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As filed with the Securities and Exchange Commission on November 9, 2020

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, 2020
Commission File Number 001-14951 

AGM-20200930_G1.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, DC 20006
(Address of principal executive offices)   (Zip code)

(202) 872-7700
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol   Exchange on which registered
Class A voting common stock AGM.A   New York Stock Exchange
Class C non-voting common stock AGM   New York Stock Exchange
6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C AGM.PRC New York Stock Exchange
5.700% Non-Cumulative Preferred Stock, Series D AGM.PRD New York Stock Exchange
5.750% Non-Cumulative Preferred Stock, Series E AGM.PRE New York Stock Exchange
5.250% Non-Cumulative Preferred Stock, Series F AGM.PRF New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Class B voting common stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes        o                                No          x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes        o                                No           x
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        ☒                              No           ☐
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 such files).
Yes                                       No          
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 Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
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 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                                        No           
As of November 2, 2020, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock, and 9,204,911 shares of Class C non-voting common stock.

1





Table of Contents
PART I
4
4
4
5
6
7
9
10
63
63
64
70
72
89
95
96
114
115
116
117
122
122
123
123
123
125
125
125
125
126
127


3





PART I

Item 1.Financial Statements
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
As of
  September 30, 2020 December 31, 2019
  (in thousands)
Assets:    
Cash and cash equivalents $ 910,592  $ 604,381 
Investment securities:    
Available-for-sale, at fair value (amortized cost of $3,522,674 and $2,961,430, respectively)
3,532,190  2,959,843 
Held-to-maturity, at amortized cost 45,032  45,032 
Total Investment Securities 3,577,222  3,004,875 
Farmer Mac Guaranteed Securities:    
Available-for-sale, at fair value (amortized cost of $7,150,606 and $7,016,971, respectively)
7,511,638  7,143,025 
Held-to-maturity, at amortized cost 1,200,570  1,447,451 
Total Farmer Mac Guaranteed Securities 8,712,208  8,590,476 
USDA Securities:    
Trading, at fair value 6,830  8,913 
Held-to-maturity, at amortized cost 2,410,848  2,232,160 
Total USDA Securities 2,417,678  2,241,073 
Loans:    
Loans held for sale, at lower of cost or fair value 20,000  — 
Loans held for investment, at amortized cost 6,825,061  5,390,977 
Loans held for investment in consolidated trusts, at amortized cost 1,276,407  1,600,917 
Allowance for losses (15,821) (10,454)
Total loans, net of allowance 8,105,647  6,981,440 
Financial derivatives, at fair value 12,837  10,519 
Interest receivable (includes $11,525 and $20,568, respectively, related to consolidated trusts)
153,170  199,195 
Guarantee and commitment fees receivable 36,664  38,442 
Deferred tax asset, net 29,288  16,510 
Prepaid expenses and other assets 43,531  22,463 
Total Assets $ 23,998,837  $ 21,709,374 
Liabilities and Equity:    
Liabilities:    
Notes payable 21,589,285  19,098,648 
Debt securities of consolidated trusts held by third parties 1,292,416  1,616,504 
Financial derivatives, at fair value 37,357  27,042 
Accrued interest payable (includes $9,353 and $18,018, respectively, related to consolidated trusts)
92,648  106,959 
Guarantee and commitment obligation 35,140  36,700 
Accounts payable and accrued expenses 18,078  22,081 
Reserve for losses 3,568  2,164 
Total Liabilities 23,068,492  20,910,098 
Commitments and Contingencies (Note 6)
Equity:    
Preferred stock:    
Series A, par value $25 per share, 2,400,000 shares authorized, issued and outstanding as of December 31, 2019 (redemption value $60,000,000)
—  58,333 
      Series C, par value $25 per share, 3,000,000 shares authorized, issued and outstanding
73,382  73,382 
Series D, par value $25 per share, 4,000,000 shares authorized, issued and outstanding
96,659  96,659 
Series E, par value $25 per share, 3,180,000 shares authorized, issued and outstanding
77,003  — 
Series F, par value $25 per share, 4,800,000 shares authorized, issued and outstanding
116,160  — 
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, 9,204,724 shares and 9,180,744 shares outstanding, respectively
9,205  9,181 
Additional paid-in capital 121,525  119,304 
Accumulated other comprehensive loss, net of tax (53,837) (16,161)
Retained earnings 488,717  457,047 
Total Equity 930,345  799,276 
Total Liabilities and Equity $ 23,998,837  $ 21,709,374 
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, 2020 September 30, 2019 September 30, 2020 September 30, 2019
  (in thousands, except per share amounts)
Interest income:
Investments and cash equivalents $ 7,096  $ 22,855  $ 35,236  $ 61,718 
Farmer Mac Guaranteed Securities and USDA Securities 45,335  81,649  178,644  252,629 
Loans 56,204  56,992  172,230  167,792 
Total interest income 108,635  161,496  386,110  482,139 
Total interest expense 63,974  121,384  251,789  358,374 
Net interest income 44,661  40,112  134,321  123,765 
Provision for losses (653) (760) (4,542) (1,074)
Net interest income after provision for losses 44,008  39,352  129,779  122,691 
Non-interest income/(expense):
Guarantee and commitment fees 3,159  3,349  9,495  10,265 
(Losses)/gains on financial derivatives (564) (7,360) (3,339) 1,193 
(Losses)/gains on trading securities (258) 49  (173) 154 
Gains on sale of real estate owned —  —  485  — 
(Provision)/release of reserve for losses (547) 137  (540) 424 
Other income 594  530  2,639  1,378 
Non-interest income/(expense) 2,384  (3,295) 8,567  13,414 
Operating expenses:
Compensation and employee benefits 8,791  7,654  27,005  22,030 
General and administrative 5,044  5,253  15,702  14,538 
Regulatory fees 725  688  2,175  2,063 
Real estate owned operating costs, net —  —  —  64 
Operating expenses 14,560  13,595  44,882  38,695 
Income before income taxes 31,832  22,462  93,464  97,410 
Income tax expense 6,340  4,629  19,516  20,362 
Net income 25,492  17,833  73,948  77,048 
Preferred stock dividends (5,166) (3,427) (12,536) (10,508)
Loss on retirement of preferred stock (1,667) —  (1,667) (1,956)
Net income attributable to common stockholders $ 18,659  $ 14,406  $ 59,745  $ 64,584 
Earnings per common share:
Basic earnings per common share $ 1.74  $ 1.34  $ 5.57  $ 6.04 
Diluted earnings per common share $ 1.73  $ 1.33  $ 5.54  $ 5.99 
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, 2020 September 30, 2019 September 30, 2020 September 30, 2019
  (in thousands)
Net income $ 25,492  $ 17,833  $ 73,948  $ 77,048 
Other comprehensive income/(loss) before taxes:
Net unrealized gains/(losses) on available-for-sale securities 47,235  (24,925) (9,554) (50,272)
Net changes in held-to-maturity securities (2,523) (6,543) (10,707) (13,406)
Net unrealized gains/(losses) on cash flow hedges 2,959  (6,736) (27,429) (22,373)
Other comprehensive income/(loss) before tax 47,671  (38,204) (47,690) (86,051)
Income tax (expense)/benefit related to other comprehensive income/(loss) (10,011) 8,023  10,014  18,071 
Other comprehensive income/(loss) net of tax 37,660  (30,181) (37,676) (67,980)
Comprehensive income/(loss) $ 63,152  $ (12,348) $ 36,272  $ 9,068 
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 Total
Shares Amount Shares Amount Capital Income/(Loss) Earnings Equity
(in thousands)
Balance as of December 31, 2019 9,400  $ 228,374  10,712  $ 10,712  $ 119,304  $ (16,161) $ 457,047  $ 799,276 
Cumulative effect adjustment from adoption of current expected credit loss standard —  —  —  —  —  —  (2,099) (2,099)
Balance as of January 1, 2020 9,400  $ 228,374  10,712  $ 10,712  $ 119,304  $ (16,161) $ 454,948  $ 797,177 
Net income —  —  —  —  —  —  12,830  12,830 
Other comprehensive loss, net of tax —  —  —  —  —  (105,276) —  (105,276)
Cash dividends:
Preferred stock —  —  —  —  —  —  (3,431) (3,431)
Common stock (cash dividend of $0.80 per share)
—  —  —  —  —  —  (8,571) (8,571)
Issuance of Class C common stock —  —  15  15  19  —  —  34 
Repurchase of Class C Common Stock —  —  (4) (4) —  —  (231) (235)
Stock-based compensation cost —  —  —  —  1,293  —  1,293 
Other stock-based award activity —  —  —  —  (204) —  —  (204)
Balance as of March 31, 2020 9,400  $ 228,374  10,723  $ 10,723  $ 120,412  $ (121,437) $ 455,545  $ 693,617 
Net income —  —  —  —  —  —  35,626  35,626 
Other comprehensive income, net of tax —  —  —  —  —  29,940  —  29,940 
Cash dividends:
Preferred stock —  —  —  —  —  —  (3,939) (3,939)
Common stock (cash dividend of $0.80 per share)
—  —  —  —  —  —  (8,585) (8,585)
Issuance of Series E preferred stock 3,180  77,003  —  —  —  —  —  77,003 
Issuance of Class C common stock —  —  10  10  17  —  —  27 
Stock-based compensation cost —  —  —  —  719  —  —  719 
Other stock-based award activity —  —  —  —  (292) —  —  (292)
Balance as of June 30, 2020 12,580  $ 305,377  10,733  $ 10,733  $ 120,856  $ (91,497) $ 478,647  $ 824,116 
Net income —  —  —  —  —  —  25,492  25,492 
Other comprehensive income, net of tax —  —  —  —  —  37,660  —  37,660 
Cash dividends:
Preferred stock —  —  —  —  —  —  (5,166) (5,166)
Common stock (cash dividend of $0.80 per share)
—  —  —  —  —  —  (8,589) (8,589)
Issuance of Series F preferred stock 4,800  116,160  —  —  —  —  —  116,160 
Redemption of Series A preferred stock (2,400) (58,333) —  —  —  —  —  (58,333)
Loss on retirement of preferred stock —  —  —  —  —  —  (1,667) (1,667)
Issuance of Class C common stock —  —  —  —  11 
Stock-based compensation cost —  —  —  —  753  —  —  753 
Other stock-based award activity —  —  —  —  (92) —  —  (92)
Balance as of September 30, 2020 14,980  $ 363,204  10,736  $ 10,736  $ 121,525  $ (53,837) $ 488,717  $ 930,345 




