special mention (2)
70,063

 
22,878

 
18,405

 
8,483

 

 

 
119,829

Substandard (3)
67,674

 
38,180

 
17,602

 
7,858

 

 
644

 
131,958

Total on-balance sheet
$
2,412,649

 
$
832,658

 
$
653,534

 
$
277,195

 
$
13,023

 
$
9,674

 
$
4,198,733

Off-Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,132,196

 
$
478,573

 
$
634,633

 
$
150,906

 
$
42,723

 
$
4,294

 
$
2,443,325

Special mention (2)
76,778

 
26,134

 
31,451

 
1,647

 

 
169

 
136,179

Substandard (3)
36,322

 
30,198

 
15,340

 
3,880

 
3,015

 
594

 
89,349

Total off-balance sheet
$
1,245,296

 
$
534,905

 
$
681,424

 
$
156,433

 
$
45,738

 
$
5,057

 
$
2,668,853

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
3,407,108

 
$
1,250,173

 
$
1,252,160

 
$
411,760

 
$
55,746

 
$
13,324

 
$
6,390,271

Special mention (2)
146,841

 
49,012

 
49,856

 
10,130

 

 
169

 
256,008

Substandard (3)
103,996

 
68,378

 
32,942

 
11,738

 
3,015

 
1,238

 
221,307

Total
$
3,657,945

 
$
1,367,563

 
$
1,334,958

 
$
433,628

 
$
58,761

 
$
14,731

 
$
6,867,586

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
21,702

 
$
18,833

 
$
3,835

 
$
3,511

 
$

 
$

 
$
47,881

Off-balance sheet
151

 

 

 
412

 

 

 
563

90 days or more past due
$
21,853

 
$
18,833

 
$
3,835

 
$
3,923

 
$

 
$

 
$
48,444

(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.



41



Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, the range of original loan-to-value ratios, and the range in the size of borrower exposure for all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of September 30, 2018 and December 31, 2017:

Table 5.10
 
As of
  
September 30, 2018
 
December 31, 2017
  
(in thousands)
By commodity/collateral type:
 
 
 
Crops
$
3,746,077

 
$
3,657,945

Permanent plantings
1,400,976

 
1,367,563

Livestock
1,353,141

 
1,334,958

Part-time farm
484,227

 
433,628

Ag. Storage and Processing
79,475

 
58,761

Other
8,122

 
14,731

Total
$
7,072,018

 
$
6,867,586

By geographic region (1) :
 

 
 

Northwest
$
815,346

 
$
740,991

Southwest
2,198,744

 
2,093,213

Mid-North
2,276,100

 
2,244,094

Mid-South
876,960

 
908,603

Northeast
315,685

 
296,264

Southeast
589,183

 
584,421

Total
$
7,072,018

 
$
6,867,586

By original loan-to-value ratio (2) :
 

 
 

0.00% to 40.00%
$
1,317,118

 
$
1,322,422

40.01% to 50.00%
1,769,124

 
1,733,671

50.01% to 60.00%
2,456,766

 
2,385,605

60.01% to 70.00%
1,227,092

 
1,150,914

70.01% to 80.00% (3)
277,204

 
248,799

80.01% to 90.00% (3)
24,714

 
26,175

Total
$
7,072,018

 
$
6,867,586

By size of borrower exposure (4) :
 
 
 
Less than $1,000,000
$
2,423,394

 
$
2,379,596

$1,000,000 to $4,999,999
2,696,431

 
2,627,617

$5,000,000 to $9,999,999
917,198

 
867,574

$10,000,000 to $24,999,999
587,618

 
584,896

$25,000,000 to $50,000,000
447,377

 
407,903

Total
$
7,072,018

 
$
6,867,586

(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)  
As of second quarter 2017, Farmer Mac revised its calculation of the original loan-to-value ratio of a loan to combine for any cross-collateralized loans: (i) the original loan principal balance amounts in the numerator and (ii) the original appraised property values in the denominator. In previous periods, the ratio was calculated on a loan-by-loan basis without considering the effects of any cross-collateralization. Prior period information has been reclassified to conform to the current period calculation and presentation.
(3)  
Primarily part-time farm loans. Loans with original loan-to-value ratios of greater than 80% are required to have private mortgage insurance.
(4)  
Includes multiple loans to the same borrower or borrower-related entities.



42



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.

6.
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 or the Rural Utilities lines of business.

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018
 
As of December 31, 2017
  
(in thousands)
Farm & Ranch:
 
 
 
Guaranteed Securities
$
287,594

 
$
333,511

USDA Guarantees:
 
 
 
Farmer Mac Guaranteed USDA Securities
346,690

 
254,217

Institutional Credit:
 

 
 

AgVantage Securities
11,556

 
11,556

Revolving floating rate AgVantage facility (1)
300,000

 
300,000

Total off-balance sheet Farmer Mac Guaranteed Securities
$
945,840

 
$
899,284

(1)  
Relates to a revolving floating rate AgVantage facility subject to specified contractual terms. Farmer Mac receives a fixed fee based on the full dollar amount of the facility.

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 Nine Months Ended
  
September 30, 2018
 
September 30, 2017
  
(in thousands)
Proceeds from new securitizations
$
305,391

 
$
404,246

Guarantee fees received
1,481

 
2,141

Purchases of assets from the trusts
(6,273
)
 
(3,147
)

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 $3.1 million


43



as of September 30, 2018 and $3.6 million as of December 31, 2017. As of September 30, 2018 and December 31, 2017, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 9.5 years and 10.0 years , respectively. As of September 30, 2018 and December 31, 2017, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 5.3 years and 0.8 years , respectively.

Long-Term Standby Purchase Commitments

An LTSPC is a commitment by Farmer Mac to purchase eligible loans from an identified pool of loans under specified circumstances set forth in the applicable agreement, either for cash or in exchange for Farmer Mac Guaranteed Securities, on one or more undetermined future dates.  As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly in arrears.

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 $3.0 billion and $3.1 billion as of September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018 and December 31, 2017, the weighted-average remaining maturity of all loans underlying LTSPCs was 15.5 years and 15.3 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 $35.5 million as of September 30, 2018 and $34.8 million as of December 31, 2017.



44




7.
EQUITY

Common Stock

For each of the first, second, and third quarters in 2018, Farmer Mac paid a quarterly dividend of $0.58 per share on all classes of its common stock. For each quarter in 2017, Farmer Mac paid a quarterly dividend of $0.36 per share on all classes of its common stock.

In August 2017, Farmer Mac's board of directors approved the continuation of the share repurchase program on its existing terms through August 2019 for the repurchase of up to $5.4 million of Farmer Mac's outstanding Class C non-voting common stock, which is the amount that was remaining under the share repurchase program originally authorized in third quarter 2015.

Capital Requirements

Farmer Mac is subject to the following 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) 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"), an independent agency in the executive branch of the United States government that regulates Farmer Mac, 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 both September 30, 2018 and December 31, 2017, the minimum capital requirement was greater than the risk-based capital requirement. Farmer Mac's ability to declare and pay dividends could be restricted if it fails to comply with applicable capital requirements.

As of September 30, 2018 , Farmer Mac's minimum capital requirement was $539.8 million and its core capital level was $713.6 million , which was $173.8 million above the minimum capital requirement as of that date. As of December 31, 2017, Farmer Mac's minimum capital requirement was $520.3 million and its core capital level was $657.1 million , which was $136.8 million above the minimum capital requirement as of that date.

In accordance with FCA's rule on Farmer Mac's capital planning, and as part of Farmer Mac's capital plan, Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital (consisting of retained


45



earnings, paid-in-capital, common stock, and qualifying preferred stock) and imposing restrictions on Tier 1-eligible dividends and any discretionary bonus payments in the event that this capital falls below specified thresholds.


8.
FAIR VALUE DISCLOSURES

As of September 30, 2018 , Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.0 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 32 percent of total assets and 73 percent of financial instruments measured at fair value as of September 30, 2018 . As of December 31, 2017, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.5 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3 represented 31 percent of total assets and 71 percent of financial instruments measured at fair value as of December 31, 2017.

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. During the first nine months of 2018 there were no transfers within 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 nine months of 2017 there was one transfer within the fair value hierarchy from Level 2 to Level 3 for the fair value measurement of a fixed-rate GSE guaranteed mortgage-backed security (interest-only security). The transfer to Level 3 was because unobservable inputs became significant to the overall estimate of the fair value of the security as of March 31, 2017.


46



The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2018 and December 31, 2017, 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 September 30, 2018
 
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
$

 
$

 
$
18,961

 
$
18,961

Floating rate asset-backed securities

 
30,056

 

 
30,056

Floating rate Government/GSE guaranteed mortgage-backed securities

 
1,336,474

 

 
1,336,474

Fixed rate GSE guaranteed mortgage-backed securities

 
422

 

 
422

Fixed rate U.S. Treasuries
838,089

 

 

 
838,089

Total Investment Securities
838,089

 
1,366,952

 
18,961

 
2,224,002

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
5,957,304

 
5,957,304

Total Farmer Mac Guaranteed Securities

 

 
5,957,304

 
5,957,304

USDA Securities:
 

 
 

 
 

 
 

Trading

 

 
10,237

 
10,237

Total USDA Securities

 

 
10,237

 
10,237

Financial derivatives

 
8,007

 

 
8,007

Total Assets at fair value
$
838,089

 
$
1,374,959

 
$
5,986,502

 
$
8,199,550

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
10

 
$
17,831

 
$

 
$
17,841

Total Liabilities at fair value
$
10

 
$
17,831

 
$

 
$
17,841

Non-recurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
317

 
$
317

REO

 

 
128

 
128

Total Non-recurring Assets at fair value
$

 
$

 
$
445

 
$
445




47



Assets and Liabilities Measured at Fair Value as of December 31, 2017
 
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
$

 
$

 
$
18,814

 
$
18,814

Floating rate asset-backed securities

 
34,210

 

 
34,210

Floating rate Government/GSE guaranteed mortgage-backed securities

 
1,290,187

 

 
1,290,187

Fixed rate GSE guaranteed mortgage-backed securities

 
486

 
4,333

 
4,819

Fixed rate senior agency debt

 
99,951

 

 
99,951

Fixed rate U.S. Treasuries
767,424

 

 

 
767,424

Total available-for-sale
767,424

 
1,424,834

 
23,147

 
2,215,405

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage

 

 
5,471,914

 
5,471,914

Total Farmer Mac Guaranteed Securities

 

 
5,471,914

 
5,471,914

USDA Securities:
 

 
 

 
 

 
 

Trading

 

 
13,515

 
13,515

Total USDA Securities

 

 
13,515

 
13,515

Financial derivatives

 
7,093

 

 
7,093

Total Assets at fair value
$
767,424

 
$
1,431,927

 
$
5,508,576

 
$
7,707,927

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
36

 
$
26,563

 
$

 
$
26,599

Total Liabilities at fair value
$
36

 
$
26,563

 
$

 
$
26,599

Non-recurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$

 
$

 
$
508

 
$
508

Total Non-recurring Assets at fair value
$

 
$

 
$
508

 
$
508






48




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. There were no liabilities measured at fair value using significant unobservable inputs during the three and nine months ended September 30, 2018 and 2017.


Table 8.2
 
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2018
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized (Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehe- nsive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
19,010

 
$

 
$

 
$

 
$

 
$
(49
)
 
$
18,961

Total available-for-sale
19,010

 

 

 

 

 
(49
)
 
18,961

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
5,985,806

 
687,381

 

 
(689,213
)
 
(13,432
)
 
(13,238
)
 
5,957,304

Total available-for-sale
5,985,806

 
687,381

 

 
(689,213
)
 
(13,432
)
 
(13,238
)
 
5,957,304

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale

 
26,321

 
(26,321
)
 

 

 

 

Trading (1)
10,748

 

 

 
(508
)
 
(3
)
 

 
10,237

Total USDA Securities
10,748

 
26,321

 
(26,321
)
 
(508
)
 
(3
)
 

 
10,237

Total Assets at fair value
$
6,015,564

 
$
713,702

 
$
(26,321
)
 
$
(689,721
)
 
$
(13,435
)
 
$
(13,287
)
 
$
5,986,502

(1)  
Includes unrealized losses of $9,000 attributable to assets still held as of September 30, 2018 that are recorded in " (Losses)/gains on trading securities ."



49



Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2017
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(losses) included
in Income
 
Unrealized Gains/(losses) included in Other
Comprehe-nsive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
18,518

 
$

 
$

 
$

 
$

 
$

 
$
18,518

Fixed rate GSE guaranteed mortgage-backed securities
4,651

 

 

 
(111
)
 

 
(82
)
 
4,458

Total available-for-sale
23,169

 

 

 
(111
)
 

 
(82
)
 
22,976

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
5,282,562

 
193,800

 

 
(29,851
)
 
(1,171
)
 
(1,594
)
 
5,443,746

Total available-for-sale
5,282,562

 
193,800

 

 
(29,851
)
 
(1,171
)
 
(1,594
)
 
5,443,746

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale

 
40,844

 
(40,844
)
 

 

 

 

Trading (1)
16,294

 

 

 
(1,430
)
 

 

 
14,864

Total USDA Securities
16,294

 
40,844

 
(40,844
)
 
(1,430
)
 

 

 
14,864

Total Assets at fair value
$
5,322,025

 
$
234,644

 
$
(40,844
)
 
$
(31,392
)
 
$
(1,171
)
 
$
(1,676
)
 
$
5,481,586

(1)  
Includes unrealized gains of $34,000 attributable to assets still held as of September 30, 2017 that are recorded in " (Losses)/gains on trading securities ."


50



Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2018
  
Beginning
Balance
 
Cumulative Effect from Change in Hedge Accounting
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized (Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehe- nsive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
18,814

 

 
$

 
$

 
$

 
$

 
$
147

 
$
18,961

Fixed rate GSE guaranteed mortgage-backed securities
4,333

 

 

 

 
(2,137
)
 
(2,092
)
 
(104
)
 

Total available-for-sale
23,147

 

 

 

 
(2,137
)
 
(2,092
)
 
43

 
18,961

Farmer Mac Guaranteed Securities:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
5,471,914

 
487

 
1,646,345

 

 
(1,128,674
)
 
(43,230
)
 
10,462

 
5,957,304

Total available-for-sale
5,471,914

 
487

 
1,646,345

 

 
(1,128,674
)
 
(43,230
)
 
10,462

 
5,957,304

USDA Securities:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale

 

 
105,628

 
(105,628
)
 

 

 

 

Trading (1)
13,515

 

 

 

 
(3,302
)
 
24

 

 
10,237

Total USDA Securities
13,515

 

 
105,628

 
(105,628
)
 
(3,302
)
 
24

 

 
10,237

Total Assets at fair value
$
5,508,576

 
$
487

 
$
1,751,973

 
$
(105,628
)
 
$
(1,134,113
)
 
$
(45,298
)
 
$
10,505

 
$
5,986,502

(1)  
Includes unrealized gains of $0.1 million attributable to assets still held as of September 30, 2018 that are recorded in " (Losses)/gains on trading securities ."








51



Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2017
  
Beginning
Balance
 
Transfers in
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(losses) included
in Income
 
Unrealized Gains/(losses) included in Other
Comprehe-nsive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
17,730

 
$

 
$

 
$

 
$

 
$

 
$
788

 
$
18,518

Fixed rate GSE guaranteed mortgage-backed securities
$

 
$
7,041

 
$

 
$

 
$
(334
)
 
$

 
$
(2,249
)
 
$
4,458

Total available-for-sale
17,730

 
7,041

 

 

 
(334
)
 

 
(1,461
)
 
22,976

Farmer Mac Guaranteed Securities:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
4,853,685

 

 
927,615

 

 
(357,006
)
 
5,166

 
14,286

 
5,443,746

Total available-for-sale
4,853,685

 

 
927,615

 

 
(357,006
)
 
5,166

 
14,286

 
5,443,746

USDA Securities:
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale

 

 
126,939

 
(126,939
)
 

 

 

 

Trading (1)
20,388

 

 

 

 
(5,440
)
 
(84
)
 

 
14,864

Total USDA Securities
20,388

 

 
126,939

 
(126,939
)
 
(5,440
)
 
(84
)
 

 
14,864

Total Assets at fair value
$
4,891,803

 
$
7,041

 
$
1,054,554

 
$
(126,939
)
 
$
(362,780
)
 
$
5,082

 
$
12,825

 
$
5,481,586

(1)  
Includes unrealized gains of $42,000 attributable to assets still held as of September 30, 2017 that are recorded in " (Losses)/gains on trading securities ."







52



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 September 30, 2018 and December 31, 2017.

Table 8.3
 
 
As of September 30, 2018
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
 
$
18,961

 
Indicative bids
 
Range of broker quotes
 
96.3% - 96.3% (96.3%)
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
5,957,304

 
Discounted cash flow
 
Discount rate
 
2.9% - 4.0% (3.1%)
 
 
 
 
 
 
 
 
 
USDA Securities
 
$
10,237

 
Discounted cash flow
 
Discount rate
 
3.3% - 5.2% (4.9%)
 
 
 
 
 
 
CPR
 
6% - 16% (15%)

 
 
As of December 31, 2017
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
 
$
18,814

 
Indicative bids
 
Range of broker quotes
 
95.5% - 95.5% (95.5%)
Fixed rate GSE guaranteed mortgage-backed securities
 
$
4,333

 
Discounted cash flow
 
Discount rate
 
2.9%
 
 
 
 
 
 
CPR
 
0 %
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
5,471,914

 
Discounted cash flow
 
Discount rate
 
2.1% - 3.4% (2.4%)
 
 
 
 
 
 
 
 
 
USDA Securities
 
$
13,515

 
Discounted cash flow
 
Discount rate
 
3.6% - 5.4% (5.0%)
 
 
 
 
 
 
CPR
 
7% - 19% (17%)

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.



53



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 September 30, 2018 and December 31, 2017:

Table 8.4

 
As of September 30, 2018
 
As of December 31, 2017
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
436,152

 
$
436,152

 
$
302,022

 
$
302,022

Investment securities
2,269,877

 
2,269,034

 
2,260,969

 
2,260,437

Farmer Mac Guaranteed Securities
8,002,686

 
8,024,611

 
7,588,806

 
7,598,188

USDA Securities
2,067,583

 
2,154,111

 
2,076,396

 
2,131,365

Loans
5,331,095

 
5,360,900

 
5,279,225

 
5,266,786

Financial derivatives
8,007

 
8,007

 
7,093

 
7,093

Guarantee and commitment fees receivable:
 
 
 
 
 
 
 
LTSPCs
37,764

 
36,436

 
33,871

 
35,718

Farmer Mac Guaranteed Securities
3,710

 
3,742

 
4,323

 
4,177

Financial liabilities:
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
Due within one year
7,363,251

 
7,378,927

 
8,079,309

 
8,089,826

Due after one year
8,348,709

 
8,419,424

 
7,445,545

 
7,432,790

Debt securities of consolidated trusts held by third parties
1,451,781

 
1,486,733

 
1,386,652

 
1,404,945

Financial derivatives
17,841

 
17,841

 
26,599

 
26,599

Guarantee and commitment obligations:
 
 
 
 
 
 
 
LTSPCs
36,796

 
35,468

 
32,976

 
34,824

Farmer Mac Guaranteed Securities
3,098

 
3,129

 
3,722

 
3,576


The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as Level 1. Investment securities primarily are valued based on unadjusted quoted prices in active markets and are classified as Level 2. Farmer Mac internally models the fair value of its loan portfolio, including loans held for investment and loans held for investment in consolidated trusts, Farmer Mac Guaranteed Securities, and USDA Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. These fair value measurements do not take into consideration the fair value of the underlying property and are classified as Level 3. Financial derivatives primarily are valued using unadjusted counterparty valuations and are classified as Level 2. The fair value of the guarantee fees receivable/obligation and debt securities of consolidated trusts are estimated based on the present value of expected future cash flows of the underlying mortgage assets using management's best estimate of certain key assumptions, which include prepayments speeds, forward yield curves, and discount rates commensurate with the risks involved and are classified as Level 3. Notes payable are valued by discounting the expected cash flows of these instruments using a yield curve derived from market prices observed for similar agency securities and are also classified as Level 3. Because the cash flows of Farmer Mac's financial instruments may be interest rate path dependent, estimated fair values and projected discount rates for Level 3 financial instruments


54



are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.



55



9.
BUSINESS SEGMENT REPORTING

The following tables present core earnings for Farmer Mac's operating segments and a reconciliation to consolidated net income for the three and nine months ended September 30, 2018 and 2017 :

Table 9.1
Core Earnings by Business Segment
For the Three Months Ended September 30, 2018
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
16,425

 
$
5,304

 
$
3,081

 
$
17,600

 
$
2,648

 
$

 
$
45,058

Less: reconciling adjustments (1)(2)(3)(4)
(2,538
)
 
(677
)
 
(204
)
 
(1,958
)
 
(604
)
 
5,981

 

Net effective spread
13,887

 
4,627

 
2,877

 
15,642

 
2,044

 
5,981

 

Guarantee and commitment fees (2)
4,489

 
214

 
376

 
91

 

 
(1,680
)
 
3,490

Other income/(expense) (3)
294

 
5

 
15

 

 
(245
)
 
880

 
949

Non-interest income/(loss)
4,783

 
219

 
391

 
91

 
(245
)
 
(800
)
 
4,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(99
)
 

 

 

 

 

 
(99
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of reserve for losses
102

 

 

 

 

 

 
102

Other non-interest expense
(4,456
)
 
(1,288
)
 
(732
)
 
(1,844
)
 
(3,432
)
 

 
(11,752
)
Non-interest expense (5)
(4,354
)
 
(1,288
)
 
(732
)
 
(1,844
)
 
(3,432
)
 

 
(11,650
)
Core earnings before income taxes
14,217

 
3,558

 
2,536

 
13,889

 
(1,633
)
 
5,181

(6)  
37,748

Income tax (expense)/benefit
(2,986
)
 
(747
)
 
(533
)
 
(2,917
)
 
292

 
(1,088
)
 
(7,979
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
11,231

 
2,811

 
2,003

 
10,972

 
(1,341
)
 
4,093

(6)  
29,769

Preferred stock dividends

 

 

 

 
(3,295
)
 

 
(3,295
)
Segment core earnings/(losses)
$
11,231

 
$
2,811

 
$
2,003

 
$
10,972

 
$
(4,636
)
 
$
4,093

(6)  
$
26,474

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
4,438,128

 
$
2,212,515

 
$
956,204

 
$
8,103,181

 
$
2,764,006

 
$

 
$
18,474,034

Total on- and off-balance sheet program assets at principal balance
$
7,072,018

 
$
2,471,251

 
$
1,632,037

 
$
8,365,280

 

 

 
$
19,540,586

(1)  
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)  
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)  
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in " Gains/(losses) on financial derivatives and hedging activities " on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)  
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread."
(5)  
Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(6)  
Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.