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Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive Retained Total
Shares Amount Shares Amount Capital Income/(Loss) Earnings Equity
(in thousands)
Balance as of December 31, 2018 8,400  $ 204,759  10,669  $ 10,669  $ 118,822  $ 24,956  $ 393,351  $ 752,557 
Net Income —  —  —  —  —  —  25,170  25,170 
Other comprehensive loss, net of tax —  —  —  —  —  (3,702) —  (3,702)
Cash dividends:
Preferred stock —  —  —  —  —  —  (3,296) (3,296)
Common stock (cash dividend of $0.70 per share)
—  —  —  —  —  —  (7,470) (7,470)
Issuance of Class C Common Stock —  —  20  20  —  —  23 
Stock-based compensation cost —  —  —  —  724  —  —  724 
Other stock-based award activity —  —  —  —  (708) —  —  (708)
Balance as of March 31, 2019 8,400  $ 204,759  10,689  $ 10,689  $ 118,841  $ 21,254  $ 407,755  $ 763,298 
Net income —  —  —  —  —  —  34,045  34,045 
Other comprehensive loss, net of tax —  —  —  —  —  (34,097) —  (34,097)
Cash dividends:
Preferred stock —  —  —  —  —  —  (3,785) (3,785)
Common stock (cash dividend of $0.70 per share)
—  —  —  —  —  —  (7,490) (7,490)
Issuance of Series D Preferred Stock 4,000  96,659  —  —  —  96,659 
Redemption of Series B Preferred Stock (3,000) (73,044) —  —  —  —  —  (73,044)
Loss on retirement of preferred stock —  —  —  —  —  —  (1,956) (1,956)
Issuance of Class C Common Stock —  —  11  11  —  —  14 
Stock-based compensation cost —  —  —  —  533  —  —  533 
Other stock-based award activity —  —  —  —  (435) —  —  (435)
Balance as of June 30, 2019 9,400  $ 228,374  10,700  $ 10,700  $ 118,942  $ (12,843) $ 428,569  $ 773,742 
Net Income —  —  —  —  —  —  17,833  17,833 
Other comprehensive loss, net of tax —  —  —  —  —  (30,181) —  (30,181)
Cash dividends:
Preferred stock —  —  —  —  —  —  (3,427) (3,427)
Common stock (cash dividend of $0.70 per share)
—  —  —  —  —  —  (7,496) (7,496)
Issuance of Class C Common Stock —  —  10  10  19  —  —  29 
Stock-based compensation cost —  —  —  —  407  —  —  407 
Other stock-based award activity —  —  —  —  (648) —  —  (648)
Balance as of September 30, 2019 9,400  $ 228,374  10,710  $ 10,710  $ 118,720  $ (43,024) $ 435,479  $ 750,259 

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

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended
  September 30, 2020 September 30, 2019
  (in thousands)
Cash flows from operating activities:    
Net income $ 73,948  $ 77,048 
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 3,800  (8,032)
Amortization of debt premiums, discounts, and issuance costs 18,502  37,794 
Net change in fair value of trading securities, hedged assets, and financial derivatives (342,380) (326,537)
Gain on sale of real estate owned (485) — 
Total provision for allowance for losses 5,083  650 
Excess tax benefits related to stock-based awards (421) 442 
Deferred income taxes (2,763) 637 
Stock-based compensation expense 2,765  1,664 
Purchases of loans held for sale (59,150) — 
Proceeds from the sale of loans held for sale 15,000  — 
Proceeds from repayment of loans purchased as held for sale 54,661  44,857 
Net change in:
Interest receivable 44,706  21,395 
Guarantee and commitment fees receivable 218  (4)
Other assets (20,169) 1,875 
Accrued interest payable (14,311) 7,597 
Other liabilities (4,412) 2,538 
Net cash used in operating activities (225,408) (138,076)
Cash flows from investing activities:    
Purchases of available-for-sale investment securities (2,177,560) (1,871,957)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities (1,798,028) (2,167,801)
Purchases of loans held for investment (2,245,958) (1,528,789)
Purchases of defaulted loans (6,272) (469)
Proceeds from repayment of available-for-sale investment securities 1,612,075  991,423 
Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities 1,725,500  1,746,948 
Proceeds from repayment of loans purchased as held for investment 1,272,603  568,280 
Proceeds from sale of Farmer Mac Guaranteed Securities 64,612  199,396 
Proceeds from sale of real estate owned 2,191  — 
Net cash used in investing activities (1,550,837) (2,062,969)
Cash flows from financing activities:    
Proceeds from issuance of discount notes 51,936,788  47,036,038 
Proceeds from issuance of medium-term notes 10,561,149  7,632,425 
Payments to redeem discount notes (51,785,666) (46,502,105)
Payments to redeem medium-term notes (8,293,765) (5,646,107)
Payments to third parties on debt securities of consolidated trusts (431,093) (143,491)
Proceeds from common stock issuance 44  25 
Retirement of preferred stock (60,000) (75,000)
Proceeds from preferred stock issuance, net of stock issuance costs 193,163  96,659 
Tax payments related to share-based awards (560) (1,750)
Purchases of common stock (235) — 
Dividends paid on common and preferred stock (37,369) (32,964)
Net cash provided by financing activities 2,082,456  2,363,730 
Net change in cash and cash equivalents 306,211  162,685 
Cash and cash equivalents at beginning of period 604,381  425,256 
Cash and cash equivalents at end of period $ 910,592  $ 587,941 
Non-cash activity:
Loans acquired and securitized as Farmer Mac Guaranteed Securities 64,612  199,396 
Consolidation of Farmer Mac 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 64,612  141,543 
Reclassification of defaulted loans from loans held for investment in consolidated trusts to loans held for investment 42,393  5,392 
Reclassification of loans held for sale to loans held for investment 24,150  — 
Capitalized interest 937  — 
Purchases of securities - traded, not yet settled —  8,680 
  The accompanying notes are an integral part of these consolidated financial statements.

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FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2019 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2019 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 2019 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, 2019, as filed with the SEC on February 25, 2020. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three and nine months ended September 30, 2020.

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 Variable Interest Entities ("VIEs") in which Farmer Mac determined itself to be the primary beneficiary.

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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, 2020
Farm & Ranch USDA Guarantees Corporate Total
(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated trusts, at amortized cost $ 1,276,407  $ —  $ —  $ 1,276,407 
Debt securities of consolidated trusts held by third parties (1)
1,292,416  —  —  1,292,416 
   Unconsolidated VIEs:
   Farmer Mac Guaranteed Securities:
      Carrying value (2)
—  36,505  —  36,505 
      Maximum exposure to loss (3)
—  36,414  —  36,414 
   Investment securities:
        Carrying value (4)
—  —  1,835,688  1,835,688 
        Maximum exposure to loss (3) (4)
—  —  1,829,604  1,829,604 
Off-Balance Sheet:
 Unconsolidated VIEs:
   Farmer Mac Guaranteed Securities:
      Maximum exposure to loss (3) (5)
85,767  310,682  —  396,449 
(1)Includes borrower remittances of $16.0 million. The borrower remittances had not been passed through to third party investors as of September 30, 2020.
(2)Includes $0.1 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.

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Consolidation of Variable Interest Entities
As of December 31, 2019
Farm & Ranch USDA Guarantees Corporate Total
(in thousands)
On-Balance Sheet:
Consolidated VIEs:
Loans held for investment in consolidated trusts, at amortized cost $ 1,600,917  $ —  $ —  $ 1,600,917 
Debt securities of consolidated trusts held by third parties (1)
1,616,504  —  —  1,616,504 
   Unconsolidated VIEs:
   Farmer Mac Guaranteed Securities:
      Carrying value (2)
—  32,041  —  32,041 
      Maximum exposure to loss (3)
—  31,887  —  31,887 
   Investment securities:
        Carrying value (4)
—  —  1,117,203  1,117,203 
        Maximum exposure to loss (3) (4)
—  —  1,120,765  1,120,765 
Off-Balance Sheet:
 Unconsolidated VIEs:
   Farmer Mac Guaranteed Securities:
      Maximum exposure to loss (3) (5)
107,322  389,216  —  496,538 
(1)Includes borrower remittances of $15.6 million. The borrower remittances had not been passed through to third party investors as of December 31, 2019.
(2)Includes $0.2 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.


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(a)Earnings Per Common Share

Basic earnings per common share ("EPS") is based on the daily weighted-average number of shares of common stock outstanding.  Diluted earnings per common share is based on the daily weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive stock appreciation rights ("SARs") and unvested restricted stock awards.  The following schedule reconciles basic and diluted EPS for the three and nine months ended September 30, 2020 and 2019:

Table 1.2
For the Three Months Ended
September 30, 2020 September 30, 2019
Net
Income
Weighted-Average Shares $ per
Share
Net
Income
Weighted-Average Shares $ per
Share
(in thousands, except per share amounts)
Basic EPS
Net income attributable to common stockholders $ 18,659  10,734  $ 1.74  $ 14,406  10,706  $ 1.34 
Effect of dilutive securities(1)
SARs and restricted stock —  51  (0.01) —  70  (0.01)
Diluted EPS $ 18,659  10,785  $ 1.73  $ 14,406  10,776  $ 1.33 
(1)For the three months ended September 30, 2020 and 2019, SARs and restricted stock of 66,445 and 26,768, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended September 30, 2020 and 2019, contingent shares of unvested restricted stock of 12,680 and 8,414, 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, 2020 September 30, 2019
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 $ 59,745  10,725  $ 5.57  $ 64,584  10,691  $ 6.04 
Effect of dilutive securities(1)
SARs and restricted stock —  56  (0.03) —  83  (0.05)
Diluted EPS $ 59,745  10,781  $ 5.54  $ 64,584  10,774  $ 5.99 
(1)For the nine months ended September 30, 2020 and 2019, SARs and restricted stock of 78,963 and 48,801, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the nine months ended September 30, 2020 and 2019, contingent shares of unvested restricted stock of 12,680 and 10,994, 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.
(b)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.


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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, 2020 and 2019:

Table 1.3
As of September 30, 2020 As of September 30, 2019
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 $ (88,261) $ 26,379  $ (29,615) $ (91,497) $ (45,384) $ 38,021  $ (5,480) $ (12,843)
Other comprehensive income/(loss) before reclassifications 38,099  —  904  39,003  (18,915) —  (5,071) (23,986)
Amounts reclassified from AOCI (783) (1,993) 1,433  (1,343) (776) (5,169) (250) (6,195)
Net comprehensive income/(loss) 37,316  (1,993) 2,337  37,660  (19,691) (5,169) (5,321) (30,181)
Ending Balance $ (50,945) $ 24,386  $ (27,278) $ (53,837) $ (65,075) $ 32,852  $ (10,801) $ (43,024)
For the Nine Months Ended:
Beginning Balance $ (43,397) $ 32,845  $ (5,609) $ (16,161) $ (25,360) $ 43,443  $ 6,873  $ 24,956 
Other comprehensive loss before reclassifications (5,210) —  (24,684) (29,894) (37,308) —  (16,679) (53,987)
Amounts reclassified from AOCI (2,338) (8,459) 3,015  (7,782) (2,407) (10,591) (995) (13,993)
Net comprehensive loss (7,548) (8,459) (21,669) (37,676) (39,715) (10,591) (17,674) (67,980)
Ending Balance $ (50,945) $ 24,386  $ (27,278) $ (53,837) $ (65,075) $ 32,852  $ (10,801) $ (43,024)



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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, 2020 and 2019:

Table 1.4
For the Three Months Ended
September 30, 2020 September 30, 2019
Before Tax Provision (Benefit) After Tax Before Tax Provision (Benefit) After Tax
(in thousands)
Other comprehensive income:
Available-for-sale-securities:
Unrealized holding gains/(losses) on available-for-sale securities $ 48,226  $ 10,127  $ 38,099  $ (23,943) $ (5,028) $ (18,915)
Less reclassification adjustments included in:
Net interest income(1)
(976) (205) (771) (961) (202) (759)
Other income(2)
(15) (3) (12) (21) (4) (17)
Total $ 47,235  $ 9,919  $ 37,316  $ (24,925) $ (5,234) $ (19,691)
Held-to-maturity securities:
Less reclassification adjustments included in:
Net interest income(3)
(2,523) (530) (1,993) (6,543) (1,374) (5,169)
Total $ (2,523) $ (530) $ (1,993) $ (6,543) $ (1,374) $ (5,169)
Cash flow hedges
Unrealized gains/(losses) on cash flow hedges $ 1,145  $ 241  $ 904  $ (6,419) $ (1,348) $ (5,071)
Less reclassification adjustments included in:
Net interest income(4)
1,814  381  1,433  (317) (67) (250)
Total $ 2,959  $ 622  $ 2,337  $ (6,736) $ (1,415) $ (5,321)
Other comprehensive income/(loss) $ 47,671  $ 10,011  $ 37,660  $ (38,204) $ (8,023) $ (30,181)
(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.