56



Core Earnings by Business Segment
For the Three Months Ended September 30, 2017
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
13,609

 
$
5,288

 
$
2,230

 
$
15,431

 
$
3,004

 
$

 
$
39,562

Less: reconciling adjustments (1)(2)(3)(4)
(2,306
)
 
(560
)
 
535

 
(976
)
 
(279
)
 
3,586

 

Net effective spread
11,303

 
4,728

 
2,765

 
14,455

 
2,725

 
3,586

 

Guarantee and commitment fees (2)
4,236

 
130

 
476

 
93

 

 
(1,621
)
 
3,314

Other income/(expense) (3)(5)
214

 
9

 
5

 

 
78

 
679

 
985

Non-interest income/(loss)
4,450

 
139

 
481

 
93

 
78

 
(942
)
 
4,299

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(270
)
 

 

 

 

 

 
(270
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for reserve for losses
(114
)
 

 

 

 

 

 
(114
)
Other non-interest expense
(4,077
)
 
(1,080
)
 
(608
)
 
(1,670
)
 
(3,067
)
 

 
(10,502
)
Non-interest expense (6)
(4,191
)
 
(1,080
)
 
(608
)
 
(1,670
)
 
(3,067
)
 

 
(10,616
)
Core earnings before income taxes
11,292

 
3,787

 
2,638

 
12,878

 
(264
)
 
2,644

(7)  
32,975

Income tax (expense)/benefit
(3,952
)
 
(1,325
)
 
(923
)
 
(4,507
)
 
439

 
(925
)
 
(11,193
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
7,340

 
2,462

 
1,715

 
8,371

 
175

 
1,719

(7)  
21,782

Preferred stock dividends

 

 

 

 
(3,295
)
 

 
(3,295
)
Non-controlling interest

 

 

 

 

 

 

Segment core earnings/(losses)
$
7,340

 
$
2,462

 
$
1,715

 
$
8,371

 
$
(3,120
)
 
$
1,719

(7)  
$
18,487

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
4,128,778

 
$
2,165,749

 
$
1,073,525

 
$
7,612,572

 
$
2,709,614

 
$

 
$
17,690,238

Total on- and off-balance sheet program assets at principal balance
$
6,557,030

 
$
2,298,956

 
$
1,886,445

 
$
7,901,842

 
$

 
$

 
$
18,644,273

(1)  
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)  
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)  
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in " Gains/(losses) on financial derivatives and hedging activities " on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)  
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread."
(5)  
Includes reconciling adjustments for 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.
(6)  
Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(7)  
Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.



57



Core Earnings by Business Segment
For the Nine Months Ended September 30, 2018
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
47,255

 
$
15,446

 
$
8,931

 
$
54,237

 
$
6,351

 
$

 
$
132,220

Less: reconciling adjustments (1)(2)(3)(4)
(7,481
)
 
(2,021
)
 
(181
)
 
(8,551
)
 
(1,646
)
 
19,880

 

Net effective spread
39,774

 
13,425

 
8,750

 
45,686

 
4,705

 
19,880

 

Guarantee and commitment fees (2)
13,356

 
570

 
1,227

 
271

 

 
(4,954
)
 
10,470

Other income/(expense) (3)
1,193

 
18

 
25

 

 
(594
)
 
(54
)
 
588

Non-interest income/(loss)
14,549

 
588

 
1,252

 
271

 
(594
)
 
(5,008
)
 
11,058

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(92
)
 

 

 

 

 

 
(92
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for reserve for losses
(77
)
 

 

 

 

 

 
(77
)
Other non-interest expense
(13,930
)
 
(3,793
)
 
(2,144
)
 
(5,720
)
 
(10,549
)
 

 
(36,136
)
Non-interest expense (5)
(14,007
)
 
(3,793
)
 
(2,144
)
 
(5,720
)
 
(10,549
)
 

 
(36,213
)
Core earnings before income taxes
40,224

 
10,220

 
7,858

 
40,237

 
(6,438
)
 
14,872

(6)  
106,973

Income tax (expense)/benefit
(8,447
)
 
(2,146
)
 
(1,651
)
 
(8,450
)
 
2,067

 
(3,122
)
 
(21,749
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
31,777

 
8,074

 
6,207

 
31,787

 
(4,371
)
 
11,750

(6)  
85,224

Preferred stock dividends

 

 

 

 
(9,886
)
 

 
(9,886
)
Segment core earnings/(losses)
$
31,777

 
$
8,074

 
$
6,207

 
$
31,787

 
$
(14,257
)
 
$
11,750

(6)  
$
75,338

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
4,438,128

 
$
2,212,515

 
$
956,204

 
$
8,103,181

 
$
2,764,006

 
$

 
$
18,474,034

Total on- and off-balance sheet program assets at principal balance
$
7,072,018

 
$
2,471,251

 
$
1,632,037

 
$
8,365,280

 

 

 
$
19,540,586

(1)  
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)  
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)  
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in " Gains/(losses) on financial derivatives and hedging activities " on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)  
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread."
(5)  
Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(6)  
Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.





58



Core Earnings by Business Segment
For the Nine Months Ended September 30, 2017
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Net interest income
$
39,701

 
$
15,747

 
$
8,181

 
$
44,364

 
$
8,371

 
$

 
$
116,364

Less: reconciling adjustments (1)(2)(3)(4)
(6,729
)
 
(1,907
)
 
(179
)
 
(2,827
)
 
(886
)
 
12,528

 

Net effective spread
32,972

 
13,840

 
8,002

 
41,537

 
7,485

 
12,528

 

Guarantee and commitment fees (2)
12,722

 
303

 
1,455

 
713

 

 
(4,563
)
 
10,630

Other income/(expense) (3)(5)
1,402

 
34

 
15

 

 
199

 
2,559

 
4,209

Non-interest income/(loss)
14,124

 
337

 
1,470

 
713

 
199

 
(2,004
)
 
14,839

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(1,234
)
 

 

 

 

 

 
(1,234
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for reserve for losses
(60
)
 

 

 

 

 

 
(60
)
Other non-interest expense
(12,588
)
 
(3,333
)
 
(1,838
)
 
(4,813
)
 
(9,923
)
 

 
(32,495
)
Non-interest expense (6)
(12,648
)
 
(3,333
)
 
(1,838
)
 
(4,813
)
 
(9,923
)
 

 
(32,555
)
Core earnings before income taxes
33,214

 
10,844

 
7,634

 
37,437

 
(2,239
)
 
10,524

(7)  
97,414

Income tax (expense)/benefit
(11,625
)
 
(3,795
)
 
(2,671
)
 
(13,103
)
 
1,775

 
(3,684
)
 
(33,103
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
21,589

 
7,049

 
4,963

 
24,334

 
(464
)
 
6,840

(7)  
64,311

Preferred stock dividends

 

 

 

 
(9,886
)
 

 
(9,886
)
Non-controlling interest

 

 

 

 
165

 

 
165

Segment core earnings/(losses)
$
21,589

 
$
7,049

 
$
4,963

 
$
24,334

 
$
(10,185
)
 
$
6,840

(7)  
$
54,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
4,128,778

 
$
2,165,749

 
$
1,073,525

 
$
7,612,572

 
$
2,709,614

 
$

 
$
17,690,238

Total on- and off-balance sheet program assets at principal balance
$
6,557,030

 
$
2,298,956

 
$
1,886,445

 
$
7,901,842

 

 

 
$
18,644,273

(1)  
Excludes the amortization of premiums and discounts on assets consolidated at fair value, originally included in interest income, to reflect core earnings amounts.
(2)  
Includes the reclassification of interest income and interest expense from consolidated trusts owned by third parties to guarantee and commitment fees, to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee.
(3)  
Includes the reclassification of interest expense related to interest rate swaps not designated as hedges, which are included in " Gains/(losses) on financial derivatives and hedging activities " on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)  
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, a component of core earnings, to also include the net effects of gains/(losses) due to terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread."
(5)  
Includes reconciling adjustments for 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.
(6)  
Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(7)  
Net adjustments to reconcile to the corresponding income measures: core earnings before income taxes reconciled to income before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.


10.
INCOME TAXES

As a result of the changes to the U.S. tax code resulting from legislation enacted in December 2017, Farmer Mac's effective tax rate decreased from 35.5 percent for the year ended December 31, 2017 to 20.1 percent for the first nine months of 2018. The effective tax rate was lower than the statutory corporate tax rate in the first nine months of 2018 due to net tax benefits recognized related to exercises of share-based compensation awards during 2018.



59



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. The accounts of Contour Valuation Services, LLC (which began doing business as AgVisory during first quarter 2016) ("AgVisory"), Farmer Mac's former majority-owned subsidiary, are also included through June 30, 2017. Farmer Mac redeemed its ownership interest in AgVisory on May 1, 2017. 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, 2017 filed with the SEC on March 8, 2018.


FORWARD-LOOKING STATEMENTS

Some statements made in this report, and in particular in the "Management's Discussion & Analysis of Financial Condition and Results of Operations" section, 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," "plans," "potential," "may," "could," "should," and similar phrases.  This report 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, substandard assets, credit losses, and provisions for losses;
trends in expenses;
trends in investment securities;
prospects for asset impairments and allowance for losses;
changes in capital position;
future dividend payments; 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, both known and unknown, 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 period ended December 31, 2017 filed with the SEC on March 8, 2018, and uncertainties regarding:
 
the availability to Farmer Mac of debt and equity financing and, if available, the reasonableness of rates and terms;
legislative or regulatory developments that could affect Farmer Mac, its sources of business, or the agricultural or rural utilities industries;


60



fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac's products and the secondary market provided by Farmer Mac;
the general rate of growth in agricultural mortgage and rural utilities indebtedness;
the effect 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;
the effect of any changes in Farmer Mac's executive leadership;
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;
the degree to which Farmer Mac is exposed to basis risk, which results from fluctuations in Farmer Mac's borrowing costs relative to market indexes such as LIBOR; and
volatility in commodity prices relative to costs of production, changes in U.S. trade policies, and/or fluctuations in 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 SEC. The information contained in this report is not necessarily indicative of future results.



61



Overview

Farmer Mac increased its outstanding business volume by $15.7 million from the end of second quarter 2018 to $19.5 billion as of September 30, 2018. This increase was driven by net growth of $53.1 million in the USDA Guarantees line of business, $47.3 million in net new Institutional Credit business from financial fund counterparties, and net growth of $41.7 million in Farm & Ranch loan purchases. The net growth in these lines of business was partially offset by net declines in other lines of business. Farmer Mac refinanced all of its AgVantage securities maturing during third quarter 2018, which included an early refinance of a $50.0 million AgVantage security that matured in third quarter 2018 but was refinanced during second quarter 2018, which contributed to reducing actual net growth in third quarter 2018. Farmer Mac's overall credit quality improved modestly during third quarter 2018 compared to second quarter 2018. This improvement offset the net growth in the Farm & Ranch portfolio, which resulted in a $3 thousand release from the total allowance for losses since last quarter. Farmer Mac's 90-day delinquencies and substandard assets both decreased slightly both in dollars and as a percentage of the Farm & Ranch portfolio. Farmer Mac's substandard asset rate and 90-day delinquency rate each remained below Farmer Mac's historical averages.

As a result of the changes to the U.S. tax code that became effective on January 1, 2018, Farmer Mac's effective tax rate decreased from 35.5 percent for the year ended December 31, 2017 to 20.1 percent for the nine months ended September 30, 2018. Farmer Mac also increased its quarterly dividend on all three classes of its common stock by 61 percent from $0.36 per share in each quarter of 2017 to $0.58 per share for each of the first, second, and third quarters of 2018.

On September 26, 2018, Farmer Mac's board of directors appointed Bradford T. Nordholm to serve as Farmer Mac's President and Chief Executive Officer effective October 15, 2018, when Mr. Nordholm replaced Lowell L. Junkins in that role. Mr. Junkins had served as Farmer Mac's Acting President and Chief Executive Officer since December 2017 and continues to serve as Farmer Mac's Chairman of the Board. For more information about Mr. Nordholm, see the Current Report on Form 8-K that Farmer Mac filed with the SEC on October 1, 2018.

The discussion below of Farmer Mac's financial information includes certain "non-GAAP measures," which are measures of financial performance that are not presented in accordance with generally accepted accounting principles in the United States ("GAAP"). For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."
 
Net Income and Core Earnings

Farmer Mac's net income attributable to common stockholders for third quarter 2018 was $26.5 million , compared to $26.3 million in second quarter 2018 and $18.5 million in third quarter 2017.

The $0.2 million sequential increase in net income attributable to common stockholders was primarily attributable to: (1) a $0.9 million after-tax increase in net interest income, primarily due to the absence of the $1.6 million after-tax premium amortization that occurred in second quarter 2018 resulting from the prepayment of an interest-only security in Farmer Mac's investment portfolio (the "Interest-Only Amortization"); and (2) a $0.8 million after-tax decrease in operating expenses. The decrease in operating expenses was primarily due to a $0.3 million after-tax decrease in hiring expenses (including expenses related to the search for Farmer Mac's President and Chief Executive Officer) and a $0.3 million after-tax


62



decrease in servicing advances. Servicing advances are potentially recoverable expenses paid by Farmer Mac on behalf of borrowers on delinquent loans for items such as legal fees, appraisal fees, insurance, and taxes to protect Farmer Mac's interest in the collateral underlying a mortgage loan. Also contributing to the sequential increase in net income available to common stockholders was a $0.5 million after-tax decrease in the net provision for the total allowance for losses. The sequential increase was offset in part by: (1) a $1.5 million after-tax decrease in gains in fair value of financial derivatives and hedging activities; and (2) a $0.6 million increase in income tax expense.

The $8.0 million year-over-year increase in net income attributable to common stockholders was driven by: (1) an increase of $4.3 million after tax in net interest income; and (2) a $4.6 million decrease in income tax expense as a result of the lower federal corporate income tax rate in 2018 compared to 2017. The year-over-year increase was offset in part by a $1.0 million after-tax increase in operating expenses in third quarter 2018, primarily attributable to higher compensation and employee benefits expenses and higher general and administrative ("G&A") expenses.

Farmer Mac's non-GAAP core earnings for third quarter 2018 were $22.4 million , compared to $19.4 million in second quarter 2018 and $16.8 million in third quarter 2017.

The $3.0 million sequential increase in core earnings was primarily attributable to: (1) a $2.3 million after-tax increase in net effective spread, resulting from the absence in third quarter 2018 of the $1.6 million after-tax impact of the Interest-Only Amortization that occurred in second quarter 2018; (2) a $0.8 million after-tax decrease in operating expenses, primarily attributable to a decrease in G&A expenses, including hiring expenses and servicing advances, and a decrease in compensation and benefits expenses, which are generally higher during second quarter due to payments of employee incentive compensation; and (3) a $0.4 million after-tax decrease in credit-related expenses due to a $2 thousand after-tax release from the total allowance for losses in third quarter 2018 compared to a provision for the total allowance for losses of $0.5 million after-tax in second quarter 2018. The sequential increase in core earnings was partially offset by a $0.5 million decrease in tax benefits primarily related to share-based compensation recognized from exercises of equity-based awards.
  
The $5.6 million year-over-year increase in core earnings was primarily attributable to: (1) a $2.4 million after-tax increase in net effective spread; and (2) a $4.2 million decrease in income tax expense attributable to the lower federal corporate income tax rate. The year-over-year increase in core earnings was offset in part by the $1.0 million after-tax increase in operating expenses described above. This increase in operating expenses was primarily attributable to: (1) continued technology and business infrastructure investments; (2) an increase in headcount; and (3) new leases for office space entered into during late 2017.

For more information about net income attributable to common stockholders, the composition of core earnings, and a reconciliation of net income attributable to common stockholders to core earnings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."



63



Net Interest Income and Net Effective Spread

Net interest income was $45.1 million for third quarter 2018, compared to $43.9 million for second quarter 2018 and $39.6 million for third quarter 2017. The overall net interest yield was 0.99 percent for third quarter 2018, compared to 0.96 percent for second quarter 2018 and 0.92 percent for third quarter 2017.

The $1.2 million sequential increase in net interest income was primarily attributable to: (1) the absence in third quarter 2018 of the Interest-Only Amortization that occurred in second quarter 2018; and (2) the effect of an increase in short-term interest rates on assets and liabilities indexed to LIBOR due to the Federal Reserve's decisions since December 2017 to raise the target range for the federal funds rate. This effect on net interest income occurred because interest expense used to calculate net interest income does not include all the funding expenses related to these assets, specifically the expense on financial derivatives not designated in hedge relationships. Another factor contributing to the sequential increase in net interest income was an increase in the amount of cash basis interest income recognized on non-accrual Farm & Ranch loans. The increase in net interest income was offset in part by an increase in net yield adjustments related to amortizations of premiums and discounts on assets consolidated at fair value. The 3 basis point sequential increase in net interest yield was primarily attributable to the absence of the Interest-Only Amortization in third quarter 2018, which had a 4 basis point negative impact in second quarter 2018.

The $5.5 million year-over-year increase in net interest income was primarily attributable to net growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and USDA Securities. Also contributing to the increase was the effect of an increase in short-term interest rates on assets and liabilities indexed to LIBOR. As noted above, the effect on net interest income occurred because interest expense does not include the expense on financial derivatives not designated in hedge relationships. Also contributing to the year-over-year increase in net interest income were the f air value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships. Effective first quarter 2018, Farmer Mac adopted Accounting Standard Update ("ASU") 2017-12, " Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. " The new accounting guidance requires the changes in the fair value of both the financial derivative designated in a fair value hedge relationship and the corresponding hedged item to be recorded in the same line item in Farmer Mac's consolidated statements of operations. Thus, Farmer Mac recognizes changes in fair value of both the financial derivatives and corresponding hedged items within net interest income in its consolidated statements of operations. Prior to first quarter 2018, changes in the fair value of financial derivatives designated in a fair value hedge relationship were recognized in "Gains/(losses) on financial derivatives and hedging activities" in Farmer Mac's consolidated statements of operations. Another factor contributing to the year-over-year increase in net interest income was an increase in the amount of cash basis interest income recognized on non-accrual Farm & Ranch loans. The 7 basis point year-over-year increase in net interest yield was primarily attributable to an increase in the f air value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships included in net interest income in third quarter 2018 and an increase in the amount of cash basis interest income recognized on nonaccrual Farm & Ranch loans.

Net effective spread, a non-GAAP measure, was $39.1 million for third quarter 2018, compared to $36.2 million in second quarter 2018 and $36.0 million in third quarter 2017. In percentage terms, net effective spread was 0.93 percent for third quarter 2018, compared to 0.86 percent in second quarter 2018 and 0.91 percent in third quarter 2017. Farmer Mac uses net effective spread as an alternative measure to net


64



interest income because management believes it is a useful metric that reflects the economics of the net spread between all the assets owned by Farmer Mac and all related funding, including any associated derivatives, some of which may not be included in net interest income.

The $2.9 million and 7 basis point sequential increase in net effective spread in dollars and percentage terms was primarily attributable to: (1) the absence of the Interest-Only Amortization in third quarter 2018 that occurred in second quarter 2018, which reduced net effective spread by $2.0 million and had a 5 basis point negative impact in second quarter; (2) an increase in the amount of cash basis interest income received from non-accrual Farm & Ranch loans, which increased net effective spread by $0.4 million and 1 basis point; and (3) a decrease in net yield adjustments on asset-backed securities in Farmer Mac's investment portfolio resulting from lower prepayments in third quarter 2018, which increased net effective spread by $0.3 million and 1 basis point.

The $3.1 million year-over-year increase in net effective spread in dollars was primarily attributable to: (1) growth in outstanding business volume, which increased net effective spread by approximately $2.3 million; and (2) a $0.8 million increase in the amount of cash basis interest income received from non-accrual Farm & Ranch loans. The 2 basis point year-over-year increase in net effective spread in percentage terms was primarily attributable to the increase in the amount of cash basis interest income received from non-accrual Farm & Ranch loans.

For more information about Farmer Mac's use of net effective spread as a financial measure, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures." For a reconciliation of net interest income to net effective spread, see Table 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."

Business Volume

Farmer Mac' s outstanding business volume was $19.5 billion as of September 30, 2018, an increase of $15.7 million from the end of second quarter 2018 after taking into account all new business, account maturities, and paydowns on existing assets. This increase was driven by net growth of $53.1 million in the USDA Guarantees line of business, $47.3 million in net new Institutional Credit business from financial fund counterparties, and net growth of $41.7 million in Farm & Ranch loan purchases. Farmer Mac refinanced all of its AgVantage securities that matured during third quarter 2018, which included an early refinance of a $50.0 million AgVantage security that matured in third quarter 2018 but was refinanced in second quarter 2018, which contributed to reducing actual net growth in third quarter 2018. Farmer Mac added $1.5 billion of gross new business volume during third quarter 2018. The new business volume included purchases of $786.0 million of AgVantage securities, the renewal of an undrawn $300.0 million revolving floating rate AgVantage facility, purchases of $192.6 million of newly originated Farm & Ranch loans, Farm & Ranch loans added under LTSPCs of $64.1 million , purchases of $90.0 million of USDA Securities, and the issuance of $26.3 million of Farmer Mac Guaranteed USDA Securities. Farmer Mac's outstanding business volume of $19.5 billion as of September 30, 2018 represented an increase of $533.3 million from December 31, 2017 .