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For the Nine Months Ended
September 30, 2020 September 30, 2019
Before Tax Provision (Benefit) After Tax Before Tax Provision (Benefit) After Tax
(in thousands)
Other comprehensive income:
Available-for-sale-securities:
Unrealized holding losses on available-for-sale securities $ (6,596) $ (1,386) $ (5,210) $ (47,225) $ (9,917) $ (37,308)
Less reclassification adjustments included in:
Net interest income(1)
(2,916) (612) (2,304) (2,870) (603) (2,267)
Other income(2)
(42) (8) (34) (177) (37) (140)
Total $ (9,554) $ (2,006) $ (7,548) $ (50,272) $ (10,557) $ (39,715)
Held-to-maturity securities:
Less reclassification adjustments included in:
Net interest income(3)
(10,707) (2,248) (8,459) (13,406) (2,815) (10,591)
Total $ (10,707) $ (2,248) $ (8,459) $ (13,406) $ (2,815) $ (10,591)
Cash flow hedges
Unrealized losses on cash flow hedges $ (31,246) $ (6,562) $ (24,684) $ (21,113) $ (4,434) $ (16,679)
Less reclassification adjustments included in:
Net interest income(4)
3,817  802  3,015  (1,260) (265) (995)
Total $ (27,429) $ (5,760) $ (21,669) $ (22,373) $ (4,699) $ (17,674)
Other comprehensive loss $ (47,690) $ (10,014) $ (37,676) $ (86,051) $ (18,071) $ (67,980)
(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.


(c)Allowance for Losses and Reserve for Losses

On January 1, 2020, Farmer Mac adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ("CECL"). Under CECL, Farmer Mac's allowance for credit losses represents the difference between the carrying amount of the related financial instruments and the present value of their expected cash flows discounted at their effective interest rates, as of the respective balance sheet date. Under CECL, Farmer Mac's reserve for credit losses represents the difference between the outstanding amount of off-balance sheet credit exposures and the present value of their expected cash flows discounted at their effective interest rates.

Farmer Mac maintains an allowance for credit losses to cover current expected credit losses as of the balance sheet date for on-balance sheet investment securities, loans held for investment, and Farmer Mac Guaranteed Securities (collectively referred to as "allowance for losses"). Additionally, Farmer Mac maintains a reserve for credit losses to cover current expected credit losses as of the balance sheet date for off-balance sheet loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (collectively referred to as "reserve for losses"). Both the allowance for losses and reserve for losses are based on historical information and reasonable and supportable forecasts.  


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Farmer Mac has never experienced a credit loss in its Rural Utilities line of business. Upon the adoption of CECL, Farmer Mac is now required to measure its expected credit losses for the expected life of all financial instruments, including its Rural Utilities loans. To estimate expected credit losses on these loans, Farmer Mac relies upon industry historical credit loss data from ratings agencies and publicly available information as disclosed in the securities filings of other major lenders who serve the utilities industry.

The allowance for losses increases through periodic provisions for loan losses that are charged against net interest income and the reserve for losses increases through provisions for losses that are charged to non-interest expense. Both the allowance for losses and reserve for losses are decreased by charge-offs for realized losses, net of recoveries.  Releases from the allowance for losses or reserve for losses occur when the estimate of expected credit losses as of the end of a period is less than the estimate at the beginning of the period.

The total allowance for losses consists of the allowance for losses and the reserve for losses.

Charge-offs

Farmer Mac records a charge-off against the allowance for losses principally when a loss has been confirmed through the receipt of assets, generally the underlying collateral, in full satisfaction of the loan. The loss equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs.

Estimation Methodology

Farmer Mac bases its methodology for determining its current estimate of expected losses on a statistical model, which incorporates credit loss history and reasonable and supportable forecasts. Farmer Mac's estimation methodology is comprised of the following key components:
An economic model for each portfolio, including Farm & Ranch, Rural Utilities, and Institutional Credit;
A migration matrix for each portfolio that reasonably predicts the movement of each financial asset among various risk categories over the course of each asset's expected life. The migration matrix forms the basis for our estimate of the probability of default of each financial asset;
A loss-given-default ("LGD") model that reasonably predicts the amount of loss that Farmer Mac would incur upon the default of each financial asset;
An economic factor forecast that updates the migration matrix model and the LGD model with current assumptions for the economic indicators that Farmer Mac has determined are most correlated with or relevant to the performance of each portfolio of assets; including Gross Domestic Product ("GDP"), credit spreads, unemployment rates, land values, and commodity prices; and
A discounted cash flow analysis, which relies upon each of the above model outputs, plus the contractual terms of each financial asset, and the effective interest rate of each financial asset.

Management evaluates these assumptions by considering many relevant factors, including:
economic conditions;
geographic and agricultural commodity/product concentrations in the portfolio;
the credit profile of the portfolio, including risk ratings and financial metrics;
delinquency trends of the portfolio;
historical charge-off and recovery activities of the portfolio; and

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other factors to capture current portfolio trends and characteristics that differ from historical experience.

Management believes that its methodology produces a reasonable estimate of expected credit losses, as of the balance sheet date, for the expected life of all of its financial assets.

Allowance for Loss on Available-for-Sale (AFS) Securities

To measure current expected credit losses on impaired AFS securities, Farmer Mac first considers those impaired securities that: 1) Farmer Mac does not intend to sell, and 2) it is not more likely than not that Farmer Mac will be required to sell before recovering its amortized cost basis. In assessing whether a credit loss exists, Farmer Mac compares the present value, discounted at the security's effective interest rate, of cash flows expected to be collected from an impaired AFS debt security to its amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the impaired security, a credit loss exists and Farmer Mac records an allowance for loss for that credit loss. However, the amount of that allowance is limited by the amount that the security’s fair value is less than its amortized cost basis. Accrued interest receivable is recorded separately on the Consolidated Balance Sheet, and the allowance for credit losses excludes uncollectible accrued interest receivable.

Collateral Dependent Assets ("CDAs")

CDAs are loans, loans underlying LTSPCs, or off-balance sheet credit exposures in which the borrower is either in foreclosure or is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral by Farmer Mac. Farmer Mac estimates the current expected credit loss on CDAs based upon the appraised value of the collateral, the costs to sell it, and any applicable credit protection such as a guarantee.

COVID-19 Payment Deferments

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. Section 4013 of the CARES Act titled “Temporary Relief from Troubled Debt Restructurings” provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of the novel coronavirus disease 2019 ("COVID-19"). On April 10, 2020, Farmer Mac’s prudential regulator, the Office of Secondary Market Oversight (OSMO) within the Farm Credit Administration (FCA), issued guidance to Farmer Mac on loan servicing and reporting TDRs for lines of business affected by the COVID-19 outbreak. This guidance was consistent with the guidance provided by other financial regulatory agencies and the Financial Accounting Standards Board that short-term modifications made on a good faith basis in response to the COVID-19 national emergency are not TDRs when the borrower was not past due on loan payments before the March 13, 2020 presidential proclamation declaring the COVID-19 outbreak a national emergency.

During second quarter 2020, Farmer Mac implemented the guidance from FCA by granting up to 6-month payment deferments to borrowers who have been economically impacted by COVID-19. Farmer Mac deems loans under a COVID-19 payment deferment not to be past due and continues to accrue interest on those loans. Furthermore, Farmer Mac does not consider a payment deferment on any such loan to be a troubled debt restructuring. For the purpose of estimating expected credit losses on Farm & Ranch loans held for investment, Farmer Mac does consider payment deferments along with other available credit and economic information that pertains to that portfolio.

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(d)New Accounting Standards

Recently Adopted Accounting Guidance
Standard Description Date of Adoption Effect on Consolidated Financial Statements
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This Update required entities to measure all expected credit losses for financial assets held at amortized cost at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, as well as requiring entities to use forward-looking information to form their credit loss estimates. January 1, 2020 In first quarter 2020 Farmer Mac adopted the new guidance. The cumulative-effect adjustment to retained earnings as of January 1, 2020 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. For more information on the transition adjustment see Table 1.5 below.
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. There is no required accounting change for securities held at a discount in this Update. January 1, 2020 The adoption of this Update did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurements, including the consideration of costs and benefits. Certain disclosure requirements were either removed, modified, or added. January 1, 2020 The adoption of this Update did not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

The following table presents the impact of adopting CECL on January 1, 2020 on our allowance and retained earnings:

Table 1.5
December 31, 2019 Transition Adjustment January 1, 2020
(in thousands)
Allowance:
Farm & Ranch:
Loans $ 10,454  $ (3,909) $ 6,545 
Long-term standby purchase commitments and guarantees 2,164  (148) 2,016 
Rural Utilities:
Loans —  5,378  5,378 
Long-term standby purchase commitments —  1,011  1,011 
Farmer Mac Guaranteed Securities:
AgVantage —  315  315 
Investment Securities — 
Total Allowance $ 12,618  $ 2,656  $ 15,274 
Retained Earnings $ 457,047  $ (2,099) $ 454,948 



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Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements
Standard Description Date of Planned Adoption Effect on Consolidated Financial Statements
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. They provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. Farmer Mac is currently evaluating the impact of the discontinuation of LIBOR on the consolidated financial statements and the applicability of the optional guidance provided by this Update.

(e)Reclassifications

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


2.INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of September 30, 2020 and December 31, 2019:
 
Table 2.1
  As of September 30, 2020
Amount Outstanding Unamortized Premium/(Discount)
Amortized
Cost(1)
Allowance for losses(2)
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  $ (37) $ —  $ (591) $ 19,072 
Floating rate asset-backed securities 9,205  —  9,205  —  —  (4) 9,201 
Floating rate Government/GSE guaranteed mortgage-backed securities 2,279,737  33  2,279,770  —  9,415  (3,152) 2,286,033 
Fixed rate GSE guaranteed mortgage-backed securities 285  —  285  —  33  —  318 
Fixed rate U.S. Treasuries 1,204,308  9,406  1,213,714  —  3,861  (9) 1,217,566 
Total available-for-sale 3,513,235  9,439  3,522,674  (37) 13,309  (3,756) 3,532,190 
Held-to-maturity:
Floating rate Government/GSE guaranteed mortgage-backed securities(3)
45,032  —  45,032  —  1,153  —  46,185 
Total investment securities $ 3,558,267  $ 9,439  $ 3,567,706  $ (37) $ 14,462  $ (3,756) $ 3,578,375 
(1)Amounts presented exclude $5.7 million of accrued interest receivable on investment securities as of September 30, 2020.
(2)Represents the amount of impairment that has resulted from credit-related factors, and therefore was recognized in the consolidated statement of operations as a provision for losses. Amount excludes unrealized losses relating to non-credit factors.
(3)The held-to-maturity investment securities had a weighted average yield of 1.5% as of September 30, 2020.



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  As of December 31, 2019
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  $ —  $ (788) $ 18,912 
Floating rate asset-backed securities 11,092  —  11,092  —  (7) 11,085 
Floating rate Government/GSE guaranteed mortgage-backed securities 1,633,731  1,174  1,634,905  2,414  (4,736) 1,632,583 
Fixed rate GSE guaranteed mortgage-backed securities 315  —  315  25  —  340 
Fixed rate U.S. Treasuries 1,295,210  208  1,295,418  1,520  (15) 1,296,923 
Total available-for-sale 2,960,048  1,382  2,961,430  3,959  (5,546) 2,959,843 
Held-to-maturity:
Floating rate Government/GSE guaranteed mortgage-backed securities(1)
45,032  —  45,032  953  —  45,985 
Total investment securities $ 3,005,080  $ 1,382  $ 3,006,462  $ 4,912  $ (5,546) $ 3,005,828 
(1)The held-to-maturity investment securities had a weighted average yield of 3.3% as of December 31, 2019.

Farmer Mac did not sell any securities from its available-for-sale investment portfolio during the three and nine months ended September 30, 2020 and 2019.

As of September 30, 2020 and December 31, 2019, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2
  As of September 30, 2020
  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
  (dollars in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans $ —  $ —  $ 19,072  $ (591)
Floating rate asset-backed securities —  —  6,873  (4)
Floating rate Government/GSE guaranteed mortgage-backed securities 154,452  (464) 403,469  (2,688)
Fixed rate U.S. Treasuries 50,861  (9) —  — 
Total $ 205,313  $ (473) $ 429,414  $ (3,283)
Number of securities in loss position 27  63 


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  As of December 31, 2019
  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
  (dollars in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans $ —  $ —  $ 18,912  $ (788)
Floating rate asset-backed securities 2,583  (1) 8,502  (6)
Floating rate Government/GSE guaranteed mortgage-backed securities 841,993  (2,244) 436,621  (2,492)
Fixed rate U.S. Treasuries 35,107  (15) —  — 
Total $ 879,683  $ (2,260) $ 464,035  $ (3,286)
Number of securities in loss position 57  62 

The unrealized losses presented above are principally due to a general widening of market spreads and changes in the levels of interest rates from the dates of acquisition to September 30, 2020 and December 31, 2019, 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 both September 30, 2020 and December 31, 2019, 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+."

Securities in unrealized loss positions for 12 months or longer have a fair value as of September 30, 2020 that is, on average, approximately 99.2% 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.

The amortized cost, fair value, and weighted-average yield of available-for-sale investment securities by remaining contractual maturity as of September 30, 2020 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, 2020
Available-for-Sale Securities
Amortized
Cost
Fair Value Weighted-
Average
Yield
  (dollars in thousands)
Due within one year $ 1,142,369  $ 1,146,222  2.01%
Due after one year through five years 361,971  362,065  0.76%
Due after five years through ten years 1,129,147  1,134,255  0.67%
Due after ten years 889,187  889,648  0.69%
Total $ 3,522,674  $ 3,532,190  1.12%


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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, 2020 and December 31, 2019:

Table 3.1
  As of September 30, 2020
Unpaid Principal Balance Unamortized Premium/(Discount)
Amortized
Cost(1)
Allowance for losses(2)
Unrealized
Gains
Unrealized
Losses
Fair Value
  (in thousands)
Held-to-maturity:
AgVantage $ 1,164,353  $ (73) $ 1,164,280  $ (216) $ 25,969  $ (99) $ 1,189,934 
Farmer Mac Guaranteed USDA Securities 36,414  92  36,506  —  1,026  (1) 37,531 
Total Farmer Mac Guaranteed Securities 1,200,767  19  1,200,786  (216) 26,995  (100) 1,227,465 
USDA Securities 2,381,416  29,432  2,410,848  —  105,721  (1,398) 2,515,171 
Total held-to-maturity $ 3,582,183  $ 29,451  $ 3,611,634  $ (216) $ 132,716  $ (1,498) $ 3,742,636 
Available-for-sale:        
AgVantage $ 7,149,082  $ 1,524  $ 7,150,606  $ (330) $ 394,280  $ (32,918) $ 7,511,638 
Trading:        
USDA Securities(3)
$ 6,617  $ 352  $ 6,969  $ —  $ 10  $ (149) $ 6,830 
(1)Amounts presented exclude $32.7 million, $41.1 million, and $0.1 million of accrued interest receivable on available-for-sale, held-to-maturity, and trading securities, respectively, as of September 30, 2020.
(2)Represents the amount of impairment that has resulted from credit-related factors, and therefore was recognized in the statement of financial operations as a provision for losses. Amount excludes unrealized losses relating to non-credit factors.
(3)The trading USDA securities had a weighted average yield of 5.09% as of September 30, 2020.