During third quarter 2018 and throughout this year, Farmer Mac's gross purchases of Farm & Ranch loans and USDA Securities have decreased compared to the prior year, which Farmer Mac believes is due to several factors. In the Farm & Ranch line of business, 2018 has seen far fewer opportunities to purchase large loans that are over $15.0 million compared to 2017. Farmer Mac believes that this could be due to a


65



fewer number of eligible borrowers that are able to secure financing of that size, as well as potentially increased pricing competition for the highest credit quality borrowers of these larger loans. The decrease in purchases in the USDA Guarantees line of business reflects increased competition, fewer refinances due to higher interest rates, and potentially lower loan volume being processed through USDA. However, Farmer Mac does not believe that this indicates a decrease in borrower demand for USDA agricultural loans. While gross loan purchase volumes are down in both the Farm & Ranch and USDA Guarantees lines of business, year-over-year net outstanding business volume growth has remained in the high single-digit to double-digit range throughout 2018. Contributing to these net growth rates is the significant slowdown during 2018 of prepayments on loans in these lines of business, as a higher interest rate and lower farm income environment appears to have reduced borrowers' incentive to prepay. Farmer Mac's net agricultural mortgage loan growth rate compares favorably to the year-over-year growth rate of the total agricultural mortgage loan market of approximately 5.1 percent through June 2018, based upon a review of bank and Farm Credit System call report data.

For more information about Farmer Mac's business volume, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume."

Capital

As of September 30, 2018 , Farmer Mac's core capital level was $713.6 million , which was $173.8 million above the minimum capital level required by Farmer Mac's statutory charter.  As of December 31, 2017 , Farmer Mac's core capital level was $657.1 million , which was $136.8 million above the minimum capital requirement. The increase in capital in excess of the minimum capital level was due primarily to an increase in retained earnings.

Credit Quality

As of September 30, 2018 , Farmer Mac's allowance for losses was $9.0 million ( 0.13 percent of the Farm & Ranch portfolio), compared to $9.0 million ( 0.13 percent of the Farm & Ranch portfolio) as of June 30, 2018 and $8.9 million ( 0.13 percent of the Farm & Ranch portfolio) as of December 31, 2017. The $3 thousand release from the total allowance for losses in third quarter 2018 was primarily attributable to: (1) a modest improvement in overall portfolio credit quality; and (2) a reduced net volume growth rate in Farm & Ranch loans during third quarter 2018.

As of September 30, 2018 , Farmer Mac's substandard assets were $216.0 million ( 3.1 percent of the Farm & Ranch portfolio) , compared to $226.5 million ( 3.2 percent of the Farm & Ranch portfolio) as of June 30, 2018 and $221.3 million ( 3.2 percent of the Farm & Ranch portfolio) as of December 31, 2017 . Farmer Mac's substandard asset volume decreased modestly from last quarter in dollars as more substandard loan volume paid off and fewer assets migrated to the substandard asset category. As of September 30, 2018, the loan volume migrating into the substandard asset category was primarily comprised of oilseeds, feedgrains, and livestock.

As of September 30, 2018 , Farmer Mac's 90-day delinquencies were $37.5 million (0.53 percent of the Farm & Ranch portfolio), compared to $43.1 million ( 0.61 percent of the Farm & Ranch portfolio) as of June 30, 2018 and $48.4 million ( 0.71 percent of the Farm & Ranch portfolio) as of December 31, 2017 . The sequential decrease in 90-day delinquencies is primarily attributable to: (1) lower than expected seasonal delinquencies associated with loans that have annual (January 1st) and semi-annual (January 1st


66



and July 1st) payment terms, which account for most of the loans in the Farm & Ranch portfolio; and (2) $9.8 million in two crop loans to a single borrower that became current during third quarter 2018.

For more information about Farmer Mac's credit metrics, including 90-day delinquencies, the total allowance for losses, and substandard assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Use of Non-GAAP Measures

In the accompanying analysis of its financial information, Farmer Mac sometimes uses "non-GAAP measures," which are measures of financial performance that are not presented in accordance with GAAP. Specifically, Farmer Mac uses the following non-GAAP measures: "core earnings," "core earnings per share," and "net effective spread." Farmer Mac uses these non-GAAP measures to measure corporate economic performance and develop financial plans because, in management's view, they are useful alternative measures in understanding Farmer Mac's economic performance, transaction economics, and business trends.

The non-GAAP financial measures that Farmer Mac uses may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of these non-GAAP measures 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.

Core Earnings and Core Earnings Per Share

Core earnings and core earnings per share principally differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding the effects of fair value fluctuations. These fluctuations are not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is expected. Among other items, these fair value fluctuations have included unrealized gains or losses on financial derivatives and hedging activities. Specifically, variation margin is exchanged between Farmer Mac and its counterparties on both its cleared and non-cleared derivatives portfolios. Prior to first quarter 2017, Farmer Mac accounted for variation margin as collateral and associated unrealized gains or losses on its centrally cleared derivative contracts. However, beginning in first quarter 2017, as a result of a change in variation margin rules implemented by the Chicago Mercantile Exchange ("CME"), the central clearinghouse used by Farmer Mac, and subsequently confirmed by the U.S. Commodity Futures Trading Commission ("CFTC"), the variation margin amounts exchanged between Farmer Mac and its counterparties on cleared derivatives are considered as partial settlement of each respective derivatives contract rather than collateral pledged by a counterparty. Therefore, Farmer Mac presents its cleared derivatives portfolio net of variation margin payments on its consolidated balance sheets and recognizes realized gains or losses as a result of these payments on its consolidated statements of operations. Farmer Mac believes that the economic character of these transactions remains the same as they were before the CME rule change. Even though these variation margin amounts are accounted for as realized gains or losses on financial derivatives and hedging activities as a result of the CME rule change and subsequent CFTC interpretation, this is not expected to have a cumulative net impact on Farmer Mac's financial condition or results of operations reported in accordance with GAAP because the related financial instruments are expected to be held to maturity.


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Therefore, the effects of realized gains or losses resulting from the exchange of variation margin on its cleared derivatives portfolio are excluded in the calculations of core earnings and core earnings per share.

Core earnings and core earnings per share also differ from net income attributable to common stockholders and earnings per common share, respectively, 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. Accordingly, the one-time, non-cash charge to income tax expense due to the re-measurement of the net deferred tax asset was excluded from core earnings and core earnings per share. Farmer Mac re-measured its net deferred tax asset at a lower federal corporate tax rate due to the enactment of new tax legislation on December 22, 2017. This charge is excluded from core earnings and core earnings per share because it is not a frequently occurring transaction, is a non-cash charge, and is not indicative of future operating results. For a reconciliation of Farmer Mac's net income attributable to common stockholders to core earnings and of earnings per common share to core earnings per share, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations."

Net Effective Spread

Farmer Mac uses net effective spread to measure the net spread Farmer Mac earns between its interest-earning assets and the related net funding costs of these assets. Net effective spread differs from net interest income and net interest yield because it excludes: (1) the amortization of premiums and discounts on assets consolidated at fair value that are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets; (2) interest income and interest expense related to consolidated trusts with beneficial interests owned by third parties, which are presented on Farmer Mac's consolidated balance sheets as " Loans held for investment in consolidated trusts, at amortized cost "; and (3) beginning January 1, 2018, the fair value changes of financial derivatives and the corresponding assets or liabilities designated in a fair value hedge relationship. Farmer Mac excludes from net effective spread the premiums and discounts on assets consolidated at fair value 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 expected. Farmer Mac also excludes from net effective spread the interest income and interest expense associated with the consolidated trusts and the average balance of the loans underlying these trusts to reflect management's view that the net interest income Farmer Mac earns on the related Farmer Mac Guaranteed Securities owned by third parties is effectively a guarantee fee. Accordingly, the excluded interest income and interest expense associated with consolidated trusts is reclassified to guarantee and commitment fees for purposes of determining Farmer Mac's core earnings.

Effective in first quarter 2018, Farmer Mac adopted ASU 2017-12, " Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ." Prior to first quarter 2018, gains and losses on financial derivatives were included in "(Losses)/gains due to fair value changes" whether or not they were designated in hedge relationships. Beginning in first quarter 2018, gains and losses on financial derivatives in hedge relationships are included in either interest income or interest expense depending on the corresponding hedged financial asset or liability, respectively. Farmer Mac excludes from net effective spread those fair value changes of financial derivatives and the corresponding assets or liabilities designated in fair value hedge relationships because they are not expected to have an economic effect on Farmer Mac's financial performance if the financial derivatives and corresponding hedged items are held to maturity, as is expected.



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Net effective spread also principally differs from net interest income and net interest yield because it includes the accrual of income and expense related to the contractual amounts due on financial derivatives that are not designated in hedge relationships ("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 hedge relationships is included as an adjustment to the yield or cost of the hedged item and is included in net interest income. For undesignated financial derivatives, Farmer Mac records the income or expense related to the accrual of the contractual amounts due in " Gains/(losses) on financial derivatives and hedging activities " on the consolidated statements of operations. However, the accrual of the contractual amounts due for undesignated financial derivatives are included in Farmer Mac's calculation of net effective spread.

Net effective spread also includes the net effects of terminations or net settlements on financial derivatives and hedging activities. The inclusion of these items in net effective spread, along with the accrual of contractual amounts due for undesignated financial derivatives described above, is intended to reflect management's view of the complete net spread between an asset and all of its related funding, including any associated derivatives, whether or not they are designated in a hedge relationship. For additional details on the specific components that relate to the net effects of terminations or net settlements on financial derivatives and hedging activities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations."
For a reconciliation of net interest income and net interest yield to net effective spread, see Table 6 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."


Results of Operations

Farmer Mac's net income attributable to common stockholders for the three months ended September 30, 2018 was $26.5 million ( $2.46 per diluted common share), compared to $18.5 million ( $1.71 per diluted common share) for the same period in 2017. For the nine months ended September 30, 2018, Farmer Mac's net income attributable to common stockholders was $75.3 million ( $7.01 per diluted common share), compared to $54.6 million ( $5.06 per diluted common share) for the same period in 2017. Farmer Mac's non-GAAP core earnings for the three months ended September 30, 2018 were $22.4 million ( $2.08 per diluted common share), compared to $16.8 million ( $1.55 per diluted common share) for the same period in 2017. Farmer Mac's non-GAAP core earnings for the nine months ended September 30, 2018 were $63.6 million ( $5.92 per diluted common share), compared to $47.8 million ( $4.42 per diluted common share) for the same period in 2017. For more information about the changes in net income attributable to common stockholders and core earnings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview—Net Income and Core Earnings."

Reconciliations of Farmer Mac's net income attributable to common stockholders to core earnings and core earnings per share are presented in the following tables along with information about the composition of core earnings:



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Table 1
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
26,474

 
$
18,487

Less reconciling items:
 

 
 

Gains on undesignated financial derivatives due to fair value changes (see Table 8)
3,625

 
995

Gains on hedging activities due to fair value changes
1,051

 
1,742

Unrealized losses on trading securities
(3
)
 

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(38
)
 
(954
)
Net effects of terminations or net settlements on financial derivatives and hedging activities (1)
546

 
862

Income tax effect related to reconciling items
(1,088
)
 
(926
)
Sub-total
4,093

 
1,719

Core earnings
$
22,381

 
$
16,768

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread (2)
$
39,077

 
$
35,976

Guarantee and commitment fees (3)
5,170

 
4,935

Other (4)
110

 
274

Total revenues
44,357

 
41,185

 
 
 
 
Credit related expense/(income)(GAAP):
 
 
 
(Release of)/provision for losses
(3
)
 
384

Losses/(gains) on sale of REO
41

 
(32
)
Total credit related expenses
38

 
352

 
 
 
 
Operating expenses (GAAP):
 
 
 
Compensation and employee benefits
6,777

 
5,987

General and administrative
4,350

 
3,890

Regulatory fees
625

 
625

Total operating expenses
11,752

 
10,502

 
 
 
 
Net earnings
32,567

 
30,331

Income tax expense (5)
6,891

 
10,268

Preferred stock dividends (GAAP)
3,295

 
3,295

Core earnings
$
22,381

 
$
16,768

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
2.10

 
$
1.58

  Diluted
2.08

 
1.55

Weighted-average shares:
 
 
 
  Basic
10,668

 
10,605

  Diluted
10,744

 
10,815


(1)  
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, which is a component of core earnings, to also include the net effects of terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" and the information set forth below.


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(2)  
Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 6 for a reconciliation of net interest income to net effective spread.
(3)  
Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(4)  
Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives and hedging activities, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(5)  
Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.



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Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
75,338

 
$
54,590

Less reconciling items:
 

 
 

Gains on undesignated financial derivatives due to fair value changes (see Table 8)
8,055

 
10,479

Gains/(losses) on hedging activities due to fair value changes
5,302

 
(716
)
Unrealized gains/(losses) on trading securities
24

 
(84
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(528
)
 
(1,198
)
Net effects of terminations or net settlements on financial derivatives and hedging activities (1)
2,020

 
2,042

Income tax effect related to reconciling items
(3,123
)
 
(3,683
)
Sub-total
11,750

 
6,840

Core earnings
$
63,588

 
$
47,750

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread (2)
$
112,340

 
$
103,836

Guarantee and commitment fees (3)
15,424

 
15,193

Other (4)
649

 
866

Total revenues
128,413

 
119,895

 
 
 
 
Credit related expense (GAAP):
 
 
 
Provision for losses
169

 
1,294

REO operating expenses
16

 
23

Loss/(gain) on sale of REO
7

 
(784
)
Total credit related expense
192

 
533

 
 
 
 
Operating expenses (GAAP):
 
 
 
Compensation and employee benefits
20,367

 
18,986

General and administrative
13,878

 
11,611

Regulatory fees
1,875

 
1,875

Total operating expenses
36,120

 
32,472

 
 
 
 
Net earnings
92,101

 
86,890

Income tax expense (5)
18,627

 
29,419

Net loss attributable to non-controlling interest (GAAP)

 
(165
)
Preferred stock dividends (GAAP)
9,886

 
9,886

Core earnings
$
63,588

 
$
47,750

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
5.97

 
$
4.51

  Diluted
5.92

 
4.42

Weighted-average shares:
 
 
 
  Basic
10,650

 
10,586

  Diluted
10,743

 
10,794

(1)  
Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread, which is a component of core earnings, to also include the net effects of terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised methodology. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" and the information set forth below.


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(2)  
Net effective spread is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for an explanation of net effective spread. See Table 6 for a reconciliation of net interest income to net effective spread.
(3)  
Includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities.
(4)  
Reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives and hedging activities, and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Securities.
(5)  
Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.


Table 2

Reconciliation of GAAP Basic Earnings Per Share to Core Earnings - Basic Earnings Per Share
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands, except per share amounts)
GAAP - Basic EPS
$
2.48

 
$
1.74

 
$
7.07

 
$
5.16

Less reconciling items:
 
 
 
 
 
 
 
Gains on undesignated financial derivatives due to fair value changes (see Table 8)
0.34

 
0.09

 
0.76

 
0.99

Gains/(losses) on hedging activities due to fair value changes
0.10

 
0.17

 
0.50

 
(0.07
)
Unrealized gains/(losses) on trading securities

 

 

 
(0.01
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value

 
(0.09
)
 
(0.05
)
 
(0.11
)
Net effects of terminations or net settlements on financial derivatives and hedging activities
0.05

 
0.08

 
0.19

 
0.20

Income tax effect related to reconciling items
(0.11
)
 
(0.09
)
 
(0.30
)
 
(0.35
)
Sub-total
0.38

 
0.16

 
1.10

 
0.65

Core Earnings - Basic EPS
$
2.10

 
$
1.58

 
$
5.97

 
$
4.51

 
 
 
 
 
 
 
 
Shares used in per share calculation (GAAP and Core Earnings)
10,668

 
10,605

 
10,650

 
10,586


Reconciliation of GAAP Diluted Earnings Per Share to Core Earnings - Diluted Earnings Per Share
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands, except per share amounts)
GAAP - Diluted EPS
$
2.46

 
$
1.71

 
$
7.01

 
$
5.06

Less reconciling items:
 
 
 
 
 
 
 
Gains on undesignated financial derivatives due to fair value changes (see Table 8)
0.33

 
0.09

 
0.75

 
0.97

Gains/(losses) on hedging activities due to fair value changes
0.10

 
0.17

 
0.49

 
(0.06
)
Unrealized gains/(losses) on trading securities

 

 

 
(0.01
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value

 
(0.09
)
 
(0.05
)
 
(0.11
)
Net effects of terminations or net settlements on financial derivatives and hedging activities
0.05

 
0.08

 
0.19

 
0.19

Income tax effect related to reconciling items
(0.10
)
 
(0.09
)
 
(0.29
)
 
(0.34
)
Sub-total
0.38

 
0.16

 
1.09

 
0.64

Core Earnings - Diluted EPS
$
2.08

 
$
1.55

 
$
5.92

 
$
4.42

 
 
 
 
 
 
 
 
Shares used in per share calculation (GAAP and Core Earnings)
10,744

 
10,815

 
10,743

 
10,794



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The non-GAAP reconciling items between net income attributable to common stockholders and core earnings are:

1. Gains/(losses) on financial derivatives and hedging activities due to fair value changes are presented by two reconciling items in Table 1 above: (1) Gains on undesignated financial derivatives due to fair value changes; and (2) Gains/(losses) on hedging activities due to fair value changes. The table below calculates the non-GAAP reconciling item for gains/(losses) on hedging activities due to fair value changes.

Table 3

Non-GAAP Reconciling Items for Gains/(Losses) on Hedging Activities due to Fair Value Changes
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
 Gains/(losses) due to fair value changes (see Table 4.2)
1,051

 
1,742

 
5,751

 
(716
)
Initial cash payment received at inception of swap (1)

 

 
(449
)
 

Gains/(losses) on hedging activities due to fair value changes

$
1,051

 
$
1,742

 
$
5,302

 
$
(716
)
(1)  
Relates to initial cash payments received at the inception of a swap designated in a fair value hedge. These initial cash payments were previously recognized in " Gains/(losses) on financial derivatives and hedging activities " in the statement of operations. Upon adoption of ASU 2017-12, " Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," for financial derivatives designated in fair value hedge relationships, the changes in the fair values of the derivative and the associated hedged item are recorded within net interest income. For core earnings purposes, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt.
2. Unrealized gains/(losses) on trading securities. The unrealized gains/(losses) on trading securities are reported on Farmer Mac's consolidated statements of operations, which represent changes during the period in fair values for trading assets remaining on Farmer Mac's balance sheet as of the end of the reporting period.
3. Amortization of premiums/discounts and deferred gains on assets consolidated at fair value. The amount of this non-GAAP reconciling item is the recorded amount of premium, discount, or deferred gain amortization during the reporting period on those assets for which the premium, discount, or deferred gain was based on the application of an accounting principle (e.g., consolidation of variable interest entities) rather than on a cash transaction (e.g., a purchase price premium or discount).
4. The net effects of terminations or net settlements on financial derivatives and hedging activities. These terminations or net settlements relate to:
Forward contracts on the debt of other GSEs and futures contracts on U.S. Treasury securities. These contracts are used as a short-term economic hedge of the issuance of debt. For GAAP purposes, realized gains or losses on settlements of these contracts are reported in the consolidated statements of operations in the period in which they occur. For core earnings purposes, these realized gains or losses are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
Initial cash payments received by Farmer Mac upon the inception of certain swaps. When there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the


74



amount of the discount on the associated hedged debt. For GAAP purposes, changes in fair value of the swaps are recognized in "Gains on financial derivatives and hedging activities," whereas the economically offsetting discount on the associated hedged debt is amortized over the term of the debt as an adjustment to its yield. For core earnings purposes, these initial cash payments are deferred and amortized as net yield adjustments over the term of the related debt, which generally ranges from 3 to 15 years.
The following sections provide more detail regarding specific components of Farmer Mac's results of operations.

Net Interest Income .  The following table provides information regarding interest-earning assets and funding for the nine months ended September 30, 2018 and 2017. 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 income and 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. 

Table 4

  
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and investments
$
2,750,402

 
$
38,681

 
1.88
%
 
$
2,746,902

 
$
24,834

 
1.21
%
Loans, Farmer Mac Guaranteed Securities and USDA Securities (1)
13,889,468

 
319,040

 
3.06
%
 
12,496,888

 
231,852

 
2.47
%
Total interest-earning assets
16,639,870

 
357,721

 
2.87
%
 
15,243,790

 
256,686

 
2.25
%
Funding:
 

 
 

 
 
 
 

 
 

 
 

Notes payable due within one year
3,521,125

 
44,990

 
1.70
%
 
5,409,742

 
36,526

 
0.90
%
Notes payable due after one year (2)
12,399,858

 
185,464

 
1.99
%
 
9,205,917

 
108,359

 
1.57
%
Total interest-bearing liabilities (3)
15,920,983

 
230,454

 
1.93
%
 
14,615,659

 
144,885

 
1.32
%
Net non-interest-bearing funding
718,887

 

 
 

 
628,131

 

 
 

Total funding
16,639,870

 
230,454

 
1.85
%
 
15,243,790

 
144,885

 
1.27
%
Net interest income/yield prior to consolidation of certain trusts
16,639,870

 
127,267

 
1.02
%
 
15,243,790

 
111,801

 
0.98
%
Net effect of consolidated trusts (4)
1,427,560

 
4,953

 
0.46
%
 
1,211,419

 
4,563

 
0.50
%
Net interest income/yield
$
18,067,430

 
$
132,220

 
0.98
%
 
$
16,455,209

 
$
116,364

 
0.94
%
(1)  
Excludes interest income of $40.1 million and $32.5 million in the first nine months of 2018 and 2017, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(2)  
Includes current portion of long-term notes.
(3)  
Excludes interest expense of $35.2 million and $27.9 million in the first nine months of 2018 and 2017, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(4)  
Includes the effect of consolidated trusts with beneficial interests owned by third parties.


Net interest income was $132.2 million for the nine months ended September 30, 2018 , compared to $116.4 million for the same period in 2017. The overall net interest yield was 0.98 percent for the nine months ended September 30, 2018 , compared to 0.94 percent for the same period in 2017.