  As of December 31, 2019
Unpaid Principal Balance Unamortized Premium/(Discount) Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
  (in thousands)
Held-to-maturity:
AgVantage $ 1,415,584  $ (174) $ 1,415,410  $ 15,300  $ (164) $ 1,430,546 
Farmer Mac Guaranteed USDA Securities 31,887  154  32,041  839  —  32,880 
Total Farmer Mac Guaranteed Securities 1,447,471  (20) 1,447,451  16,139  (164) 1,463,426 
USDA Securities 2,190,671  41,489  2,232,160  54,356  (758) 2,285,758 
Total held-to-maturity $ 3,638,142  $ 41,469  $ 3,679,611  $ 70,495  $ (922) $ 3,749,184 
Available-for-sale:        
AgVantage $ 7,017,095  $ (124) $ 7,016,971  $ 161,316  $ (35,262) $ 7,143,025 
Trading:        
USDA Securities(1)
$ 8,400  $ 479  $ 8,879  $ 61  $ (27) $ 8,913 
(1)The trading USDA securities had a weighted average yield of 5.20% as of December 31, 2019.


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As of September 30, 2020 and December 31, 2019, 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, 2020
  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 $ 49,901  $ (99) $ —  $ — 
Farmer Mac Guaranteed USDA Securities 45  (1) —  — 
USDA Securities $ —  $ —  $ 21,521  $ (1,398)
Total held-to-maturity $ 49,946  $ (100) $ 21,521  $ (1,398)
Available-for-sale:
AgVantage $ 333,544  $ (445) $ 972,161  $ (32,473)


As of December 31, 2019
  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 $ —  $ —  $ 301,836  $ (164)
USDA Securities —  —  27,089  (758)
Total held-to-maturity $ —  $ —  $ 328,925  $ (922)
Available-for-sale:
AgVantage $ 225,239  $ (2,203) $ 1,394,802  $ (33,059)

The unrealized losses presented above are principally due to changes in interest rates from the date of acquisition to September 30, 2020 and December 31, 2019, as applicable. The unrealized losses on the held-to-maturity USDA Securities as of both September 30, 2020 and December 31, 2019 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 of America. As of September 30, 2020, Farmer Mac had executed COVID-19 payment deferments on loans with unpaid principal balances of $83.8 million underlying USDA Securities.

The unrealized losses from AgVantage securities were on 12 and 17 available-for-sale securities as of September 30, 2020 and December 31, 2019, respectively. There were 2 and 4 held-to-maturity AgVantage securities with an unrealized loss as of September 30, 2020 and December 31, 2019,

24





respectively. As of September 30, 2020 and December 31, 2019, 7 and 13 available-for-sale AgVantage securities, respectively, had been in a loss position for more than 12 months.

During the three and nine months ended September 30, 2020 and 2019, Farmer Mac had no sales of Farmer Mac Guaranteed Securities or USDA Securities and, therefore, Farmer Mac realized no gains or losses.

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, 2020 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, 2020
Available-for-Sale Securities
Amortized
Cost(1)
Fair Value Weighted-
Average
Yield
  (dollars in thousands)
Due within one year $ 1,461,551  $ 1,468,084  1.48  %
Due after one year through five years 3,102,003  3,214,595  2.24  %
Due after five years through ten years 1,073,248  1,157,450  2.42  %
Due after ten years 1,513,804  1,671,509  2.57  %
Total $ 7,150,606  $ 7,511,638  2.18  %
(1)Amounts presented exclude $32.7 million of accrued interest receivable.


As of September 30, 2020
Held-to-Maturity Securities
Amortized
Cost(1)
Fair Value Weighted-
Average
Yield
  (dollars in thousands)
Due within one year $ 482,593  $ 486,460  2.75  %
Due after one year through five years 765,529  790,138  3.15  %
Due after five years through ten years 226,396  234,799  2.96  %
Due after ten years 2,137,116  2,231,239  3.25  %
Total $ 3,611,634  $ 3,742,636  3.11  %
(1)Amounts presented exclude $41.1 million of accrued interest receivable.



4.FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions 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.  For more information about Farmer Mac's financial derivatives, see Note 6 in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020.


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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, 2020 and December 31, 2019:

Table 4.1
   As of September 30, 2020
   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 $ 5,410,407  $ 5,530  $ (4,106) 2.26% 0.24% 12.02
Receive fixed non-callable 2,435,729  —  (11,532) 0.35% 1.75% 2.26
Receive fixed callable 343,500  4,460  —  0.18% 1.78% 3.41
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable 482,000  1,597  (10,739) 2.02% 0.56% 6.17
No hedge designation:
Interest rate swaps:
Pay fixed non-callable 356,864  —  (10,879) 2.38% 0.24% 4.26
Receive fixed non-callable 2,622,182  —  —  0.16% 0.98% 0.73
Receive fixed callable 200,000  (5) 0.07% 0.08% 0.97
Basis swaps 3,268,500  1,242  (188) 0.22% 0.25% 1.29
Treasury futures 4,400  9 —  139.73 
Credit valuation adjustment (2) 92       
Total financial derivatives $ 15,123,582  $ 12,837  $ (37,357)         
Collateral (held)/pledged (600) 225,646 
Net amount $ 12,237  $ 188,289 

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   As of December 31, 2019
   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 $ 4,955,686  $ 7,163  $ (3,281) 2.47% 1.93% 11.26
Receive fixed non-callable 1,413,200  76  (5,329) 1.88% 2.13% 1.25
Receive fixed callable 524,000  476  (772) 1.52% 1.91% 2.83
Cash flow hedges:
Interest rate swaps:
Pay fixed non-callable 428,000  1,882  (1,514) 2.36% 2.12% 5.43
No hedge designation:
Interest rate swaps:
Pay fixed non-callable 342,745  (14,046) 3.55% 2.00% 5.51
Receive fixed non-callable 3,124,148  49  (1,637) 1.88% 2.06% 1.66
Receive fixed callable 525,000  79  (80) 1.64% 1.68% 0.83
Basis swaps 2,670,000  787  (395) 1.86% 1.76% 0.90
Treasury futures 39,400  —  (51) 128.29 
Credit valuation adjustment —  63       
Total financial derivatives $ 14,022,179  $ 10,519  $ (27,042)         
Collateral (held)/pledged (2,685) 132,129 
Net amount $ 7,834  $ 105,087 

As of September 30, 2020, Farmer Mac expects to reclassify $5.3 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 after September 30, 2020. During the three and nine months ended September 30, 2020 and 2019, there were no gains or losses from interest rate swaps designated as cash flow hedges reclassified to earnings because it was probable that the originally forecasted transactions would occur.

















27






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, 2020 and 2019:

Table 4.2
For the Three Months Ended September 30, 2020
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 Losses on financial derivatives
(in thousands)
Total amounts presented in the consolidated statement of operations $ 45,335  $ 56,204  $ (63,974) $ (564) $ 37,001 
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives (20,373) (6,194) 9,605  —  (16,962)
Recognized on hedged items 31,439  10,965  (12,328) —  30,076 
Discount amortization recognized on hedged items —  —  (191) —  (191)
Income/(expense) related to interest settlements on fair value hedging relationships $ 11,066  $ 4,771  $ (2,914) $ —  $ 12,923 
(Losses)/gains on fair value hedging relationships:
Recognized on derivatives $ 38,363  $ 28,198  $ (9,665) $ —  $ 56,896 
Recognized on hedged items (41,855) (29,372) 9,284  —  (61,943)
(Losses)/gains on fair value hedging relationships $ (3,492) $ (1,174) $ (381) $ —  $ (5,047)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives $ —  $ —  $ (1,814) $ —  $ (1,814)
Recognized on hedged items —  —  (711) —  (711)
Discount amortization recognized on hedged items —  —  (4) —  (4)
Expense recognized on cash flow hedges $ —  $ —  $ (2,529) $ —  $ (2,529)
Losses on financial derivatives not designated in hedging relationships:
Losses on interest rate swaps $ —  $ —  $ —  $ (4,292) $ (4,292)
Interest expense on interest rate swaps —  —  —  3,800  3,800 
Treasury futures —  —  —  (72) (72)
Losses on financial derivatives not designated in hedge relationships $ —  $ —  $ —  $ (564) $ (564)