75



The $15.8 million increase in net interest income for the nine months ended September 30, 2018 compared to the same period in 2017 was driven by net growth in on-balance sheet AgVantage securities, Farm & Ranch loans, and USDA Securities. Another factor contributing to the increase was the effect of an increase in short-term interest rates on assets and liabilities indexed to LIBOR due to the Federal Reserve's decisions since December 2016 to raise the target range for the federal funds rate. The effect on net interest income occurred because interest expense does not include the expense on financial derivatives not designated in hedge relationships. Also contributing to the increase were the f air value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships. The increase was offset in part by the $2.0 million negative impact of the Interest-Only Amortization during second quarter 2018.

The 4 basis point year-over-year increase in net interest yield was primarily driven by an increase in the aforementioned f air value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships, offset in part by the impact of the Interest-Only Amortization.

The following table sets forth information regarding changes in the components of Farmer Mac's net interest income prior to consolidation of certain trusts 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.  

Table 5

  
For the Nine Months Ended September 30, 2018 Compared to Same Period in 2017
 
Increase/(Decrease) Due to
 
Rate
 
Volume
 
Total
 
(in thousands)
Income from interest-earning assets:
 
 
 
 
 
Cash and investments
$
13,815

 
$
32

 
$
13,847

Loans, Farmer Mac Guaranteed Securities and USDA Securities
59,391

 
27,797

 
87,188

Total
73,206

 
27,829

 
101,035

Expense from other interest-bearing liabilities
71,662

 
13,907

 
85,569

Change in net interest income prior to consolidation of certain trusts (1)
$
1,544

 
$
13,922

 
$
15,466

(1)  
Excludes the effect of debt in consolidated trusts with beneficial interests owned by third parties.  

The following table presents a reconciliation of net interest income and net interest yield to net effective spread.  Net effective spread is measured by: including (1) expenses related to undesignated financial derivatives and hedging activities, which consists of income or expense related to contractual amounts due on financial derivatives not designated in hedge relationships (the income or expense related to financial derivatives designated in hedge relationships is already included in net interest income), and (2) the amortization of losses due to terminations or net settlements of financial derivatives and hedging activities; and excluding (3) the amortization of premiums and discounts on assets consolidated at fair value, (4) the net effects of consolidated trusts with beneficial interests owned by third parties, and (5) beginning in first quarter of 2018, the fair value changes of financial derivatives and corresponding financial assets or liabilities in fair value hedge relationships. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for more information regarding the explanation of net effective spread.


76




Table 6
  
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
Net interest income/yield
$
45,058

 
0.99
 %
 
$
39,562

 
0.92
 %
 
$
132,220

 
0.98
 %
 
$
116,364

 
0.94
 %
Net effects of consolidated trusts
(1,681
)
 
0.05
 %
 
(1,621
)
 
0.04
 %
 
(4,953
)
 
0.04
 %
 
(4,563
)
 
0.04
 %
Expense related to undesignated financial derivatives
(3,223
)
 
(0.08
)%
 
(2,675
)
 
(0.07
)%
 
(9,523
)
 
(0.08
)%
 
(8,317
)
 
(0.07
)%
Amortization of premiums/discounts on assets consolidated at fair value
49

 
 %
 
961

 
0.03
 %
 
555

 
0.01
 %
 
1,219

 
0.01
 %
Amortization of losses due to terminations or net settlements on financial derivatives and hedging activities
(75
)
 
 %
 
(251
)
 
(0.01
)%
 
(207
)
 
 %
 
(867
)
 
(0.01
)%
Fair value changes on fair value hedge relationships
(1,051
)
 
(0.03
)%
 

 
 %
 
$
(5,752
)
 
(0.05
)%
 
$

 
 %
Net effective spread
$
39,077

 
0.93
 %
 
$
35,976

 
0.91
 %
 
$
112,340

 
0.90
 %
 
$
103,836

 
0.91
 %

Net effective spread was $39.1 million and $112.3 million for the three and nine months ended September 30, 2018, compared to $36.0 million and $103.8 million for the same periods in 2017, respectively. In percentage terms, net effective spread for the three and nine months ended September 30, 2018 was 0.93 percent and 0.90 percent , respectively, compared to 0.91 percent for both comparable periods in 2017.

For the first nine months of 2018 compared to the same period in 2017, the $8.5 million increase in net effective spread in dollars was primarily due to: (1) growth in outstanding business volume, which increased net effective spread by approximately $8.6 million; and (2) a $1.4 million increase in the amount of cash basis interest income recognized on nonaccrual Farm & Ranch loans. The increase was offset in part by the $2.0 million impact of the Interest-Only Amortization. The 1 basis point year-over-year decrease in net effective spread in percentage terms was primarily attributable to: (1) the dilutive effect of the refinancing in second quarter 2017 of a $1.0 billion AgVantage security, $970.0 million of which was previously held by third-party investors and reported as off-balance sheet business volume in the Institutional Credit line of business; and (2) the Interest-Only Amortization. The decrease was offset by the increase in amount of cash basis interest income recognized on nonaccrual Farm & Ranch loans.

See Note 9 to the consolidated financial statements for more information regarding net interest income and net effective spread from Farmer Mac's individual business segments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Information" for quarterly net effective spread by line of business.



77



Provision for and Release of Allowance for Loan Losses and Reserve for Losses . The following table summarizes the components of Farmer Mac's total allowance for losses for the three and nine months ended September 30, 2018 and 2017:

Table 7
 
As of September 30, 2018
 
As of September 30, 2017
 
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
$
6,789

 
$
2,249

 
$
9,038

 
$
6,138

 
$
1,966

 
$
8,104

Provision for/(release of) losses
99

 
(102
)
 
(3
)
 
270

 
114

 
384

Charge-offs
(17
)
 

 
(17
)
 

 

 

Ending Balance
$
6,871

 
$
2,147

 
$
9,018

 
$
6,408

 
$
2,080

 
$
8,488

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
6,796

 
$
2,070

 
$
8,866

 
$
5,415

 
$
2,020

 
$
7,435

Provision for losses
92

 
$
77

 
$
169

 
1,234

 
60

 
1,294

Charge-offs
(17
)
 
$

 
$
(17
)
 
(241
)
 

 
(241
)
Ending Balance
$
6,871

 
$
2,147

 
$
9,018

 
$
6,408

 
$
2,080

 
$
8,488


The provision for the allowance for loan losses recorded during the three and nine months ended September 30, 2018 was attributable to an increase in the balance of on-balance sheet Farm & Ranch loans, which was partially offset by a modest improvement in overall portfolio credit quality. The release of the reserve for losses recorded during the three months ended September 30, 2018 was attributable to a decrease in the balance of loans underlying LTSPCs. The provision for the reserve for losses recorded during the nine months ended September 30, 2018 was primarily attributable to an increase in the balance of loans underlying LTSPCs. The charge-off that Farmer Mac recorded during the three and nine months ended September 30, 2018 related to one loan that was foreclosed and transitioned to REO during third quarter 2018.

The provision for the allowance for loan losses recorded during the three and nine months ended September 30, 2017 was attributable to: (1) an increase in the specific allowance for certain impaired on-balance sheet crop and permanent planting loans resulting from both an increase in the outstanding balance of such loans and downgrades in risk ratings on certain of those loans; and (2) an increase in the general allowance due to overall net volume growth in on-balance sheet Farm & Ranch loans. The increases to the allowance were offset in part by a modest decline in loss rates used to estimate probable losses. The provision for the reserve for losses recorded during the three and nine months ended September 30, 2017 was primarily attributable to an increase in the general reserve due to downgrades in risk ratings on certain unimpaired Agricultural Storage and Processing loans underlying LTSPCs. The increase in the general reserve for losses was offset in part by a net decrease in the balance of loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. The charge-offs recorded during the first nine months of 2017 were primarily related to two impaired crop loans (with one borrower) that were foreclosed and transitioned to REO during first quarter 2017. Farmer Mac had previously recorded a specific allowance of $0.2 million on these impaired crop loans as of December 31, 2016. During second quarter 2017, Farmer Mac sold the related properties for $5.4 million and recognized a $0.8 million gain on sale of REO.



78



See Note 5 to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations—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 off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, were $3.5 million and $10.5 million for the three and nine months ended September 30, 2018, compared to $3.3 million and $10.6 million for the same periods in 2017, respectively.

Guarantee and commitment Fees, for the purpose of core earnings, include interest income and interest expense related to consolidated trusts owned by third parties to reflect management's view that the net interest income Farmer Mac earns is effectively a guarantee fee on the consolidated Farmer Mac Guaranteed Securities. For the three and nine months ended September 30, 2018, guarantee and commitment Fees, for the purpose of core earnings, were $5.2 million and $15.4 million, compared to $4.9 million and $15.2 million for the same periods in 2017.

For more information about net income attributable to common stockholders, the composition of core earnings, and a reconciliation of net income attributable to common stockholders to core earnings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations." For more information about the non-GAAP measures Farmer Mac uses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures."

(Losses)/Gains on Financial Derivatives and Hedging Activities .  The effect of unrealized and realized gains on Farmer Mac's financial derivatives and hedging activities were net gains of $0.6 million and net losses of $0.7 million for the three and nine months ended September 30, 2018, respectively, compared to net gains of $0.7 million and $2.5 million for the comparable periods in 2017, respectively.



79



The components of gains and losses on financial derivatives and hedging activities for the three and nine months ended September 30, 2018 and 2017 are summarized in the following table:

Table 8
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
(Losses)/gains due to fair value changes:
 
 
 
 
 
 
 
Financial derivatives (2)
$

 
$
1,576

 


 
$
(5,466
)
Hedged items

 
166

 


 
4,750

(Losses)/gains on fair value hedging activities

 
1,742

 

 
(716
)
Cash flow hedges:
 
 
 
 
 
 
 
Loss recognized (ineffective portion)

 
(191
)
 


 
(365
)
Losses on cash flow hedges

 
(191
)
 


 
(365
)
No hedge designation:
 
 
 
 
 
 
 
(Losses)/Gains due to fair value changes
3,624

 
995

 
8,055

 
10,479

Accrual of contractual payments
(3,224
)
 
(2,484
)
 
(9,524
)
 
(7,952
)
Gains/(losses) due to terminations or net settlements
228

 
599

 
781

 
1,084

(Losses)/gains on financial derivatives not designated in hedging relationships
628

 
(890
)
 
(688
)
 
3,611

(Losses)/gains on financial derivatives and hedging activities
$
628

 
$
661

 
$
(688
)
 
$
2,530

(1)  
Effective in first quarter 2018, Farmer Mac adopted ASU 2017-12, " Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ." For financial derivatives designated in fair value hedge relationships, changes in the fair values of the derivative and the associated hedged item are recorded within net interest income. For financial derivatives designated in cash flow hedge relationships, changes in the fair values of the derivative and the associated hedged item are recorded within accumulated other comprehensive income and reclassified to net interest income when the hedged item impacts earnings.
(2)  
Included in the assessment of hedge effectiveness as of September 30, 2017 , but excluded from the amounts in the table, were losses of $1.6 million and gains of $0.7 million for the three and nine months ended September 30, 2017 , 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 nine months ended September 30, 2017 were gains of $0.1 million and losses of zero , respectively.

The adoption of the new hedge accounting guidance ASU 2017-12, " Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, " effective first quarter 2018, impacted the presentation in Table 8 above. Beginning in first quarter 2018, gains and losses due to fair value changes on financial derivatives designated in fair value hedge accounting relationships are included in either interest income or interest expense depending on the corresponding hedged financial asset or liability, respectively. For cash flow hedges, both the effective and ineffective portions of the changes in the fair values of the derivative instruments are recorded in accumulated other comprehensive income (AOCI) and reclassified to net interest income when the hedged item impacts earnings. Thus, for the first nine months of 2018, the table above only presents changes in the fair values of Farmer Mac's open financial derivative positions that are not designated in hedge accounting relationships. Prior to first quarter 2018, gains and losses on financial derivatives were included in "(Losses)/gains due to fair value changes" whether or not they were designated in hedge accounting relationships. Thus, for the first nine months of 2017, the table above presents gains and losses on all financial derivatives in "(Losses)/gains due to fair value changes." These changes in fair value are primarily the result of fluctuations in long-term interest rates. The accrual of periodic cash settlements for interest paid or received from Farmer Mac's interest rate swaps that are not designated in hedge accounting 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 hedge accounting relationships and initial cash payments received upon the inception of certain swaps not


80



designated in hedge accounting relationships are included in "Gains/(losses) due to terminations or net settlements" in the table above. For swaps not designated in a hedge accounting relationship, when there is no direct payment arrangement between a swap dealer counterparty and a debt dealer issuing Farmer Mac's medium-term notes for a particular transaction, Farmer Mac may receive an initial cash payment from the swap dealer at the inception of the swap to offset dollar-for-dollar the amount of the discount on the associated hedged debt. Changes in the fair value of these swaps are recognized immediately in " Gains/(losses) on financial derivatives and hedging activities ," whereas the offsetting discount on the hedged debt is amortized over the term of the debt as an adjustment to its yield. The amounts of initial cash payments received by Farmer Mac vary depending upon the number of the aforementioned type of swaps it executes during a quarter.
 
(Losses)/Gains on Sale of Real Estate Owned (REO) . During the three and nine months ended September 30, 2018, Farmer Mac realized net losses of $41,000 and $7,000 on the sales of REO properties, respectively, compared to net gains of $32,000 and $0.8 million for the three and nine months ended September 30, 2017, respectively.

Other Income . Other income totaled $0.4 million and $1.3 million for the three and nine months ended September 30, 2018, respectively, compared to $0.2 million and $0.9 million for the same periods in 2017, respectively. The increase in other income for the three and nine months ended September 30, 2018 was primarily attributable to the collection of $0.3 million and $1.1 million, respectively, in late fees received on Farm & Ranch loans, compared to $0.1 million and $0.4 million for the same periods in 2017. The increase was offset in part by the recognition of zero and $0.4 million during the three and nine months ended September 30, 2017, respectively, of appraisal fees received by Farmer Mac's former consolidated appraisal company subsidiary, AgVisory, compared to none for the same periods in 2018. As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company. Farmer Mac recognized a loss of approximately $0.1 million upon the transfer.

Compensation and Employee Benefits .   Compensation and employee benefits were $6.8 million and $20.4 million for the three and nine months ended September 30, 2018, respectively, compared to $6.0 million and $19.0 million for the same periods in 2017, respectively. The increase in compensation and employee benefits for both the three and nine months ended September 30, 2018 compared to the same periods in 2017 was primarily attributable to an increase in headcount and related employee health insurance costs and higher payouts of variable incentive compensation resulting from actual performance exceeding certain performance target amounts during 2017, which was paid in 2018.

General and Administrative Expenses .   G&A expenses were $4.4 million and $13.9 million for the three and nine months ended September 30, 2018, respectively, compared to $3.9 million and $11.6 million for the same periods in 2017, respectively. The increase in G&A expenses for the three months ended September 30, 2018 compared to the same period in 2017 was primarily attributable to higher expenses related to: (1) continued technology and business infrastructure investments; (2) an increase in headcount and the search process for Farmer Mac's President and Chief Executive Officer; and (3) new leases for office space entered into during 2017. The increase for the nine months ended September 30, 2018 compared to the same period in 2017 was caused by all of the same reasons described above and an increase in legal fees related to general corporate matters, including fees related to the development of new products, a higher number of AgVantage transactions, and the termination of employment of Farmer Mac's former President and Chief Executive Officer.



81



Regulatory Fees .   Regulatory fees, which consist of the fees paid to the Farm Credit Administration ("FCA"), an independent agency in the executive branch of the United States government that regulates Farmer Mac, were $0.6 million and $1.9 million for the three and nine months ended September 30, 2018, respectively, compared to $0.6 million and $1.9 million for the same periods in 2017, respectively. FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2019 would increase to $2.75 million ($0.688 million per federal fiscal quarter).  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 Expense .  Income tax expense was $8.0 million and $21.7 million for the three and nine months ended September 30, 2018, respectively, compared to $11.2 million and $33.1 million for same periods in 2017, respectively. The decrease in income tax expense in the three and nine months ended September 30, 2018 compared to the same periods in 2017 was primarily due to a lower effective federal tax rate under the new tax legislation enacted in December 2017. The effective federal tax rate for the three and nine months ended September 30, 2018 was lower than the statutory corporate tax rate due to the effect of exercises of share-based compensation awards during the first nine months of 2018.

Business Volume .  During third quarter 2018 , Farmer Mac added $1.5 billion of gross new business volume, compared to $0.9 billion in third quarter 2017. Specifically, Farmer Mac:

purchased $786.0 million of AgVantage securities;
renewed a $300.0 million revolving floating rate AgVantage facility;
purchased $192.6 million of newly originated Farm & Ranch loans;
purchased $90.0 million of USDA Securities;
added $64.1 million of Farm & Ranch loans under LTSPCs; and
issued $26.3 million of Farmer Mac Guaranteed USDA Securities.

Farmer Mac's outstanding business volume was $19.5 billion as of September 30, 2018 , which represented a net increase of $15.7 million from June 30, 2018. This increase was driven by net growth of $53.1 million in the USDA Guarantees line of business, $47.3 million in net new Institutional Credit business from financial fund counterparties, and net growth of $41.7 million in Farm & Ranch loan purchases. Farmer Mac refinanced all of its AgVantage securities maturing during third quarter 2018, which included an early refinance of a $50.0 million AgVantage security that matured in third quarter 2018 but which was refinanced in second quarter 2018.

Although Farmer Mac experienced net growth in some of its lines of business during third quarter 2018, several factors combined to reduce overall net growth. Specifically, within the Institutional Credit line of business, three factors contributed to reducing overall net growth: (1) an early refinance of a $50.0 million AgVantage security in second quarter 2018 that matured in third quarter 2018; (2) the quarterly amortization of $14.0 million on another AgVantage security; and (3) a $9.8 million prepayment on a Farm Equity AgVantage security. The Farm Equity AgVantage security prepaid upon the sale of the underlying asset, as the counterparty's limited life fund that held the asset is nearing its maturity date and selling assets to return capital to its investors. Another factor reducing overall net growth this quarter was a $37.4 million net decrease in Farmer Mac's Rural Utilities line of business due to loan repayments. The last factor that contributed to reducing overall net growth was a $15.0 million net decrease in Farm & Ranch LTSPCs, as repayments exceeded new business volume.

Within the Institutional Credit line of business, while outstanding business volume experienced a net


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decrease of $26.6 million in third quarter 2018 compared to second quarter 2018 primarily due to the aforementioned early refinance of the $50.0 million AgVantage security, Farmer Mac was able to successfully refinance all of its third quarter 2018 scheduled maturities. Specifically, Farmer Mac refinanced $650.0 million of maturing on-balance sheet AgVantage securities and a $300.0 million off-balance sheet AgVantage facility. The purchases in Farmer Mac's Institutional Credit line of business during third quarter 2018 included refinancing purchases of AgVantage securities in the amounts of $275.0 million from MetLife, $250.0 million from National Rural Utilities Cooperative Finance Corporation ("CFC"), and $125.0 million from Rabo Agrifinance, Inc. ("Rabo"). The counterparties in these transactions used the funds to repay AgVantage securities that matured in third quarter 2018. Farmer Mac also purchased a new AgVantage security in the amount of $25.0 million from Rabo. Farmer Mac committed to the new $300.0 million revolving floating rate AgVantage facility with CFC to replace a similar facility that expired during third quarter 2018. Farmer Mac receives a fixed fee based on the full dollar amount of this facility. If CFC draws on this facility, the amounts drawn will be in the form of on-balance sheet AgVantage securities, and Farmer Mac will earn interest income on those securities.

For more information about potential growth opportunities in Farmer Mac's lines of business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook" in this report.

The following table sets forth purchases of non-delinquent eligible loans, new loans added under 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 9
New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
192,628

 
$
298,274

 
$
675,840

 
$
924,628

LTSPCs
64,100

 
102,774

 
349,231

 
271,934

USDA Guarantees:
 
 
 
 
 
 
 
USDA Securities
90,018

 
90,229

 
264,196

 
298,539

Farmer Mac Guaranteed USDA Securities
26,321

 
41,069

 
105,628

 
133,121

Rural Utilities:
 
 
 
 
 
 
 
Loans

 
70,000

 
8,645

 
122,341

Institutional Credit:
 
 
 
 
 
 
 
AgVantage securities
785,953

 
290,995

 
2,424,493

 
2,149,159

AgVantage revolving line of credit facility
300,000

 

 
300,000

 

Total purchases, guarantees, LTSPCs, and AgVantage securities
$
1,459,020

 
$
893,341

 
$
4,128,033

 
$
3,899,722


The decrease in gross new business volume of loans purchased within the Farm & Ranch line of business for the first nine months of 2018 compared to the same period of 2017 was primarily due to there being far fewer opportunities to purchase large loans over $15.0 million. Farmer Mac believes this could be due to a fewer number of eligible borrowers that are able to secure financing of that size, as well as potentially increased pricing competition for the highest rated borrowers of these larger loans. During the first nine


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months of 2017, Farmer Mac purchased eight large loans totaling $210.0 million, compared to the purchase of only two large loans totaling $35.5 million during the first nine months of 2018. While gross Farm & Ranch loan purchases were down during the first nine months of 2018, net outstanding Farm & Ranch loan volume grew 8.6 percent year-over-year, which compares to year-over-year total agricultural mortgage market growth of 5.1 percent through the first six months of 2018, based on a review of bank and Farm Credit System call report data. During the first nine months of 2018, Farmer Mac purchased 1,606 Farm & Ranch loans with an average unpaid principal balance of $431,000, compared to 1,621 Farm & Ranch loans purchased with an average unpaid principal balance of $572,000 during the same period in 2017.

The increase in new business volume for loans added under LTSPCs within the Farm & Ranch line of business in the first nine months of 2018 compared to the first nine months of 2017 reflected an increase in demand among Farm Credit System institutions for the LTSPC product.

The moderate decrease in new business volume in the USDA Guarantees line of business in the first nine months of 2018 compared to the same period in 2017 reflected an increase in competition for these loans, fewer refinances due to a higher interest rate environment, and potentially lower loan volume being processed through USDA. However, Farmer Mac does not believe that this indicates a decline in borrower demand for USDA agricultural loans.

Loan purchase volume in the Rural Utilities line of business decreased in the first nine months of 2018 compared to the first nine months of 2017 primarily as a result of a leveling off of loan demand within the rural utilities industry as demand for capital remains flat.

Changes in AgVantage securities volume are primarily driven by the generally larger transaction sizes for that product and the fluctuating wholesale funding and liquidity needs of Farmer Mac's customer network and scheduled maturity amounts. The volume of new AgVantage securities was higher in the first nine months of 2018 compared to the first nine months of 2017 primarily due to net new business with CFC, Rabo, and several financial fund counterparties.

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.  The weighted-average age of the Farm & Ranch non-delinquent eligible loans purchased and retained (excluding the purchases of defaulted loans) during both the third quarter of 2018 and 2017 was less than one year . Of those loans, 63 percent and 73 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 22.4 years and 19.1 years, respectively.

During third quarter 2018 and 2017 , Farmer Mac securitized some of the Farm & Ranch loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities in the amounts of $82.8 million and $115.4 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 nine months ended September 30, 2018 $38.9 million and $68.7 million , respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank, which is a related party to Farmer Mac, compared to $46.0 million and $102.5 million for the same periods in 2017, respectively.



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

Table 10
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities
$
82,781

 
$
115,427

 
$
199,764

 
$
277,307

Farmer Mac Guaranteed USDA Securities
26,321

 
41,069

 
105,628

 
127,164

AgVantage securities
785,953

 
290,995

 
2,424,493

 
2,149,159

Total Farmer Mac Guaranteed Securities issuances
$
895,055

 
$
447,491

 
$
2,729,885

 
$
2,553,630


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

Table 11
Lines of Business - Outstanding Business Volume
 
As of September 30, 2018
 
As of December 31, 2017
 
(in thousands)
On-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
Loans
$
2,937,484

 
$
2,798,906

Loans held in trusts:
 
 
 
Beneficial interests owned by third party investors
1,483,135

 
1,399,827

USDA Guarantees:
 
 
 
USDA Securities
2,096,700

 
2,068,017

Farmer Mac Guaranteed USDA Securities
27,861

 
29,980

Rural Utilities:
 
 
 
Loans
962,702

 
1,076,291

Institutional Credit:
 
 
 
AgVantage securities
8,053,724

 
7,593,322

Total on-balance sheet
$
15,561,606

 
$
14,966,343

Off-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
LTSPCs
$
2,363,805

 
$
2,335,342

Guaranteed Securities
287,594

 
333,511

USDA Guarantees:
 
 
 
Farmer Mac Guaranteed USDA Securities
346,690

 
254,217

Rural Utilities:
 
 
 
LTSPCs (1)
669,335

 
806,342

Institutional Credit:
 
 
 
AgVantage securities
11,556

 
11,556

Revolving floating rate AgVantage facility (2)
300,000

 
300,000

Total off-balance sheet
$
3,978,980

 
$
4,040,968

Total
$
19,540,586

 
$
19,007,311



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(1)  
Includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee as of both September 30, 2018 and December 31, 2017.
(2)  
During the first nine months of 2018, $100.0 million of this facility was drawn and subsequently repaid. During 2017, $100.0 million of this facility was drawn and subsequently repaid. Farmer Mac receives a fixed fee based on the full dollar amount of the facility. If the counterparty draws on the facility, the amounts drawn will be in the form of AgVantage securities, and Farmer Mac will earn interest income on those securities.


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 September 30, 2018 :

Table 12
Schedule of Principal Amortization as of September 30, 2018
 
Loans Held
 
Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs
 
 USDA Securities and Farmer Mac Guaranteed USDA Securities
 
Total
 
(in thousands)
2018
51,715

 
57,751

 
25,722

 
135,188

2019
219,777

 
267,446

 
109,758

 
596,981

2020
240,173

 
238,144

 
107,449

 
585,766

2021
249,110

 
270,939

 
111,138

 
631,187

2022
216,044

 
208,781

 
114,561

 
539,386

Thereafter
4,406,501

 
2,277,675

 
2,002,622

 
8,686,798

Total
$
5,383,320

 
$
3,320,736

 
$
2,471,250

 
$
11,175,306


Of the $19.5 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of September 30, 2018 , $8.4 billion were AgVantage securities included in the Institutional Credit line of business.  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. The following table summarizes by maturity date the outstanding principal amount of both on- and off-balance sheet AgVantage securities as of September 30, 2018 :

Table 13
AgVantage Balances by Year of Maturity
 
As of
 
September 30, 2018
 
(in thousands)
2018
520,919

2019
1,437,279

2020
1,320,758

2021
1,414,262

2022
909,278

Thereafter (1)(2)
2,762,784

Total
$
8,365,280

(1)  
Includes the expiration of the $300.0 million revolving floating rate AgVantage facility.


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(2)  
Includes various maturities ranging from 2023 to 2044.

The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 4.8 years as of September 30, 2018 .  

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 then-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 loan.  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. The delinquent loans purchased out of securitized pools and LTSPCs during third quarter 2018 had a weighted average age of 3 years . During third quarter 2017, the delinquent loans purchased out of securitized pools had a weighted-average age of 5 years . See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

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

Table 14
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
(in thousands)
Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by third party investors
$
5,552

 
$
3,043

 
$
6,273

 
$
3,147

Defaulted loans purchased underlying LTSPCs
1,483

 

 
1,483

 
311

Total loan purchases
$
7,035

 
$
3,043

 
$
7,756

 
$
3,458


Outlook   

Farmer Mac continues to provide a stable source of liquidity, capital, and risk management tools as the secondary market that helps meet the financing needs of rural America. While the pace of Farmer Mac's growth will depend on the capital and liquidity needs of the participants in the rural financing business, Farmer Mac foresees opportunities for continued growth across most of its lines of business, driven by several key factors:

As agricultural and rural utilities lenders seek to manage equity capital requirements under 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, LTSPCs, or wholesale funding.
Prospects for loan growth within the rural utilities industry appear to be modest in the near term due to generally flat demand for capital. Future growth opportunities for Farmer Mac related to this industry through its Rural Utilities and Institutional Credit lines of business may be impacted by sector growth, credit quality, and the competitiveness of Farmer Mac's AgVantage product.


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As a result of targeted marketing and brand awareness initiatives, product development efforts, and continued interest in the agricultural asset class from institutional investors, Farmer Mac's customer base continues to expand, which may generate additional demand for Farmer Mac's products from new sources.
Consolidation, expansion, and vertical integration occurring across many sectors of the agricultural industry and in agricultural finance, coupled with Farmer Mac's relationships with larger regional and national lenders, continues to provide opportunities that could influence Farmer Mac's loan demand and the average transaction size within Farmer Mac's Farm & Ranch line of business.

Farmer Mac believes that these growth opportunities will be important in replacing income earned on its loans and other assets as they mature, pay down, or are reinvested at potentially lower spreads.

Expense Outlook . Farmer Mac continues to expand its investments in human capital, technology, and business infrastructure to increase capacity and efficiency as it seeks to accommodate its growth opportunities and achieve its long-term strategic objectives. Accordingly, Farmer Mac expects the annual increases in its operating expenses to be above historical averages over the next several years. Specifically, Farmer Mac believes that aggregate compensation and employee benefits and general and administrative expenses will increase approximately 15 percent in 2018 relative to 2017, with percent increases moderating in 2019.

Agricultural Industry . The agricultural industry includes many diverse sectors that respond in different ways to changes in economic conditions. Those individual sectors 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 sectors may be under stress while others are not. The profitability of agricultural sectors is also affected by the demand for and supply of agricultural commodities and products on a domestic and global basis, which can vary largely as a result of global production trends, international trade policies, weather patterns, access to water supply, and harvest conditions.

Net cash income, as reported by the USDA and one of its benchmark measures of economic activity in the agricultural industry, has declined significantly since reaching a cyclical peak in 2013. However, changes in farm income levels are largely localized and depend on producer region and commodity production type. The USDA estimates that aggregate net cash income levels increased year-over-year in 2017 due to higher commodity quantities sold and stabilizing commodity prices. In August 2018, the USDA forecasted a 12 percent decline in net cash income in 2018, largely as a result of lower expected commodity prices throughout the year. Farmland values appear to be holding largely steady in 2018, even in the Midwest region, where producers are most exposed to changes in the grain markets. Data released by the USDA indicates an average increase in farm real estate values of 2.7 percent in 2018 in Corn Belt states (Illinois, Indiana, Iowa, Missouri, and Ohio), but a decline of 1.4 percent in Northern Plains states (Kansas, Nebraska, North Dakota, and South Dakota). In all other regions, farmland value averages are reported to be flat to increasing. While regional averages for farmland values provide a good barometer for the overall movement in U.S. farmland values, economic forces affecting land markets are highly localized and some markets may experience greater volatility than state or national averages indicate.

Over the past few decades, the U.S. agricultural industry has become increasingly connected to global trade, and agricultural export demand depends significantly on trading relationships in numerous foreign markets, as well as on foreign exchange rates. A slowdown in global economic growth or a tightening in trade policies and agreements could also adversely affect the demand for certain U.S. agricultural exports,


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which may result in downward pressure on commodity prices. For example, the series of reciprocal import tariffs that were placed on various agricultural products by China and the U.S. during 2018 has materially affected the market prices for these products, including soybeans produced in the U.S. Tariffs placed on imports of U.S. agricultural products into Mexico have also dampened price outlooks for other agricultural products, such as pork and dairy. In August 2018, the USDA released initial details on a potential $12 billion aid package for U.S. agricultural producers designed to help offset market frictions resulting from recent trade disruptions. The USDA anticipates making initial payments to affected producers of nearly $5.9 billion, more than half of which is anticipated to assist soybean growers in the form of cash payments in late 2018 or early 2019 through the USDA's Market Facilitation Program. If fully realized, these initial aid payments would constitute approximately 6 percent of net cash income, which equates to approximately half of the expected decline in net cash income forecasted for 2018. At the same time, the U.S. dollar strengthened by approximately 3 percent during the first three quarters of 2018, as measured by the U.S. Dollar Index, which has decreased the competitiveness of U.S. agricultural exports and thereby has diminished their global demand and driven down producer profits. Farmer Mac believes that its portfolio is sufficiently diverse by product and production region to be able to withstand any short-term market volatility that may arise as a result of changes in trade policy or sentiment. However, a prolonged trade dispute between one or more primary agricultural markets without substantial offsetting relief could put significant financial stress on the U.S. agricultural industry, which could have an adverse effect on Farmer Mac's portfolio.

In recent years, the 90-day delinquencies and credit losses in Farmer Mac's portfolio have remained low compared to their historical averages. However, some indications of stress have emerged, as the volume of Farmer Mac's substandard assets has generally increased since 2015 and 90-day delinquencies have generally increased compared to the historically favorable levels observed in recent years. To date, the increases in these two measures have not yet translated into rising credit losses. Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of its portfolio, which Farmer Mac believes is adequately collateralized. Farmer Mac believes that its portfolio remains sufficiently diversified, both geographically and by commodity, and that its portfolio has been underwritten to high credit quality standards. Accordingly, Farmer Mac believes that its portfolio is well-positioned to endure reasonably foreseeable volatility in farmland values and commodity prices. Farmer Mac also continues to closely monitor sector profitability, economic and weather conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions. For more information about the loan balances, loan-to-value ratios, 90-day delinquencies, and substandard asset rate for the Farm & Ranch loans in Farmer Mac's portfolio as of September 30, 2018 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Farmer Mac continues to monitor the establishment and evolution of legislation and regulations, as well as the status of various international trade agreements and partnerships, that could affect farmers, ranchers, rural lenders, and rural America in general. The Tax Cuts and Jobs Act, signed into law in December 2017, may result in lower overall effective tax rates for U.S. farmers and ranchers, thereby improving after-tax returns for farming operations. The Agricultural Act of 2014, also referred to as the U.S. Farm Bill, expired on September 30, 2018. Legislators may sign a new Farm Bill or extend the current Farm Bill before the end of the 2018 calendar year. Various federal agricultural policies, including those affecting crop subsidies, crop insurance, commodity support programs, Farm Services Agency (FSA) guaranteed loan limits, and other aspects of agricultural production, in effect under the previous U.S. Farm Bill may be altered with the enactment of new legislation. Other legislation and regulations focused on groundwater management practices, including in California, may result in tighter restrictions on groundwater usage that


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could negatively affect agricultural producers in the future. As the Trump administration and the U.S. Congress continue their review of existing regulations and promote new legislative or regulatory proposals and policies, Farmer Mac will monitor the effects that any changes in legislation or regulation could have on Farmer Mac or its customers.

Farmer Mac's marketing and brand awareness initiatives 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 conducts 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. Farmer Mac's initiatives to increase the awareness of Farmer Mac and its products within the agricultural lender community and the larger agricultural industry have included hosting events on relevant agricultural lending topics, participating on speaker panels at agriculture-related regional and national conferences, and distributing original content about conditions in the agricultural economy. In the Farm & Ranch line of business, Farmer Mac is experiencing continued demand for its loan products. Demand for Farmer Mac's secondary market tools also depends on the fluctuating needs of rural lenders as they seek to maintain liquidity and adequate capital levels.

Farmer Mac also directs marketing efforts towards the agricultural industry by trying to identify and develop relationships with potential issuers of AgVantage securities, including insurance company agricultural lenders, agricultural finance companies, and bank and non-bank agricultural lenders such as agricultural mortgage funds, who can pledge loans as collateral to obtain financing as part of Farmer Mac's Institutional Credit line of business. As part of these efforts, Farmer Mac has increased its focus on wholesale financing for institutional investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. Farmer Mac has tailored a version of its AgVantage product to this type of issuer, which is referred to as the Farm Equity AgVantage product. Farmer Mac also offers other AgVantage products tailored to fund investors in agricultural mortgages. Farmer Mac directs its outreach efforts to these potential issuers through its business relationships within the agricultural community and through executive outreach to institutions whose profile presents opportunity to benefit from wholesale financing. As institutional investment in agricultural assets continues to grow, Farmer Mac believes that it is in a unique position to help increase access to capital for these types of counterparties and thereby provide a new source of capital to benefit rural America. Farmer Mac believes there is opportunity to expand this type of business as both the trend toward institutional investment in agricultural assets and awareness of Farmer Mac's AgVantage product offerings continue to grow. For more information about the AgVantage products, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" in this report.

Rural Utilities Industry . Prospects for loan growth within the rural utilities industry appear to be modest in the near term due to generally flat demand for capital. Future opportunities within the rural utilities industry may be impacted by sector growth, credit quality, and competitive dynamics within the rural utilities cooperative finance industry.

Balance Sheet Review

Assets .  Farmer Mac's total assets as of September 30, 2018 were $18.5 billion , compared to $17.8 billion as of December 31, 2017 .  The increase in total assets was primarily attributable to an increase in total Farmer Mac Guaranteed Securities and cash and cash equivalents.



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As of September 30, 2018 , Farmer Mac had $0.4 billion of cash and cash equivalents and $2.3 billion of investment securities, compared to $0.3 billion of cash and cash equivalents and $2.3 billion of investment securities as of December 31, 2017. As of September 30, 2018 , Farmer Mac had $8.0 billion of Farmer Mac Guaranteed Securities, $5.4 billion of loans, net of allowance, and $2.2 billion of USDA Securities. This compares to $7.6 billion of Farmer Mac Guaranteed Securities, $5.3 billion of loans, net of allowance, and $2.1 billion of USDA Securities as of December 31, 2017 .

Liabilities .  Farmer Mac's total liabilities were $17.7 billion as of September 30, 2018 , compared to $17.1 billion as of December 31, 2017.  The increase in total liabilities was primarily attributable to an increase in total notes payable and accounts payable and accrued expenses. The increase in accounts payable and accrued expenses was attributable to the purchase of a $250 million AgVantage security issued by CFC, the proceeds of which will be used to refinance an AgVantage security of the same amount, which does not settle until fourth quarter 2018.

Equity .  As of September 30, 2018 , Farmer Mac had total equity of $777.6 million , compared to $708.1 million as of December 31, 2017 . The increase in total equity was a result of an increase in retained earnings and accumulated other comprehensive income. The increase in accumulated other comprehensive income was due to increases in fair value on certain floating-rate AgVantage securities.

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 securitization trusts where Farmer Mac is not the primary beneficiary and in the event of de-consolidation, 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 more information about consolidation and Farmer Mac's off-balance sheet business activities.

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 LTSPCs in the Farm & Ranch and Rural Utilities lines of business and loans underlying Farm & Ranch Guaranteed Securities. Farmer Mac has direct credit exposure to the loans in non-AgVantage transactions but only indirect credit exposure to loans that secure AgVantage transactions because AgVantage securities represent a general obligation of an issuer that is, in turn, secured by eligible loans. Non-AgVantage transactions like loan purchases, LTSPCs, and "pass-through" guaranteed securities that represent beneficial interests in the underlying loans do not include a general obligation of a counterparty


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as a separate source of repayment. For the reasons described in more detail below, Farmer Mac excludes its assets in the USDA Guarantees line of business, the loans in the Rural Utilities line of business, and AgVantage securities in the Institutional Credit line of business from the loan-level credit risk metrics it discloses.

Farmer Mac's direct credit exposure to Farm & Ranch loans held and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs as of September 30, 2018 was $7.1 billion across 48 states. Farmer Mac has established underwriting, collateral valuation, and documentation standards for agricultural real estate mortgage loans and 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 based on industry practices for agricultural real estate mortgage 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 for Farm & Ranch loans, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

Farmer Mac's direct credit exposure to Rural Utilities loans held and loans underlying LTSPCs as of September 30, 2018 was $1.6 billion across 39 states, of which $1.2 billion were loans to electric distribution cooperatives and $0.4 billion were loans to generation and transmission ("G&T") cooperatives. 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. See "Business—Farmer Mac's Lines of Business—Rural Utilities—Underwriting" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018. As of September 30, 2018 , there were no delinquencies in Farmer Mac's portfolio of Rural Utilities loans, and Farmer Mac has not experienced any credit losses on Rural Utilities loans since Congress authorized Farmer Mac's Rural Utilities line of business in 2008. Based on this performance, Farmer Mac excludes the loans in the Rural Utilities line of business from the credit risk metrics it discloses.

Farmer Mac has indirect credit exposure to the Farm & Ranch loans and Rural Utilities loans that secure AgVantage securities included in the Institutional Credit line of business. Farmer Mac's AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured by current loans in an amount at least equal to the outstanding principal amount of the related security. Accordingly, Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because Farmer Mac has only indirect credit risk on those loans and because of the other characteristics of AgVantage securities that mitigate credit risk. Those characteristics include a general obligation of an issuing institution approved by Farmer Mac, the required collateralization level for the securities, the requirement for delinquent loans to be removed from the pool of pledged loans and replaced with current eligible loans, and in some cases, the requirement for the counterparty to comply with specified financial covenants for the life of the related AgVantage security. As of September 30, 2018 , 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional" for more information about Farmer Mac's credit risk on AgVantage securities.



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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.  Therefore, 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 September 30, 2018 , neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the USDA Guarantees line of business, and neither expects to incur any such losses in the future.

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.  For example, debt service ratios depend upon farm operator efficiency and leverage, which can vary widely within a geographic region or commodity type or based upon an operator's business and farming skills. Thus, Farmer Mac considers a loan's original loan-to-value ratio as one of many factors in evaluating loss severity. This 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, updated appraised value at the time of guarantee, purchase, or commitment.  Other factors Farmer Mac considers 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 September 30, 2018 and December 31, 2017, the average unpaid loan balances for loans outstanding in the Farm & Ranch line of business was $634,000 and $642,000 , respectively. The original loan-to-value ratio is based on the original appraised value that has not been indexed to provide a current market value or reflect amortization of loans. As of second quarter 2017, Farmer Mac revised its calculation of the original loan-to-value ratio of a loan to combine for any cross-collateralized loans: (1) the original loan principal balance amounts in the numerator; and (2) the original appraised property values in the denominator. In previous periods, the ratio was calculated on a loan-by-loan basis without considering the effects of any cross-collateralization. Prior period ratios of original loan-to-value have been recalculated to conform to this revised calculation. The weighted-average original loan-to-value ratio for Farm & Ranch loans purchased during third quarter 2018 was 42 percent , compared to 52 percent for loans purchased during third quarter 2017. The weighted-average original loan-to-value ratio for all Farm & Ranch loans held and all loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 51 percent as of both September 30, 2018 and December 31, 2017. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 51 percent and 52 percent , respectively, as of September 30, 2018 and December 31, 2017.

The weighted-average current loan-to-value ratio, which is the 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 44 percent as of September 30, 2018 and 45 percent as of December 31, 2017.

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


93



Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018. 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.

The following table summarizes the changes in the components of Farmer Mac's total allowance for losses for the three and nine months ended September 30, 2018 and 2017:

Table 15
 
As of September 30, 2018
 
As of September 30, 2017
 
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
$
6,789

 
$
2,249

 
$
9,038

 
$
6,138

 
$
1,966

 
$
8,104

Provision for losses
99

 
(102
)
 
(3
)
 
270

 
114

 
384

Charge-offs
(17
)
 

 
(17
)
 

 

 

Ending Balance
$
6,871

 
$
2,147

 
$
9,018

 
$
6,408

 
$
2,080

 
$
8,488

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
6,796

 
$
2,070

 
$
8,866

 
$
5,415

 
$
2,020

 
$
7,435

Provision for losses
92

 
77

 
169

 
1,234

 
60

 
1,294

Charge-offs
(17
)
 

 
(17
)
 
(241
)
 

 
(241
)
Ending Balance
$
6,871

 
$
2,147

 
$
9,018

 
$
6,408

 
$
2,080

 
$
8,488


Activity affecting the allowance for loan losses and reserve for losses is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Provision for and Release of Allowance for Loan Losses and Reserve for Losses." As of September 30, 2018 , Farmer Mac's total allowance for losses totaled $9.0 million , or 0.13 percent of the outstanding principal balance of Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities, compared to $8.9 million , or 0.13 percent , as of December 31, 2017 .