28






For The Three Months Ended September 30, 2019
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 Losses on financial derivatives
(in thousands)
Total amounts presented in the consolidated statement of operations: $ 81,649  $ 56,992  $ (121,384) $ (7,360) $ 9,897 
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives (1,051) (584) (961) —  (2,596)
Recognized on hedged items 31,435  7,321  (10,778) —  27,978 
Discount amortization recognized on hedged items —  —  (146) —  (146)
Income/(expense) related to interest settlements on fair value hedging relationships $ 30,384  $ 6,737  $ (11,885) $ —  $ 25,236 
(Losses)/gains on fair value hedging relationships:
Recognized on derivatives $ (87,495) $ (35,597) $ 1,979  $ —  $ (121,113)
Recognized on hedged items 84,164  33,493  (1,034) —  116,623 
(Losses)/gains on fair value hedging relationships $ (3,331) $ (2,104) $ 945  $ —  $ (4,490)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives $ —  $ —  $ 317  $ —  $ 317 
Recognized on hedged items —  —  (2,726) —  (2,726)
Discount amortization recognized on hedged items —  —  (1) —  (1)
Expense recognized on cash flow hedges $ —  $ —  $ (2,410) $ —  $ (2,410)
Losses on financial derivatives not designated in hedge relationships:
Losses on interest rate swaps $ —  $ —  $ —  $ (7,402) $ (7,402)
Interest expense on interest rate swaps —  —  —  127  127 
Treasury futures —  —  —  (85) (85)
Losses on financial derivatives not designated in hedge relationships $ —  $ —  $ —  $ (7,360) $ (7,360)



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For the Nine Months Ended September 30, 2020
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 Losses on financial derivatives
(in thousands)
Total amounts presented in the consolidated statement of operations $ 178,644  $ 172,230  $ (251,789) $ (3,339) $ 95,746 
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives (38,781) (12,607) 16,671  —  (34,717)
Recognized on hedged items 95,366  29,454  (39,325) —  85,495 
Discount amortization recognized on hedged items —  —  (552) —  (552)
Income/(expense) related to interest settlements on fair value hedging relationships $ 56,585  $ 16,847  $ (23,206) $ —  $ 50,226 
(Losses)/gains on fair value hedging relationships:
Recognized on derivatives $ (264,797) $ (124,322) $ 52,991  $ —  $ (336,128)
Recognized on hedged items 257,575  119,072  (53,628) —  323,019 
(Losses)/gains on fair value hedging relationships $ (7,222) $ (5,250) $ (637) $ —  $ (13,109)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives $ —  $ —  $ (3,817) $ —  $ (3,817)
Recognized on hedged items —  —  (3,863) —  (3,863)
Discount amortization recognized on hedged items —  —  (6) —  (6)
Expense recognized on cash flow hedges $ —  $ —  $ (7,686) $ —  $ (7,686)
(Losses)/gains on financial derivatives not designated in hedging relationships:
Losses on interest rate swaps $ —  $ —  $ —  $ (2,415) $ (2,415)
Interest expense on interest rate swaps —  —  —  1,143  1,143 
Treasury futures —  —  —  (2,067) (2,067)
(Losses)/gains on financial derivatives not designated in hedge relationships $ —  $ —  $ —  $ (3,339) $ (3,339)



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For The Nine Months Ended September 30, 2019
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 on financial derivatives
(in thousands)
Total amounts presented in the consolidated statement of operations: $ 252,629  $ 167,792  $ (358,374) $ 1,193  $ 63,240 
Income/(expense) related to interest settlements on fair value hedging relationships:
Recognized on derivatives 1,665  (808) (6,751) —  (5,894)
Recognized on hedged items 86,628  18,199  (32,594) —  72,233 
Discount amortization recognized on hedged items —  —  (460) —  (460)
Income/(expense) related to interest settlements on fair value hedging relationships $ 88,293  $ 17,391  $ (39,805) $ —  $ 65,879 
Gains/(losses) on fair value hedging relationships:
Recognized on derivatives $ (262,886) $ (89,631) $ 27,101  $ —  $ (325,416)
Recognized on hedged items 258,155  83,524  (24,880) —  316,799 
Gains/(losses) on fair value hedging relationships $ (4,731) $ (6,107) $ 2,221  $ —  $ (8,617)
Expense related to interest settlements on cash flow hedging relationships:
Interest settlements reclassified from AOCI into net income on derivatives $ —  $ —  $ 1,260  $ —  $ 1,260 
Recognized on hedged items —  —  (8,142) —  (8,142)
Discount amortization recognized on hedged items —  —  (3) —  (3)
Expense recognized on cash flow hedges $ —  $ —  $ (6,885) $ —  $ (6,885)
Gains on financial derivatives not designated in hedge relationships:
Gains on interest rate swaps $ —  $ —  $ —  $ 5,920  $ 5,920 
Interest expense on interest rate swaps —  —  —  (3,321) (3,321)
Treasury futures —  —  —  (1,406) (1,406)
Gains on financial derivatives not designated in hedge relationships $ —  $ —  $ —  $ 1,193  $ 1,193 


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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, 2020 and December 31, 2019:

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, 2020 December 31, 2019 September 30, 2020 December 31, 2019
(in thousands)
Farmer Mac Guaranteed Securities, Available-for-Sale, at fair value(1)
$ 4,277,240  $ 4,092,611  $ 437,777  $ 180,215 
Loans held for investment, at amortized cost(2)(3)
1,628,241  1,050,335  156,979  37,907 
Notes Payable(4)
(2,838,690) (2,761,052) (61,149) (7,433)
(1)Includes $1.6 million of hedging adjustments on discontinued hedging relationships as of September 30, 2020.
(2)Includes $1.4 million of hedging adjustments on a discontinued hedging relationship as of September 30, 2020.
(3)Includes $0.2 million as of September 30, 2020 in fair value adjustment, currently included in "Prepaid expenses and other assets" related to hedge accounting designations of purchase commitments
(4)Carrying amount represents amortized cost.

The following table shows Farmer Mac's credit exposure to interest rate swap counterparties as of September 30, 2020 and December 31, 2019:

Table 4.4
September 30, 2020
Gross Amount Recognized(1)
Counterparty Netting Net Amount Presented in the Consolidated Balance Sheet
(in thousands)
Assets:
Derivatives
Interest rate swap $ 114,788  $ 114,165  $ 623 
Liabilities:
Derivatives
Interest rate swap $ 718,812  $ 714,470  $ 4,342 
(1)Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest.

December 31, 2019
Gross Amount Recognized(1)
Counterparty Netting Net Amount Presented in the Consolidated Balance Sheet
(in thousands)
Assets:
Derivatives
Interest rate swaps $ 56,139  $ 53,771  $ 2,368 
Liabilities:
Derivatives
Interest rate swaps $ 305,584  $ 291,326  $ 14,258 
(1)Gross amount excludes netting arrangements and any adjustment for nonperformance risk, but includes accrued interest.


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As of September 30, 2020, Farmer Mac held $0.6 million of cash and no investment securities as collateral for its derivatives in net asset positions, compared to $2.7 million of cash and no investment securities as collateral for its derivatives in net asset positions as of December 31, 2019.

Farmer Mac posted $13.6 million cash and $212.1 million of investment securities as of September 30, 2020 and posted $0.5 million cash and $131.7 million investment securities as of December 31, 2019.  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, 2020 and December 31, 2019, it could have been required to settle its obligations under the agreements, but would not have been required to post additional collateral. As of September 30, 2020 and December 31, 2019, 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.