As of September 30, 2018 , Farmer Mac individually evaluated $30.6 million of the $145.8 million of recorded investment in impaired assets for collateral shortfalls against updated appraised values, other updated collateral valuations, or discounted values. For the remaining $115.2 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 $3.3 million for undercollateralized assets as of September 30, 2018 . Farmer Mac's general allowances were $5.7 million as of September 30, 2018 .

The charge-off recorded during the first nine months of 2018 related to one loan that was foreclosed and transitioned to REO during third quarter 2018. The charge-offs recorded during first nine months of 2017 were primarily related to two impaired crop loans (with one borrower) that were foreclosed and transitioned to REO during first quarter 2017. Farmer Mac had previously recorded a specific allowance of $0.2 million on these impaired crop loans as of December 31, 2016. In second quarter 2017, Farmer Mac sold the related properties for $5.4 million and recognized a $0.8 million gain on the sale of the REO.



94



Farmer Mac's 90-day delinquency measure includes loans 90 days or more past due, as well as loans in foreclosure and non-performing loans where the borrower is in bankruptcy. As of September 30, 2018 , Farmer Mac's 90-day delinquencies were $37.5 million (0.53 percent of the Farm & Ranch portfolio), compared to $48.4 million ( 0.71 percent of the Farm & Ranch portfolio) as of December 31, 2017 and $66.4 million ( 1.01% of the Farm & Ranch portfolio) as of September 30, 2017. Those 90-day delinquencies were comprised of 64 delinquent loans as of September 30, 2018 , compared with 51 delinquent loans as of December 31, 2017 and 68 delinquent loans as of September 30, 2017. The decrease in 90-day delinquencies compared to December 31, 2017 is primarily attributable to: (1) lower than expected seasonal delinquencies associated with loans that have annual (January 1st) and semi-annual (January 1st and July 1st) payment terms, which account for most of the loans in the Farm & Ranch portfolio; (2) the paydown on two large permanent planting loans to a single borrower that resulted in the loans becoming current; and (3) $9.8 million in two crop loans to a single borrower that became current during third quarter 2018. Farmer Mac's 90-day delinquencies have historically fluctuated from quarter to quarter, both in dollars and as a percentage of the outstanding Farm & Ranch portfolio, with higher levels generally observed at the end of the first and third quarters and lower levels generally observed at the end of the second and fourth quarters of each year as a result of the annual (January 1st) and semi-annual (January 1st and July 1st) payment terms of most Farm & Ranch loans. Farmer Mac believes that it remains adequately collateralized on its delinquent loans. Farmer Mac expects that over time its 90-day delinquency rate will revert closer to Farmer Mac's historical average, and possibly exceed it (which it did in third quarter 2017), due to macroeconomic factors and the cyclical nature of the agricultural economy. Farmer Mac's average 90-day delinquency rate as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 1 percent. The highest 90-day delinquency rate observed during that period occurred in 2009 at approximately 2 percent, which coincided with increased delinquencies in loans within Farmer Mac's then-held ethanol loan portfolio that Farmer Mac no longer holds.

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 16
 
Farm & Ranch Line of Business
 
90-Day
Delinquencies
 
Percentage
 
(dollars in thousands)
As of:
 
 
 
 
 
September 30, 2018
$
7,072,018

 
$
37,545

 
0.53
%
June 30, 2018
7,045,397

 
43,076

 
0.61
%
March 31, 2018
6,932,002

 
47,560

 
0.69
%
December 31, 2017
6,867,586

 
48,444

 
0.71
%
September 30, 2017
6,557,030

 
66,381

 
1.01
%
June 30, 2017
6,426,518

 
41,901

 
0.65
%
March 31, 2017
6,240,467

 
50,807

 
0.81
%
December 31, 2016
6,139,304

 
21,038

 
0.34
%
September 30, 2016
6,004,728

 
18,377

 
0.31
%

When analyzing the overall risk profile of its lines of business, Farmer Mac considers more than the Farm & Ranch loan delinquency percentages provided above. The lines of business also include AgVantage securities and Rural Utilities loans held and underlying LTSPCs, neither of which have any delinquencies, and USDA Securities, which are backed by the full faith and credit of the United States.


95



Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.19 percent of total outstanding business volume as of September 30, 2018 , compared to 0.25 percent as of December 31, 2017 and 0.36 percent as of September 30, 2017.



96



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 September 30, 2018 by year of origination, geographic region, commodity/collateral type, original loan-to-value ratio, and range in the size of borrower exposure:

Table 17
Farm & Ranch 90-Day Delinquencies as of September 30, 2018
 
Distribution of Farm & Ranch Line of Business
 
Farm & Ranch Line of Business
 
90-Day Delinquencies (1)
 
Percentage
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
 
 
2008 and prior
11
%
 
790,898

 
8,548

 
1.08
%
2009
1
%
 
95,465

 
477

 
0.50
%
2010
2
%
 
152,089

 

 
%
2011
3
%
 
225,295

 
914

 
0.41
%
2012
8
%
 
532,747

 
1,955

 
0.37
%
2013
11
%
 
759,516

 
4,018

 
0.53
%
2014
8
%
 
597,238

 
3,075

 
0.51
%
2015
11
%
 
768,477

 
391

 
0.05
%
2016
16
%
 
1,123,758

 
8,663

 
0.77
%
2017
19
%
 
1,306,981

 
9,504

 
0.73
%
2018
10
%
 
719,554

 

 
%
Total
100
%
 
$
7,072,018

 
$
37,545

 
0.53
%
By geographic region (2) :
 

 
 

 
 

 
 

Northwest
12
%
 
$
815,346

 
$
12,659

 
1.55
%
Southwest
31
%
 
2,198,744

 
12,065

 
0.55
%
Mid-North
32
%
 
2,276,100

 
7,373

 
0.32
%
Mid-South
12
%
 
876,960

 
3,274

 
0.37
%
Northeast
5
%
 
315,685

 
1,487

 
0.47
%
Southeast
8
%
 
589,183

 
687

 
0.12
%
Total
100
%
 
$
7,072,018

 
$
37,545

 
0.53
%
By commodity/collateral type:
 
 
 

 
 

 
 

Crops
53
%
 
$
3,746,077

 
$
16,989

 
0.45
%
Permanent plantings
20
%
 
1,400,976

 
9,340

 
0.67
%
Livestock
19
%
 
1,353,141

 
6,763

 
0.50
%
Part-time farm
7
%
 
484,227

 
4,453

 
0.92
%
Ag. Storage and Processing
1
%
 
79,475

 

 
%
Other

 
8,122

 

 
%
Total
100
%
 
$
7,072,018

 
$
37,545

 
0.53
%
By original loan-to-value ratio (3) :
 
 
 
 
 
 
 
0.00% to 40.00%
19
%
 
$
1,317,118

 
$
4,607

 
0.35
%
40.01% to 50.00%
25
%
 
1,769,124

 
11,794

 
0.67
%
50.01% to 60.00%
35
%
 
2,456,766

 
16,074

 
0.65
%
60.01% to 70.00%
17
%
 
1,227,092

 
3,809

 
0.31
%
70.01% to 80.00% (4)
4
%
 
277,204

 
960

 
0.35
%
80.01% to 90.00% (4)
%
 
24,714

 
301

 
1.22
%
Total
100
%
 
$
7,072,018

 
$
37,545

 
0.53
%
By size of borrower exposure (5) :
 
 
 
 
 
 
 
Less than $1,000,000
34
%
 
$
2,423,394

 
$
13,862

 
0.57
%
$1,000,000 to $4,999,999
38
%
 
2,696,431

 
23,683

 
0.88
%
$5,000,000 to $9,999,999
13
%
 
917,198

 

 
%
$10,000,000 to $24,999,999
8
%
 
587,618

 

 
%
$25,000,000 to $50,000,000
7
%
 
447,377

 

 
%
Total
100
%
 
$
7,072,018

 
$
37,545

 
0.53
%
(1)  
Includes loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, or in bankruptcy with at least one missed payment, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.



97




(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)  
As of second quarter 2017, Farmer Mac revised its calculation of the original loan-to-value ratio of a loan to combine for any cross-collateralized loans, set forth as follows: (i) the original loan principal balance amounts in the numerator; and (ii) the original appraised property values in the denominator. In previous periods, the ratio was calculated on a loan-by-loan basis without considering the effects of any cross-collateralization. Prior period information has been reclassified to conform to the current period calculation and presentation.
(4)  
Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.
(5)  
Includes aggregated loans to single borrowers or borrower-related entities.

Another indicator that Farmer Mac considers in analyzing the credit quality of its Farm & Ranch portfolio is the level of internally-rated "substandard" assets, both in dollars and as a percentage of the outstanding Farm & Ranch portfolio. Assets categorized as "substandard" have a well-defined weakness or weaknesses, and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected. As of September 30, 2018 , Farmer Mac's substandard assets were $216.0 million ( 3.1 percent of the Farm & Ranch portfolio), compared to $221.3 million ( 3.2 percent of the Farm & Ranch portfolio) as of December 31, 2017 . Those substandard assets were comprised of 336 loans as of September 30, 2018 and 307 loans as of December 31, 2017. As of September 30, 2018, substandard asset volume included several large exposures and represents a relatively diverse set of commodities. Farmer Mac's substandard asset volume decreased modestly from year-end 2017 in dollars as assets newly classified as substandard were slightly less than assets that were paid off, paid down, or upgraded in risk rating. As of September 30, 2018, the commodity composition of substandard assets was similar to past quarters. The improvement in substandard assets as compared to December 31, 2017 was primarily due to paydowns of loans and fewer loans migrating into the substandard asset category. Farmer Mac expects that over time its substandard asset rate will eventually revert closer to, and possibly exceed, Farmer Mac's historical average due to macroeconomic factors and the cyclical nature of the agricultural economy. Farmer Mac's average substandard assets as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 4 percent. The highest substandard asset rate observed during that period occurred in 2010 at approximately 8 percent, which coincided with an increase in substandard loans within Farmer Mac's then-held ethanol portfolio that Farmer Mac no longer holds. If Farmer Mac's substandard asset rate increases from current levels, it is likely that Farmer Mac's provision to the allowance for loan losses and the reserve for losses will also increase.

Although some credit losses are inherent to the business of agricultural lending, Farmer Mac believes that any losses associated with the current agricultural credit cycle will be moderated by the strength and diversity of its portfolio, which Farmer Mac believes is adequately collateralized. See Note 5 to the consolidated financial statements for more information regarding credit quality indicators related to Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.



98



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 September 30, 2018 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 18
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of September 30, 2018
 
Cumulative Original Loans, Guarantees and LTSPCs
 
 Cumulative Net Credit Losses/(Recoveries)
 
 Cumulative Loss Rate
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
2008 and prior
14,974,346

 
28,538

 
0.19
 %
2009
579,665

 
1,544

 
0.27
 %
2010
663,870

 
5

 
 %
2011
785,554

 
3,661

 
0.47
 %
2012
1,158,941

 

 
 %
2013
1,423,735

 

 
 %
2014
980,965

 

 
 %
2015
1,104,579

 
(540
)
 
(0.05
)%
2016
1,404,299

 

 
 %
2017
1,482,209

 

 
 %
2018
776,090

 

 
 %
Total
$
25,334,253

 
$
33,208

 
0.13
 %
By geographic region (1) :
 

 
 

 
 

Northwest
$
3,245,378

 
$
11,191

 
0.34
 %
Southwest
8,840,676

 
8,167

 
0.09
 %
Mid-North
6,239,007

 
12,830

 
0.21
 %
Mid-South
2,930,849

 
(211
)
 
(0.01
)%
Northeast
1,780,211

 
259

 
0.01
 %
Southeast
2,298,132

 
972

 
0.04
 %
Total
$
25,334,253

 
$
33,208

 
0.13
 %
By commodity/collateral type:
 

 
 

 
 

Crops
$
11,416,270

 
$
2,887

 
0.03
 %
Permanent plantings
5,369,875

 
9,368

 
0.17
 %
Livestock
6,055,966

 
3,877

 
0.06
 %
Part-time farm
1,550,443

 
1,403

 
0.09
 %
Ag. Storage and Processing
783,908

 
15,673

 
2.00
 %
Other
157,791

 

 
 %
Total
$
25,334,253

 
$
33,208

 
0.13
 %
(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).


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 successful operations within the commodity group. Certain geographic areas also offer better growing conditions and market access 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.


99




In Farmer Mac's historical experience, the degree to which the collateral for a commodity group is single-use or highly improved is a more significant determinant of the probability of ultimate losses on a given loan than diversity of geographic location within a commodity group. Commodity groups that tend to be single-use or highly improved include permanent plantings (nut crops for example), agricultural storage and processing facilities (canola plants and grain processing facilities for example), and certain livestock facilities (dairy facilities for example). 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. Producers of agricultural commodities that require highly improved property are generally less able to adapt their operations when faced with adverse economic conditions. Also, in the event of a borrower's default, 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 agricultural storage and processing loans, for which the collateral is typically highly improved and specialized.


100



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 19
 
As of September 30, 2018
 
Farm & Ranch Concentrations by Commodity Type within Geographic Region
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
 
(dollars in thousands)
By geographic region (1) :
 
 
 
 
 
 
 
 
 
 
 
 
 
Northwest
$
401,675

 
$
102,187

 
$
240,728

 
$
70,353

 
$

 
$
403

 
$
815,346

 
5.7
%
 
1.4
%
 
3.4
%
 
1.0
%
 
%
 
%
 
11.5
%
Southwest
534,570

 
1,089,010

 
439,515

 
81,284

 
50,292

 
4,073

 
2,198,744

 
7.6
%
 
15.4
%
 
6.2
%
 
1.1
%
 
0.7
%
 
0.1
%
 
31.1
%
Mid-North
1,932,370

 
16,948

 
188,220

 
126,823

 
8,943

 
2,796

 
2,276,100

 
27.3
%
 
0.3
%
 
2.7
%
 
1.8
%
 
0.1
%
 
%
 
32.2
%
Mid-South
533,204

 
8,094

 
264,086

 
62,458

 
8,661

 
457

 
876,960

 
7.5
%
 
0.1
%
 
3.7
%
 
0.9
%
 
0.1
%
 
%
 
12.3
%
Northeast
153,233

 
22,450

 
60,545

 
74,879

 
4,578

 

 
315,685

 
2.2
%
 
0.3
%
 
0.9
%
 
1.1
%
 
0.1
%
 
%
 
4.6
%
Southeast
191,025

 
162,287

 
160,047

 
68,430

 
7,001

 
393

 
589,183

 
2.7
%
 
2.3
%
 
2.3
%
 
0.9
%
 
0.1
%
 
%
 
8.3
%
Total
$
3,746,077

 
$
1,400,976

 
$
1,353,141

 
$
484,227

 
$
79,475

 
$
8,122

 
$
7,072,018

 
53.0
%
 
19.8
%
 
19.2
%
 
6.8
%
 
1.1
%
 
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).

Table 20
 
As of September 30, 2018

Farm & Ranch Cumulative Credit Losses by Origination Year and Commodity Type
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Total
 
(in thousands)
By year of origination:
 
 
 
 
 
 
 
 
 
 
 
2008 and Prior
$
3,329

 
$
9,184

 
$
3,803

 
$
1,403

 
$
10,819

 
$
28,538

2009
98

 
184

 
69

 

 
1,193

 
1,544

2010

 

 
5

 

 

 
5

2011

 

 

 

 
3,661

 
3,661

2012

 

 

 

 

 

2013

 

 

 

 

 

2014

 

 

 

 

 

2015
(540
)
 

 

 

 

 
(540
)
2016

 

 

 

 

 

2017

 

 

 

 

 

2018

 

 

 

 

 

Total
$
2,887

 
$
9,368

 
$
3,877

 
$
1,403

 
$
15,673

 
$
33,208




101



Farmer Mac regularly conducts detailed, statistical stress tests of its portfolio for credit risk and compares those results to current and historical credit quality metrics and to the various statutory, regulatory, and Farmer Mac's board of directors' capital policy metrics. 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.

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. During the previous three years ended September 30, 2018, Farmer Mac has required one seller to repurchase a total of two loans aggregating $0.8 million for breaches of representations and warranties made about those two loans, both of which repurchases occurred during first quarter 2016. In addition to relying on the representations and warranties of lenders, Farmer Mac also underwrites all of the agricultural real estate 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 "Business—Farmer Mac's Lines of Business—Farm & Ranch—Loan Eligibility" and "Business—Farmer Mac's Lines of Business—Rural Utilities—Loan Eligibility" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

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. During the previous three years ended September 30, 2018, Farmer Mac had 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's Lines of Business—Farm & Ranch—Servicing" and "Business—Farmer Mac's Lines of Business—Rural Utilities—Servicing" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

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.

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 for the


102



particular counterparty and transaction.  The required collateralization level is established at the time the AgVantage facility is entered into with the counterparty and does not change during the life of the AgVantage securities issued under the facility.  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 Farm Equity AgVantage counterparties and smaller financial funds or entities, Farmer Mac also requires that the counterparty generally (1) maintain a higher collateralization level, through lower loan-to-value ratio thresholds and higher overcollateralization than required for traditional AgVantage securities and (2) comply with specified financial covenants for the life of the related AgVantage security to avoid default. For a more detailed description of AgVantage securities, see "Business—Farmer Mac's Lines of Business—Institutional Credit—AgVantage Securities" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans eligible for the Farm & Ranch line of business totaled $5.3 billion as of September 30, 2018 and $5.1 billion as of December 31, 2017 . The unpaid principal balance of on-balance sheet AgVantage securities secured by loans eligible for the Rural Utilities line of business totaled $2.8 billion as of September 30, 2018 and $2.5 billion as of December 31, 2017 . The unpaid principal balance of outstanding off-balance sheet AgVantage securities totaled $0.3 billion as of September 30, 2018 and $0.3 billion as of December 31, 2017 .

The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of September 30, 2018 and December 31, 2017 :

Table 21
 
 
As of September 30, 2018
 
As of December 31, 2017
Counterparty
 
Balance
 
Credit Rating
 
Required Collateralization
 
Balance
 
Credit Rating
 
Required Collateralization
 
 
(dollars in thousands)
AgVantage:
 
 
 
 
 
 
 
 
 
 
 
 
MetLife
 
$
2,550,000

 
AA-
 
103%
 
$
2,550,000

 
AA-
 
103%
CFC (1)
 
3,086,187

 
A
 
100%
 
2,800,188

 
A
 
100%
Rabo AgriFinance
 
2,075,000

 
None
 
110%
 
2,075,000

 
None
 
106%
Other (2)
 
374,303

 
(3)  
 
106% to 125%
 
199,959

 
(3)  
 
106% to 125%
Farm Equity AgVantage (4)
 
279,790

 
None
 
110%
 
279,731

 
None
 
110%
Total outstanding
 
$
8,365,280

 
 
 
 
 
$
7,904,878

 
 
 
 
(1)  
Includes $300.0 million related to a revolving floating rate AgVantage facility. Farmer Mac receives a fixed fee based on the full dollar amount of the facility.
(2)  
Consists of AgVantage securities issued by 6 different issuers as of both September 30, 2018 and December 31, 2017.
(3)  
Consists of AgVantage securities from 6 different issuers without a credit rating as of both September 30, 2018 and December 31, 2017.
(4)  
Consists of AgVantage securities from 5 different issuers as of both September 30, 2018 and December 31, 2017.

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 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's Lines of Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac's Lines of


103



Business—Rural Utilities—Approved Lenders" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

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. Furthermore, Farmer Mac is required to fully collateralize its derivatives positions without any minimum threshold for cleared swap transactions, as well as for non-cleared swap transactions entered into after March 1, 2017 (the effective date of new rules that established zero threshold requirements for the exchange of variation margin between Farmer Mac and its swap dealer counterparties in such transactions). Farmer Mac transacts interest rate swaps with multiple counterparties to reduce any counterparty credit exposure concentration. As a result of mandatory clearing rules for certain interest rate derivative transactions enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Farmer Mac uses 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk" and Note 4 to the consolidated financial statements.

Credit Risk Other Investments . As of September 30, 2018 , Farmer Mac had $0.4 billion of cash and cash equivalents 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 criteria for investments that are eligible for Farmer Mac's investment portfolio, including limitations on asset class, 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.

On September 13, 2018, FCA adopted a final rule to amend the Liquidity and Investment Regulations to comply with Section 939A of the Dodd-Frank Act by removing references and requirements relating to credit ratings and replacing them with other standards of creditworthiness. Previously, the Liquidity and Investment Regulations and Farmer Mac's policies generally required each investment or issuer of an investment to be highly rated by a nationally recognized statistical rating organization.  The amendments to the Liquidity and Investment Regulations and Farmer Mac's internal policies now require that investments held in Farmer Mac's investment portfolio meet the following creditworthiness standards: (1) at a minimum, at least one obligor of the investment must have a very strong capacity to meet financial commitments for the life of the investment, even under severely adverse or stressful conditions, and generally present a very low risk of default; (2) in the event that the obligor whose capacity to meet financial commitments is being relied upon to meet the standard set forth in subparagraph (1) is located outside of the United States, the investment must also be fully guaranteed by a U.S. government agency; and (3) the investment must exhibit low credit risk and other risk characteristics consistent with the purpose or purposes for which it is held.

The Liquidity and Investment Regulations and Farmer Mac's internal policies also establish concentration limits, which are intended to limit exposure to any single entity, issuer, or obligor. The amendments to the Liquidity and Investment Regulations changed the limit for Farmer Mac's total credit exposure to any single issuer, issuer, or obligor of securities from 25 percent to 10 percent of Farmer Mac's regulatory capital ( $72.3 million as of September 30, 2018 ). However, Farmer Mac's current policy limits this total


104



credit exposure to 5 percent of its regulatory capital ( $36.1 million as of September 30, 2018 ). These exposure limits do not apply to obligations of U.S. government agencies or GSEs, although Farmer Mac's current policy restricts investing more than 100 percent of regulatory capital in the senior non-convertible debt securities of any one GSE.

Prior to their amendment, the Liquidity and Investment Regulations also established limits on the maximum amount, expressed as a percentage of Farmer Mac's investment portfolio, that could be invested in each eligible asset class. Although the amended Liquidity and Investments Regulations eliminated these limits, Farmer Mac's internal policies set forth asset class limits as part of Farmer Mac's overall risk management framework.

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 (excluding AgVantage 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.

Interest Rate Risk Management

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. 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;
refinancing existing liabilities; or
using financial derivatives to alter the characteristics of existing assets or liabilities.

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 when projecting and valuing cash flows associated with these assets.  Because borrowers' behaviors in various interest rate environments may change over time, Farmer


105



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.

Yield maintenance provisions and other prepayment penalties contained in certain agricultural real estate mortgage loans and most 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 September 30, 2018 , approximately 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 or other forms of prepayment protection (together covering 4 percent of all loans with fixed interest rates).  Of the Farm & Ranch loans purchased in third quarter 2018 , none had yield maintenance or another form of prepayment protection. As of September 30, 2018 , none of Farmer Mac's USDA Securities had yield maintenance provisions; however, 4 percent contained other prepayment penalties.  Of the USDA Securities purchased in third quarter 2018 , 7 percent contained various forms of prepayment penalties.  As of September 30, 2018 , 67 percent of the Rural Utilities loans owned by Farmer Mac had yield maintenance provisions. Farmer Mac did not purchase any Rural Utilities loans in third quarter 2018 .

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 but has not yet purchased, other than delinquent loans purchased through LTSPCs or loans designated for securitization under a forward purchase agreement.  When Farmer Mac commits to purchase these loans, it is exposed to interest rate risk between the time it commits to purchase the loans and the time it issues debt to fund the purchase of those loans.

Farmer Mac manages the interest rate risk related to these loans by using futures contracts involving U. S. Treasury securities and/or forward sale contracts on the debt securities of other GSEs.  Farmer Mac uses U.S. Treasury futures contracts as a hedge against the level of interest rates, while forward sale contracts on GSE securities 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 $0.4 billion of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities. As of September 30, 2018 , $2.19 billion of the $ 2.27 billion of investment securities ( 96 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.


106




Interest Rate Risk Metrics

Farmer Mac regularly stress tests its portfolio for interest rate risk and 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 projected net effective spread ("NES") 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 NES simulation represents the difference between projected income from interest-earning assets and interest expense produced by the related funding, including associated derivatives. Farmer Mac's NES 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 NES forecast represents an estimate of the net effective spread income that Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, NES sensitivity statistics provide a short-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 portfolio.

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 factors such as projected interest rates, interest rate volatility, and prepayment speeds. Accordingly, these metrics should be understood as estimates rather than as precise measurements. 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.



107



The following schedule summarizes the results of Farmer Mac's MVE and NES sensitivity analysis as of September 30, 2018 and December 31, 2017 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:

Table 22
 
 
Percentage Change in MVE from Base Case
Interest Rate Scenario
 
As of September 30, 2018
 
As of December 31, 2017
+100 basis points
 
(1.6
)%
 
(1.1
)%
-100 basis points
 
(2.7
)%
 
(5.4
)%

 
 
Percentage Change in NES from Base Case
Interest Rate Scenario
 
As of September 30, 2018
 
As of December 31, 2017
+100 basis points
 
5.2
 %
 
4.4
 %
-100 basis points
 
(5.8
)%
 
(3.7
)%

As of September 30, 2018 , Farmer Mac's effective duration gap was 0.0 months , compared to negative 0.9 months as of December 31, 2017 .  During the first nine months of 2018, interest rates increased significantly. This rate movement increased the duration of Farmer Mac’s assets relative to its liabilities, thereby reducing Farmer Mac’s duration gap. Despite this rate movement, Farmer Mac’s overall interest rate sensitivity remained stable and at relatively low levels during the first nine months of 2018.

Financial Derivatives Transactions

The economic effects of financial derivatives are included in Farmer Mac's MVE, NES, 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 September 30, 2018 , Farmer Mac had $9.7 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to twenty-five years, of which $3.5 billion were pay-fixed interest rate swaps, $4.7 billion were receive-fixed interest rate swaps, and $1.5 billion were basis swaps.

Farmer Mac enters into interest rate swap contracts to synthetically 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 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


108



specific transactions. Certain financial derivatives are designated as fair value hedges of fixed rate assets classified as available for sale or liabilities to protect against fair value changes in the assets or liabilities related to a benchmark interest rate (e.g., LIBOR). Furthermore, certain financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.

All of Farmer Mac's financial derivatives transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty. As of September 30, 2018 , Farmer Mac had $4.4 million of uncollateralized net exposures to four counterparties. As of December 31, 2017 , Farmer Mac had uncollateralized net exposures of $0.5 million to three counterparties.

Basis Risk

In addition to being exposed to the risk of asset and liability cash flow mismatches, Farmer Mac is exposed to the risk related to changes in its cost of funds relative to floating rate market indexes (such as LIBOR) on some of the floating rate assets it holds. This exposure is referred to as "basis risk." Some of Farmer Mac's floating rate assets reset on rate adjustment dates based on a floating rate market index, whereas the related debt that Farmer Mac issued to fund those assets until their maturities may be refinanced based on Farmer Mac’s cost of funds at a particular time. Basis risk arises from the potential variability between the rates at which those floating rate assets reset and the rates at which Farmer Mac can issue debt to fund those assets. Farmer Mac can fund these floating rate assets in several ways, including:

issuing short-term discount notes with maturities that match the reset period of the assets;
issuing floating rate medium-term notes with maturities that match the maturities of the assets;
issuing non-maturity matched, floating rate medium-term notes; or
issuing non-maturity matched, fixed-rate discount notes or medium-term notes swapped to match the interest rate reset dates of the assets as an alternative source of effectively floating rate funding.

Farmer Mac primarily uses the last two options identified in the list above to fund these floating rate assets because this funding strategy is usually the most effective way to provide an interest rate match, maintain a suitable liquidity profile, and lower Farmer Mac’s cost of funds. As funding for these floating rate assets matures, Farmer Mac seeks to refinance the debt associated with these assets in a similar fashion to achieve an appropriate interest rate match for the remaining life of the assets. However, if the rates on Farmer Mac’s discount notes or medium-term notes deteriorate relative to LIBOR during the time between when these floating rate assets were first funded and when Farmer Mac refinances the associated debt, Farmer Mac is exposed to a commensurate reduction in its net effective spread on the associated assets. Conversely, if the rates on Farmer Mac’s discount notes or medium-term notes improve relative to LIBOR during that time, Farmer Mac would benefit from a commensurate increase in its net effective spread on those assets.

Farmer Mac is also subject to basis risk on some of its fixed rate assets as a result of its use of pay-fixed interest rate swaps, combined with a series of discount note or medium-term note issuances, as an alternative source of effectively fixed rate funding. This risk arises because the rates at which Farmer Mac refinances its funding for some fixed rate assets through the issuance of discount notes or medium-term notes may vary from the agreed-upon rates based on the floating rate market index received by Farmer Mac on the associated swaps. In these cases, if the rates on Farmer Mac's discount notes or medium-term


109



notes were to deteriorate relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction in its net interest income and net effective spread. Conversely, if the rates on Farmer Mac's discount notes or medium-term notes were to improve relative to LIBOR, Farmer Mac would benefit from a commensurate increase in its net interest income and net effective spread.

To mitigate this basis risk, Farmer Mac seeks to issue debt of sufficient maturity to reduce the frequency of required refinancing of that debt over the life of the associated asset. As of September 30, 2018, Farmer Mac held $6.4 billion of floating rate assets in its lines of business and its investment portfolio that reset based on floating rate market indexes, primarily one-month and three-month LIBOR. As of the same date, Farmer Mac also had $3.5 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of interest and receives a floating rate of interest.

Farmer Mac's short-term funding costs relative to LIBOR have varied during the first nine months of 2018. For most of this period, funding costs relative to LIBOR have been at levels generally more favorable than Farmer Mac’s historical experience. As of September 30, 2018 these levels have deteriorated to levels less favorable than Farmer Mac's historical experience. Farmer Mac adjusts its funding strategies to mitigate the effects of this variability from time to time and seeks to maintain an effective funding cost. Farmer Mac believes that material improvements in its short-term funding costs relative to LIBOR in the near-term are unlikely.

Liquidity and Capital Resources

Farmer Mac regularly accesses the capital markets for funding, and Farmer Mac has maintained access to the capital markets at favorable rates throughout 2017 and the first nine months of 2018. 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. Farmer Mac is required to maintain a minimum of 90 days of liquidity under the Liquidity and Investment Regulations. In accordance with the methodology for calculating available days of liquidity prescribed by those regulations, Farmer Mac maintained an average of 215  days of liquidity during third quarter 2018 and had 212  days of liquidity as of September 30, 2018 .
                              
Debt Issuance .  Farmer Mac funds its purchases of eligible loan assets and investment assets and finances its operations 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. As of September 30, 2018 , Farmer Mac had outstanding discount notes of $1.2 billion , medium-term notes that mature within one year of $6.2 billion , and medium-term notes that mature after one year of $8.5 billion .

Farmer Mac's board of directors has authorized the issuance of up to $20.0 billion of discount notes and medium-term notes (of which $15.8 billion was outstanding as of September 30, 2018 ), 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, USDA Securities, Farmer Mac Guaranteed


110



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 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 September 30, 2018 and December 31, 2017:

Table 23
 
As of September 30, 2018
 
As of December 31, 2017

 
(in thousands)
Cash and cash equivalents
$
436,152

 
$
302,022

Investment securities:
 

 
 

Guaranteed by U.S. Government and its agencies
1,299,903

 
1,331,490

Guaranteed by GSEs
935,633

 
893,843

 
 
 
 
Asset-backed securities
33,498

 
35,104

Total
$
2,705,186

 
$
2,562,459


Capital Requirements . Farmer Mac is subject to the following 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 September 30, 2018 , Farmer Mac was in compliance with its statutory capital requirements and was classified as within "level I" (the highest compliance level). See Note 9 to the consolidated financial statements for more information about Farmer Mac's capital position and see "Business—Government Regulation of Farmer Mac—Capital Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018 for more information on the capital requirements applicable to Farmer Mac.

In accordance with FCA's rule on capital planning, Farmer Mac's board of directors has adopted a policy for maintaining a sufficient level of "Tier 1" capital (consisting of retained earnings, paid-in capital, common stock, and qualifying preferred stock). That policy imposes restrictions on Tier 1-eligible dividends and any discretionary bonus payments if Tier 1 capital falls below specified thresholds. As of September 30, 2018 and December 31, 2017, Farmer Mac's Tier 1 capital ratio was 13.3% and 12.6% , respectively, as capital growth outpaced the growth in risk-weighted assets during the first nine months of 2018. For more information about Farmer Mac's capital adequacy policy and FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—Capital Standards" in Farmer Mac's


111



Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018. As of September 30, 2018 , Farmer Mac was in compliance with its capital adequacy policy.

Regulatory Matters

On September 13, 2018, FCA adopted a final rule to amend the Liquidity and Investment Regulations to comply with Section 939A of the Dodd-Frank Act by removing references and requirements relating to credit ratings and replacing them with other standards of creditworthiness, as well as to revise the eligibility criteria and exposure limits for certain types of investments. Farmer Mac expects that it will be able to successfully adapt to FCA's amendments of the Liquidity and Investment Regulations, which will become effective on the later of 30 days after their publication in the Federal Register or January 1, 2019. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Other Investments" for more information about these amendments.

Other Matters

Common Stock Dividends . For each of the first, second, and third quarters in 2018, Farmer Mac paid a quarterly dividend of $0.58 per share on all classes of its common stock. For each quarter in 2017, Farmer Mac paid a quarterly dividend of $0.36 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—Capital Standards—Enforcement Levels" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 8, 2018.

Preferred Stock Dividends . For each of the first, second, and third quarters in 2018 and for each quarter of 2017, Farmer Mac paid the following quarterly dividends on its outstanding preferred stock:
 
$0.3672 per share on its 5.875% Non-Cumulative Preferred Stock, Series A;
$0.4297 per share on its 6.875% Non-Cumulative Preferred Stock, Series B; and
$0.3750 per share on its 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C.



112



Supplemental Information

The following tables present quarterly and annual information regarding new business volume, repayments, and outstanding business volume:

Table 24
New Business Volume
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
LTSPCs
 
USDA Securities
 
Loans
 
LTSPCs
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
$
192,628

 
$
64,100

 
$
116,339

 
$

 
$

 
$
1,085,953

 
$
1,459,020

June 30, 2018
224,101

 
126,066

 
129,960

 

 

 
825,203

 
1,305,330

March 31, 2018
259,111

 
159,065

 
123,525

 
8,645

 

 
813,337

 
1,363,683

December 31, 2017
204,917

 
282,809

 
100,024

 
15,000

 

 
234,753

 
837,503

September 30, 2017
298,274

 
102,774

 
131,298

 
70,000

 

 
290,995

 
893,341

June 30, 2017
312,217

 
55,899

 
169,261

 
25,000

 

 
1,296,757

 
1,859,134

March 31, 2017
314,137

 
113,261

 
131,101

 
27,341

 

 
561,407

 
1,147,247

December 31, 2016
243,692

 
117,265

 
129,343

 
10,800

 
20,000

 
247,154

 
768,254

September 30, 2016
282,690

 
155,657

 
119,201

 
20,000

 

 
528,234

 
1,105,782

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
1,129,545

 
554,743

 
531,684

 
137,341

 

 
2,383,912

 
4,737,225

December 31, 2016
966,023

 
399,095

 
481,257

 
50,491

 
441,404

 
2,098,852

 
4,437,122





113



Table 25
Repayments of Assets by Line of Business
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
LTSPCs
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
73,476

 
$
3,556

 
$
21,742

 
$
28,135

 
$
25,640

 
$
8,286

 
$
1,112,558

 
$
1,273,393

Unscheduled
77,492

 
6,683

 
47,159

 
35,068

 
3,476

 

 

 
169,878

September 30, 2018
$
150,968

 
$
10,239

 
$
68,901

 
$
63,203

 
$
29,116

 
$
8,286

 
$
1,112,558

 
$
1,443,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
33,075

 
$
8,391

 
$
31,067

 
$
36,983

 
$
353

 
$
8,699

 
$
759,223

 
$
877,791

Unscheduled
86,426

 
8,273

 
69,539

 
66,601

 
51,306

 

 

 
282,145

June 30, 2018
$
119,501

 
$
16,664

 
$
100,606

 
$
103,584

 
$
51,659

 
$
8,699

 
$
759,223

 
$
1,159,936

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
110,733

 
$
14,085

 
$
70,057

 
$
40,811

 
$
26,507

 
$

 
$
392,310

 
$
654,503

Unscheduled
73,502

 
4,929

 
81,204

 
43,189

 
14,952

 
120,022

 

 
337,798

March 31, 2018
$
184,235

 
$
19,014

 
$
151,261

 
$
84,000

 
$
41,459

 
$
120,022

 
$
392,310

 
$
992,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
25,848

 
$
14,371

 
$
36,806

 
$
22,381

 
$
315

 
$
13,621

 
$
231,717

 
$
345,059

Unscheduled
49,229

 
6,941

 
43,975

 
24,385

 
4,876

 

 

 
129,406

December 31, 2017
$
75,077

 
$
21,312

 
$
80,781

 
$
46,766

 
$
5,191

 
$
13,621

 
$
231,717

 
$
474,465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
61,961

 
$
6,735

 
$
21,409

 
$
24,163

 
$
27,191

 
$
39,816

 
$
100,571

 
$
281,846

Unscheduled
49,894

 
5,861

 
124,676

 
45,192

 
457

 

 

 
226,080

September 30, 2017
$
111,855

 
$
12,596

 
$
146,085

 
$
69,355

 
$
27,648

 
$
39,816

 
$
100,571

 
$
507,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
21,687

 
$
9,116

 
$
41,821

 
$
35,169

 
$

 
$
9,885

 
$
1,166,922

 
$
1,284,600

Unscheduled
51,442

 
10,737

 
47,262

 
46,776

 

 

 
4,000

 
160,217

June 30, 2017
$
73,129

 
$
19,853

 
$
89,083

 
$
81,945

 
$

 
$
9,885

 
$
1,170,922

 
$
1,444,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
70,394

 
$
16,184

 
$
48,375

 
$
36,322

 
$
26,909

 
$
8,934

 
$
161,451

 
$
368,569

Unscheduled
114,811

 
11,985

 
64,486

 
39,457

 
814

 

 
102,059

 
333,612

March 31, 2017
$
185,205

 
$
28,169

 
$
112,861

 
$
75,779

 
$
27,723

 
$
8,934

 
$
263,510

 
$
702,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
20,566

 
$
15,209

 
$
21,546

 
$
21,325

 
$

 
$
15,929

 
$
311,739

 
$
406,314

Unscheduled
47,156

 
10,767

 
111,137

 
34,477

 
4,427

 

 
2,240

 
210,204

December 31, 2016
$
67,722

 
$
25,976

 
$
132,683

 
$
55,802

 
$
4,427

 
$
15,929

 
$
313,979

 
$
616,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
47,221

 
$
7,954

 
$
39,192

 
$
22,626

 
$
26,522

 
$
58,177

 
$
559,895

 
$
761,587

Unscheduled
85,583

 
17,108

 
67,094

 
36,099

 
2,108

 

 
5,000

 
212,992

September 30, 2016
$
132,804

 
$
25,062

 
$
106,286

 
$
58,725

 
$
28,630

 
$
58,177

 
$
564,895

 
$
974,579

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
179,890

 
$
46,406

 
$
148,411

 
$
118,035

 
$
54,415

 
$
72,256

 
$
1,660,661

 
$
2,280,074

Unscheduled
265,376

 
35,524

 
280,399

 
155,810

 
6,147

 

 
106,059

 
849,315

December 31, 2017
$
445,266

 
$
81,930

 
$
428,810

 
$
273,845

 
$
60,562

 
$
72,256

 
$
1,766,720

 
$
3,129,389

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
121,111

 
$
50,905

 
$
137,967

 
$
121,354

 
$
52,570

 
$
85,670

 
$
1,528,180

 
$
2,097,757

Unscheduled
288,433

 
47,705

 
304,992

 
183,805

 
6,535

 

 
7,240

 
838,710

December 31, 2016
$
409,544

 
$
98,610

 
$
442,959

 
$
305,159

 
$
59,105

 
$
85,670

 
$
1,535,420

 
$
2,936,467





114



Table 26
Lines of Business - Outstanding Business Volume
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
LTSPCs
 
AgVantage
 
Total
 
(in thousands)
As of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
$
4,420,619

 
$
287,594

 
$
2,363,805

 
$
2,471,251

 
$
962,702

 
$
669,335

 
$
8,365,280

 
$
19,540,586

June 30, 2018
4,378,958

 
297,833

 
2,368,606

 
2,418,115

 
991,819

 
677,621

 
8,391,885

 
19,524,837

March 31, 2018
4,274,359

 
314,497

 
2,343,146

 
2,391,739

 
1,043,477

 
686,320

 
8,325,905

 
19,379,443

December 31, 2017
4,198,733

 
333,511

 
2,335,342

 
2,352,214

 
1,076,291

 
806,342

 
7,904,878

 
19,007,311

September 30, 2017
4,068,893

 
354,823

 
2,133,314

 
2,298,956

 
1,066,482

 
819,963

 
7,901,842

 
18,644,273

June 30, 2017
3,882,474

 
367,419

 
2,176,625

 
2,237,013

 
1,024,130

 
859,779

 
7,711,418

 
18,258,858

March 31, 2017
3,643,386

 
387,272

 
2,209,809

 
2,149,697

 
999,130

 
869,664

 
7,585,583

 
17,844,541

December 31, 2016
3,514,454

 
415,441

 
2,209,409

 
2,094,375

 
999,512

 
878,598

 
7,287,686

 
17,399,475

September 30, 2016
3,338,484

 
441,417

 
2,224,827

 
2,020,834

 
993,139

 
874,527

 
7,354,511

 
17,247,739



Table 27
On-Balance Sheet Outstanding Business Volume
 
Fixed Rate
 
5- to 10-Year ARMs & Resets
 
1-Month to 3-Year ARMs
 
Total Held in Portfolio
 
(in thousands)
As of:
 
 
 
 
 
 
 
September 30, 2018
$
7,945,007

 
$
2,629,612

 
$
4,986,987

 
$
15,561,606

June 30, 2018
7,551,149

 
2,594,399

 
5,398,021

 
15,543,569

March 31, 2018
7,507,581

 
2,498,985

 
5,432,923

 
15,439,489

December 31, 2017
7,158,014

 
2,499,203

 
5,309,126

 
14,966,343

September 30, 2017
6,921,477

 
2,447,923

 
5,426,757

 
14,796,157

June 30, 2017
6,722,463

 
2,406,120

 
5,226,982

 
14,355,565

March 31, 2017
5,373,283

 
2,330,819

 
5,255,146

 
12,959,248

December 31, 2016
5,346,011

 
2,274,535

 
4,888,291

 
12,508,837

September 30, 2016
5,278,332

 
2,212,946

 
4,869,765

 
12,361,043





115



The following table presents the quarterly net effective spread (a non-GAAP measure) by segment:

Table 28
 
Net Effective Spread by Line of Business
 
 
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Net Effective Spread (1)
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018 (2)
$
13,887

 
1.91
%
 
$
4,627

 
0.86
%
 
$
2,877

 
1.18
%
 
$
15,642

 
0.78
%
 
$
2,044

 
0.30
%
 
$
39,077

 
0.93
%
June 30, 2018
13,347

 
1.86
%
 
4,398

 
0.83
%
 
2,923

 
1.15
%
 
15,220

 
0.76
%
 
274

 
0.04
%
 
36,162

 
0.86
%
March 31, 2018
12,540

 
1.80
%
 
4,400

 
0.82
%
 
2,950

 
1.12
%
 
14,824

 
0.78
%
 
2,387

 
0.36
%
 
37,101

 
0.91
%
December 31, 2017
12,396

 
1.80
%
 
4,979

 
0.93
%
 
3,057

 
1.14
%
 
14,800

 
0.78
%
 
2,235

 
0.35
%
 
37,467

 
0.93
%
September 30, 2017 (2)
11,303

 
1.73
%
 
4,728

 
0.90
%
 
2,765

 
1.07
%
 
14,455

 
0.78
%
 
2,725

 
0.41
%
 
35,976

 
0.91
%
June 30, 2017
11,158

 
1.77
%
 
4,551

 
0.87
%
 
2,669

 
1.06
%
 
14,467

 
0.81
%
 
2,489

 
0.36
%
 
35,334

 
0.91
%
March 31, 2017
10,511

 
1.77
%
 
4,561

 
0.89
%
 
2,568

 
1.04
%
 
12,615

 
0.82
%
 
2,271

 
0.32
%
 
32,526

 
0.90
%
December 31, 2016
10,131

 
1.75
%
 
5,152

 
1.04
%
 
2,530

 
1.02
%
 
11,636

 
0.78
%
 
1,999

 
0.26
%
 
31,448

 
0.88
%
September 30, 2016
10,476

 
1.86
%
 
4,994

 
1.03
%
 
2,541

 
1.01
%
 
11,431

 
0.75
%
 
2,239

 
0.24
%
 
31,681

 
0.85
%
(1)  
Net effective spread is a non-GAAP measure. Effective in fourth quarter 2017, Farmer Mac revised its methodology for calculating net effective spread to also include the net effects of terminations or net settlements on financial derivatives and hedging activities. All prior period information has been recast to reflect the revised net effective spread methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Measures—Net Effective Spread" for more information about net effective spread.
(2)  
See Note 9 to the consolidated financial statements for a reconciliation of GAAP net interest income by line of business to net effective spread by line of business for the three months ended September 30, 2018 and 2017.






























116



The following table presents quarterly core earnings (a non-GAAP measure) reconciled to net income attributable to common stockholders:

Table 29
Core Earnings by Quarter End
 
September 2018
 
June 2018
 
March 2018
 
December 2017
 
September 2017
 
June 2017
 
March 2017
 
December 2016
 
September 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net effective spread
$
39,077

 
$
36,162

 
$
37,101

 
$
37,467

 
$
35,976

 
$
35,334

 
$
32,526

 
$
31,448

 
$
31,681

Guarantee and commitment fees
5,170

 
5,171

 
5,083

 
5,157

 
4,935

 
4,942

 
5,316

 
5,158

 
4,533

Other
110

 
111

 
428

 
69

 
274

 
107

 
485

 
545

 
713

Total revenues
44,357

 
41,444

 
42,612

 
42,693

 
41,185

 
40,383

 
38,327

 
37,151

 
36,927

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit related expense/(income):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Release of)/provision for losses
(3
)
 
582

 
(410
)
 
464

 
384

 
466

 
444

 
512

 
(31
)
REO operating expenses

 

 
16

 

 

 
23

 

 

 

Losses/(gains) on sale of REO
41

 
(34
)
 

 
(964
)
 
(32
)
 
(757
)
 
5

 

 
(15
)
Total credit related expense/(income)
38

 
548

 
(394
)
 
(500
)
 
352

 
(268
)
 
449

 
512

 
(46
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
6,777

 
6,936

 
6,654

 
5,247

 
5,987

 
6,682

 
6,317

 
5,949

 
5,438

General and administrative
4,350

 
5,202

 
4,326

 
4,348

 
3,890

 
3,921

 
3,800

 
4,352

 
3,474

Regulatory fees
625

 
625

 
625

 
625

 
625

 
625

 
625

 
625

 
613

Total operating expenses
11,752

 
12,763

 
11,605

 
10,220

 
10,502

 
11,228

 
10,742

 
10,926

 
9,525

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
32,567

 
28,133

 
31,401

 
32,973

 
30,331

 
29,423

 
27,136

 
25,713

 
27,448

Income tax expense
6,891

 
5,477

 
6,259

 
11,796

 
10,268

 
10,307

 
8,844

 
9,189

 
9,577

Net (loss)/income attributable to non-controlling interest (1)

 

 

 

 

 
(150
)
 
(15
)
 
28

 
(18
)
Preferred stock dividends
3,295

 
3,296

 
3,295

 
3,296

 
3,295

 
3,296

 
3,295

 
3,296

 
3,295

Core earnings
$
22,381

 
$
19,360

 
$
21,847

 
$
17,881

 
$
16,768

 
$
15,970

 
$
15,012

 
$
13,200

 
$
14,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciling items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) on undesignated financial derivatives due to fair value changes
3,625

 
6,709

 
(2,279
)
 
(261
)
 
995

 
801

 
8,683

 
17,906

 
734

Gains/(losses) on hedging activities due to fair value changes
1,051

 
1,687

 
2,564

 
(3
)
 
1,742

 
1,420

 
(3,878
)
 
(673
)
 
726

Unrealized (losses)/gains on trading assets
(3
)
 
11

 
16

 
60

 

 
(2
)
 
(82
)
 
(474
)
 
1,182

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(38
)
 
196

 
(686
)
 
(129
)
 
(954
)
 
(117
)
 
(127
)
 
(40
)
 
(157
)
Net effects of terminations or net settlements on financial derivatives and hedging activities
546

 
232

 
1,242

 
632

 
862

 
232

 
948

 
2,150

 
238

Re-measurement of net deferred tax asset due to enactment of new tax legislation

 

 

 
(1,365
)
 

 

 

 

 

Income tax effect related to reconciling items
(1,088
)
 
(1,855
)
 
(180
)
 
(105
)
 
(926
)
 
(816
)
 
(1,941
)
 
(6,604
)
 
(953
)
Net income attributable to common stockholders
$
26,474

 
$
26,340

 
$
22,524

 
$
16,710

 
$
18,487

 
$
17,488

 
$
18,615

 
$
25,465

 
$
16,364

(1)  
As of May 1, 2017, Farmer Mac transferred its entire 65% ownership interest in AgVisory back to the limited liability company.



117




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 that 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

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 Quarterly Report on Form 10-Q, 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 September 30, 2018 .
  
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 September 30, 2018 .

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 September 30, 2018 that have materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial reporting.


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, 2017 filed with the SEC on March 8, 2018.


118



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

(a) Farmer Mac is a federally chartered instrumentality of the United States whose debt and equity securities are exempt from registration under Section 3(a)(2) of the Securities Act of 1933. During third quarter 2018, the following transactions occurred related to Farmer Mac's equity securities that were not registered under the Securities Act of 1933 and were not otherwise reported on a Current Report on Form 8-K:

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 41 shares of its Class C Non-Voting Common Stock on July 2, 2018 to the three 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 $89.48 per share, which was the closing price of the Class C Non-Voting Common Stock on June 29, 2018 (the last trading day of the second quarter) as reported by the New York Stock Exchange.


(b)
Not applicable.

(c)
None.

Item 3. Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4.
Mine Safety Disclosures

Not applicable.


119



Item 5. Other Information

(a) None.

(b) None.

Item 6. Exhibits
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
*
 
 
 
**#
 
 
 
*
 
 
 
 
**
 
 
 
**
 
 
 
**
 
 
 
*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
#
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
Management contract or compensatory plan.


120



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/ Bradford T. Nordholm
 
November 8, 2018
By:
Bradford T. Nordholm
 
Date
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 

          /s/ R. Dale Lynch
 
November 8, 2018
By:
R. Dale Lynch
 
Date
 
Executive Vice President – Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
    




121


Exhibit 10.1

CONFIDENTIAL TREATMENT FOR THIS EXHIBIT HAS BEEN REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION

PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED, AND THE REDACTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION



SECOND SUPPLEMENTAL NOTE PURCHASE AGREEMENT

SECOND SUPPLEMENTAL NOTE PURCHASE AGREEMENT, dated as of July 31, 2018 (the “ Agreement ”), among FARMER MAC MORTGAGE SECURITIES CORPORATION (the “Purchaser”), a wholly owned subsidiary of FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally-chartered instrumentality of the United States and an institution of the Farm Credit System (“ Farmer Mac ” or the “ Guarantor ”), and NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a cooperative association existing under the laws of the District of Columbia (“ National Rural ”).

RECITALS

WHEREAS National Rural, the Purchaser and the Guarantor have heretofore executed and delivered the Master Note Purchase Agreement dated as of July 31, 2015, among National Rural, the Purchaser and the Guarantor (as amended from time to time, the “ Master Agreement ”); and

WHEREAS, pursuant to the Master Agreement, the parties desire to establish hereby the terms of one or more series of Notes to be issued by National Rural and purchased by the Purchaser.

NOW, THEREFORE, in consideration of the mutual agreements herein contained, Farmer Mac, the Purchaser and National Rural agree as follows:

1. Capitalized Terms . Capitalized terms used herein without definition shall have the meanings assigned to them in the Master Agreement.

2. Title of Series . The series of Note issued hereunder shall be designated as “Series 2018-1.” Failure to make a notation of the name on the Note shall not affect the validity and effect of such Note.

3. Note Funding . On each Funding Date, the Purchaser shall fund draws under the Note as requested from National Rural from time to time during the Draw Period, in each case pursuant to a Draw Notice, in an aggregate principal amount, not in excess of $300,000,000.00 outstanding at any one time (the “Maximum Purchase Amount”), subject to the terms and conditions set forth in the Master Agreement. For purposes hereof, “Draw Period” means the period beginning on July 31, 2018 to and including the earlier of (i) the Early Termination Date or (ii) December 20, 2023. National Rural may borrow, repay and reborrow funds at any time or from time to time during the Draw Period in accordance with the procedures set forth in the Master Agreement. The outstanding principal balance of the Note shall reflect each such borrowing, repayment and reborrowing during the Draw Period, as indicated on the books and records of the Purchaser (as may be evidenced by a schedule of exchanges of notes), copies of which records of the Purchaser shall be made available by the Purchaser to National Rural not more frequently than monthly upon

1



Exhibit 10.1

CONFIDENTIAL TREATMENT FOR THIS EXHIBIT HAS BEEN REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION

PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED, AND THE REDACTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION


National Rural’s written request. Disbursements under the Note shall be in an initial minimum amount of $25 million and additional increments of $5 million in excess thereof.

4. (a)    The following additional defined terms shall apply to each Note issued pursuant to this Agreement:

Applicable Margin : [REDACTED PORTION FILED SEPARATELY WITH SEC PURSUANT TO CONFIDENTIAL TREATMENT REQUEST], provided that Farmer Mac may adjust the Applicable Margin in its sole discretion on any Facility Renewal Date with at least 30 days’ notice to Issuer prior to the respective Facility Renewal Date.

Early Termination Date : The date that either the Issuer or the Purchaser elects to terminate this Agreement, provided that (i) if such termination is at the Issuer’s election, the Issuer shall have provided at least 30 days’ prior written notice to Purchaser and Farmer Mac and (ii) if such termination is at Purchaser’s election, such Early Termination Date may only be on a Facility Renewal Date and Purchaser shall have provided at least 30 days’ prior written notice to Issuer.

Facility Renewal Date : January 31, 2019 and thereafter on the 20 th of each June and December to but excluding December 20, 2023.

Funding Date : The date of each funding under the Note pursuant to a Draw Notice.

LIBOR: The London Interbank Offered Rate for one-month U.S. Dollar deposits, as calculated by Farmer Mac in the following order of priority:

the rate that appears at 11:00 a.m. (London time) on the LIBOR Determination Date equal to the London interbank offered rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate for
U.S. Dollars for a period equal in length to such Interest Period) as displayed on page LIBOR01 of the Reuters screen that displays such rate (or, in the event such rate does not appear on a Reuters page or screen, on any successor or substitute page on such screen that displays such rate, or on the appropriate page of such other information service that publishes such rate from time to time) for one-month U.S. Dollar deposits;

if a rate does not so appear, Farmer Mac will select four leading banks in the London interbank market and request those banks to provide their offered quotations to prime banks in the London interbank market for one-month U.S. Dollar deposits at 11:00 a.m. (London time) on the LIBOR Determination Date. If at least two of the selected banks provide the requested quotations, LIBOR will be the arithmetic mean of the quotations obtained, as determined by Farmer Mac;

if fewer than two of the selected banks provide the requested quotations, Farmer Mac will select three major banks in New York City and request those banks to provide their offered quotations to leading European banks for one-month U.S. Dollar loans, beginning on the applicable Interest Rate Reset Date, at approximately 11:00 a.m. (London time) on

2



Exhibit 10.1

CONFIDENTIAL TREATMENT FOR THIS EXHIBIT HAS BEEN REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION

PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED, AND THE REDACTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION


the LIBOR Determination Date. LIBOR will be the arithmetic mean of the quotations obtained, as determined by Farmer Mac; and

if fewer than three of the selected banks provide the requested quotations, it shall be deemed that LIBOR is no longer recognized as an industry standard benchmark interest rate.

Notwithstanding anything herein to the contrary, if Farmer Mac determines (or it is deemed pursuant to the immediately preceding bullet) that LIBOR has been discontinued, is no longer being published or is no longer recognized as an industry standard benchmark interest rate, in each case whether due to lack of contributing banks or for any other reason, then Farmer Mac, in its sole discretion, may, in lieu of any provision above, designate a substitute or successor index rate, taking into account general comparability to LIBOR, acceptance as a market-based benchmark interest rate and any other adjustments or factors as Farmer Mac deems appropriate. If Farmer Mac determines a substitute or successor index rate in accordance with the foregoing, Farmer Mac, in its sole discretion, may, notwithstanding anything herein to the contrary, also determine the Business Day convention, the definition of Business Day (or London Banking Day), the Interest Reset Date and the index rate determination date to be used and any other relevant methodology for calculating the substitute or successor index rate, including any adjustment factor needed to make such substitute or successor index rate comparable to LIBOR, in a manner that is consistent with industry accepted practices for such substitute or successor index rate.

LIBOR Determination Date : The second London Banking Day before the first day of the applicable Interest Period.

London Banking Day : Any day on which commercial banks are open for business, including dealings in foreign exchange and deposits in U.S. Dollar deposits, in London, England.

(b)    The following defined terms set forth in the Master Agreement as applied to the Note issued pursuant to this Agreement shall be amended in their entirety as set forth below:

Closing Date : The date hereof.

Facility Fee : [REDACTED PORTION FILED SEPARATELY WITH SEC PURSUANT TO CONFIDENTIAL TREATMENT REQUEST] of the Maximum Purchase Amount, payable on the date hereof and on each Facility Renewal Date during the Draw Period, provided that Farmer Mac may adjust the Facility Fee in its sole discretion on any Facility Renewal Date with at least 30 days’ notice prior to the respective Facility Renewal Date. The Facility Fee is nonrefundable in whole or part.

Index : LIBOR


3



Exhibit 10.1

CONFIDENTIAL TREATMENT FOR THIS EXHIBIT HAS BEEN REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION

PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED, AND THE REDACTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION


Interest Payment Date : On the 20th (or next succeeding Business Day) of each month for which principal amounts under the Note were outstanding in the preceding Interest Period.

Interest Period : Initially, the period commencing on the effective date of a Note Funding to but excluding the next Interest Payment Date, and thereafter, each period from and including the prior Interest Payment Date to but excluding the next Interest Payment Date.

Note : A variable funding promissory note of National Rural payable to the Purchaser, having the terms provided for in Article II of the Master Agreement and otherwise in the form of Annex A attached to this Agreement.

(c)    The following additional terms and conditions shall apply to the Note issued under this Agreement:

(i) On each Funding Date, each of the conditions precedent set forth in Section 3.01(b), (d), (e), (g), and (h) shall have been met as of such Funding Date.

(ii) The representations of each of the parties hereto as set forth in Sections 5.01 and 5.02, respectively, shall be made as of each Funding Date.

(iii) Section 2.03(c) of the Master Agreement is hereby amended by replacing the second and third sentences thereof with the following: “National Rural shall provide the Purchaser with a Notice of Prepayment at least two (2) Business Days prior to the date scheduled for prepayment as set forth in such Notice of Prepayment.”

(iv) Section 4.01 of the Master Agreement is hereby amended by replacing subsection (a) thereof with the following: “(a)    within the earlier of (i) two (2) Business Days after filing with the Securities and Exchange Commission and (ii) 120 calendar days after the end of each Fiscal Year, the Financial Statements for such Fiscal Year;”.

5. GOVERNING LAW . EXCEPT AS SET FORTH IN SECTION 9.01 OF THE MASTER AGREEMENT, THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, FEDERAL LAW. TO THE EXTENT FEDERAL LAW INCORPORATES STATE LAW, THAT STATE LAW SHALL BE THE LAWS OF THE DISTRICT OF COLUMBIA APPLICABLE TO CONTRACTS MADE AND PERFORMED THEREIN.

6. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument.


4



Exhibit 10.1

CONFIDENTIAL TREATMENT FOR THIS EXHIBIT HAS BEEN REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION

PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED, AND THE REDACTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION


7. Inconsistency . In the event of any inconsistency between the terms of this Supplemental Note Purchase Agreement and the Master Agreement, the terms of this Supplemental Note Purchase Agreement shall apply.

[Remainder of page intentionally left blank.]


5



Exhibit 10.1

CONFIDENTIAL TREATMENT FOR THIS EXHIBIT HAS BEEN REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION

PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED, AND THE REDACTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION


IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed by an authorized officer as of the day and year first above written.


FARMER MAC MORTGAGE SECURITIES CORPORATION


By: _ /s/ R. Dale Lynch __________________
Name: R. Dale Lynch
Title: Executive Vice President – Chief Executive Officer

FEDERAL AGRICULTURAL MORTGAGE CORPORATION


By: _ /s/ R. Dale Lynch __________________
Name: R. Dale Lynch
Title: Executive Vice President – Chief Executive Officer


NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION


By: _ /s/ J. Andrew Don __________________
Name: J. Andrew Don
Title: Senior Vice President and Chief Financial Officer


ANNEX A
FORM OF SERIES 2018-1 NOTE

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Floating Rate, Variable Funding Senior Note due December 20, 2023
Washington, D.C.
July 31, 2018
FOR VALUE RECEIVED, the undersigned, NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION (“ National Rural ”), a District of Columbia cooperative association, hereby promises to pay to FARMER MAC MORTGAGE SECURITIES CORPORATION (the “Purchaser”), a wholly owned subsidiary of FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally-chartered instrumentality of the United States and an institution of the Farm Credit System (“Farmer Mac”), or registered assigns, the principal sum as set forth in the “Schedule of Exchanges of Notes” attached hereto, which amount shall not exceed THREE HUNDRED MILLION DOLLARS ($300,000,000.00) outstanding hereunder at any one time, on December 20, 2023 together with interest computed from the date hereof according to the terms of the Note Purchase Agreement (as defined below).

Payments of principal and interest on this Note are to be made in lawful money of the United States of America at such place as shall have been designated by written notice to National Rural from the registered holder of this Note as provided in the Note Purchase Agreement referred to below.

This Note is issued pursuant to the Master Note Purchase Agreement, dated as of July 31, 2015, as well as the Second Supplemental Note Purchase Agreement dated as of July 31, 2018 (together, as from time to time amended, the “ Note Purchase Agreement ”), between National Rural, the Purchaser, and Farmer Mac and is entitled to the benefits thereof. This Note is also entitled to the benefits of the Second Amended, Restated and Consolidated Pledge Agreement, dated as of July 31, 2015 (as from time to time amended), among National Rural, Farmer Mac, the Purchaser and the Collateral Agent named therein.

Capitalized terms used herein and not defined herein shall have the meanings given to those terms in the Note Purchase Agreement.

This Note is a registered Note and, upon surrender of this Note for registration of transfer or exchange, accompanied by a written instrument of transfer duly executed by the registered holder hereof or such holder’s attorney duly authorized in writing, a new Note will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, National Rural may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and National Rural will not be affected by any notice to the contrary.

This Note is prepayable at any time by National Rural, in whole or in part at the option of National Rural on the terms set forth in the Note Purchase Agreement. In the event that any such repayment or prepayment of the principal amount of any Note is made on a day other than an Interest Payment Date, accrued interest on the principal amount thereof shall be payable through and excluding the call date on which such repayment or prepayment is made. The outstanding principal balance of this Note shall reflect each borrowing, repayment and reborrowing during the Draw Period as described more fully in the Note Purchase Agreement and as reflected in the books and records of the Purchaser. The outstanding principal amount under this Note at any given time during the Draw Period may not reflect the full face amount set forth on the first page of this Note, and may be less.

If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared due and payable in the manner, at the price and with the effect provided in the Note Purchase Agreement.

This Note shall be construed and enforced in accordance with, and the rights of National Rural and the holder hereof shall be governed by, the laws of the District of Columbia, excluding choice-of-law principles of the law of the District of Columbia that would require the application of the laws of another jurisdiction.

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
By
 
 
 
Name:
 
Title:


SCHEDULE OF EXCHANGES OF NOTES

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Floating Rate, Variable Funding Senior Note due December 20, 2023
The initial principal amount of this Bond is [XXX MILLION XXX THOUSAND DOLLARS ($XX,XXX,XXX.00)]. The following increases or decreases in this Bond have been made:




Date of Exchange

Amount of decrease in principal amount of this Bond

Amount of increase in principal amount of this Bond
Principal amount of this Bond following such decrease or increase
Signature of authorized officer or signatory of Issuer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






Exhibit 31.1
 
CERTIFICATION
 
I, Bradford T. Nordholm, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation for the fiscal quarter ended September 30, 2018;
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: November 8, 2018
 

/s/ Bradford T. Nordholm
 
Bradford T. Nordholm
 
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 September 30, 2018;
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: November 8, 2018
 

/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 September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Bradford T. Nordholm, 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/ Bradford T. Nordholm
 
Bradford T. Nordholm
 
Chief Executive Officer
 
 
 
 
/s/ R. Dale Lynch
 
R. Dale Lynch
 
Chief Financial Officer
 
 
 
 
Date:
November 8, 2018