Of Farmer Mac's $15.1 billion notional amount of interest rate swaps outstanding as of September 30, 2020, $12.4 billion were cleared through the swap clearinghouse, the Chicago Mercantile Exchange ("CME"). Of Farmer Mac's $14.0 billion notional amount of interest rate swaps outstanding as of December 31, 2019, $11.0 billion were cleared through the CME. During the first half of 2020 and throughout 2019, Farmer Mac increased its use of non-cleared basis swaps as it began to prepare for the transition away from the use of LIBOR as a reference rate. For more information about interest rate swaps cleared through a clearinghouse, see Note 6 in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020.

5.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 basis adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled
basis. During the three months ended September 30, 2020, Farmer Mac acquired $59.2 million in loans held for sale, of which it sold $15.0 million during the quarter, and reclassified $24.2 million as loans held for investment. As of September 30, 2020 and December 31, 2019, Farmer Mac had $20.0 million and no loans held for sale, respectively.















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The following table includes loans held for investment and loans held for sale and displays the composition of the loan balances as of September 30, 2020 and December 31, 2019:

Table 5.1
As of September 30, 2020(1)
As of December 31, 2019(2)
Unsecuritized In Consolidated Trusts Total Unsecuritized In Consolidated Trusts Total
(in thousands)
Farm & Ranch $ 4,580,917  $ 1,276,407  $ 5,857,324  $ 3,675,640  $ 1,600,917  $ 5,276,557 
Rural Utilities 2,109,355  —  2,109,355  1,671,293  —  1,671,293 
Total unpaid principal balance(3)
6,690,272  1,276,407  7,966,679  5,346,933  1,600,917  6,947,850 
Unamortized premiums, discounts, fair value hedge basis adjustment, and other cost basis adjustments 154,789  —  154,789  44,044  —  44,044 
Total loans 6,845,061  1,276,407  8,121,468  5,390,977  1,600,917  6,991,894 
Allowance for losses (14,878) (943) (15,821) (8,853) (1,601) (10,454)
Total loans, net of allowance $ 6,830,183  $ 1,275,464  $ 8,105,647  $ 5,382,124  $ 1,599,316  $ 6,981,440 
(1)Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020, Farmer Mac maintained an allowance for losses to cover estimated probable incurred losses on loans held.
(3)Unpaid principal balance is the basis of presentation in disclosures of outstanding balances for Farmer Mac's lines of business.

Allowance for Losses

The following table is a summary, by asset type, of the allowance for losses as of September 30, 2020 and December 31, 2019:

Table 5.2
September 30, 2020(1)
December 31, 2019(2)
Allowance for Losses Allowance for Losses
(in thousands)
Loans:
Farm & Ranch $ 5,739  $ 10,454 
Rural Utilities 10,082  — 
Total $ 15,821  $ 10,454 
(1)Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020, Farmer Mac maintained an allowance for loan losses to cover estimated probable incurred losses on loans held.

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The following is a summary of the changes in the allowance for losses for the three and nine month period ended September 30, 2020 and 2019:

Table 5.3
For the Three Months Ended For the Nine Months Ended
September 30, 2020(1)
September 30, 2019(2)
September 30, 2020(1)
September 30, 2019(2)
Allowance for Losses Allowance for Losses Allowance for Losses Allowance for Losses
(in thousands)
Farm & Ranch:
Beginning Balance $ 6,039  $ 7,264  $ 10,454  $ 7,017 
Cumulative effect adjustment from adoption of current expected credit loss standard —  —  (3,909) — 
Adjusted Beginning Balance 6,039  7,264  6,545  7,017 
(Release of)/provision for losses (300) 760  (412) 1,074 
Charge-offs —  —  (394) (67)
Ending Balance(3)
$ 5,739  $ 8,024  $ 5,739  $ 8,024 
Rural Utilities:
Beginning Balance $ 8,900  $ —  $ —  $ — 
Cumulative effect adjustment from adoption of current expected credit loss standard —  —  5,378  — 
Adjusted Beginning Balance 8,900  —  5,378  — 
Provision for losses 1,182  —  4,704  — 
Charge-offs —  —  —  — 
Ending Balance(4)
$ 10,082  $ —  $ 10,082  $ — 

(1)Allowance for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," effective January 1, 2020, Farmer Mac maintained an allowance for loan losses to cover estimated probable incurred losses on loans held.
(3)Allowance for losses includes $1.8 million for collateral dependent assets secured by agricultural real estate.
(4)Allowance for losses includes no allowance for collateral dependent assets.

The cumulative transition adjustment decrease of $3.9 million in the Farm & Ranch portfolio was primarily driven by differences in the way that the two loss models measure the impact of low loan-to-value ratios in that portfolio. Under the previous accounting standard, Farmer Mac's estimated incurred loss model was based on historical weighted-average loss rates from realized losses within commodities and risk ratings. The historical weighted average loss rates were then applied to sub-portfolios, as disaggregated by commodity and risk rating, to calculate the general allowance. Under the CECL accounting standard, Farmer Mac's current expected credit losses are calculated individually based on the expected probability of default and the expected loss-given-default for each loan. The low loan-to-value ratios in the Farm & Ranch portfolio result in low individual losses-given-default. Thus, our expected credit losses as of January 1, 2020 were less than our estimate of incurred losses as of December 31, 2019.

The cumulative transition adjustment increase of $5.4 million in the Rural Utilities portfolio was primarily driven by the change from measuring incurred probable credit losses to measuring expected credit losses over the expected lives of these loans. Farmer Mac has never experienced a credit loss in its Rural Utilities portfolio. Additionally, these loans have strong credit ratings and performance, which supported Farmer Mac's estimate of no incurred credit losses under the previous accounting standard. Upon the adoption of CECL, Farmer Mac is now required to measure its expected credit losses for the entire expected life of all

35





financial instruments, including its Rural Utilities loans. To estimate expected credit losses on these loans, Farmer Mac relies upon industry data from ratings agencies and publicly available information as disclosed in the securities filings of other major lenders who serve the utilities industry. Under the CECL accounting standard, Farmer Mac's loss allowance model for these loans is primarily impacted by the long-term maturities of the loans and their low probability of prepayment. In addition, the highly-specialized nature of power generation and transmission and other rural infrastructure facilities results in significant expected losses given default even though the probability of default is low. Thus, the long-term expected lives of these loans combined with high losses given default result in an estimate of expected losses although we have never incurred a credit loss in this portfolio.

The provision to the allowance for loan losses of $0.9 million recorded during third quarter 2020 was primarily due to the impact of net new loan volume in the Rural Utilities portfolio and credit downgrades on existing volume during the quarter. The impact of the Rural Utilities portfolio on the net increase to the provision was partially offset by improving economic factors that uniquely impacted the Farm & Ranch portfolio, specifically continued improvements in commodity prices and continued expectations for stable farm land values.

The provision to the allowance for loan losses of $4.3 million recorded during the nine months ended September 30, 2020 was primarily due to the impact of net new loan volume in the Rural Utilities portfolio and the impact of economic factor forecasts on the Rural Utilities portfolio, especially continued expected higher unemployment, as a result of the COVID-19 pandemic and the resulting economic volatility.

The provision for the allowance for loan losses recorded during three and nine months ended September 30, 2019 was attributable to a decrease in the portfolio credit quality, primarily related to idiosyncratic factors of a few large loans and less related to systemic, macroeconomic factors. The $0.1 million charge-off that occurred during the nine months ended September 30, 2019 related to the foreclosure of one part-time farm loan.

The following table presents the unpaid principal balances by delinquency status of Farmer Mac's loans and non-performing assets as of September 30, 2020:

Table 5.4
As of September 30, 2020
Accruing
Current(5)
30-59 Days 60-89 Days
90 Days and Greater(2)
Total Past Due
Nonaccrual loans(3)(4)
Total Loans
(in thousands)
Loans(1):
Farm & Ranch $ 5,716,834  $ 3,513  $ 637  $ 6,901  $ 11,051  $ 129,439  $ 5,857,324 
Rural Utilities 2,109,355  —  —  —  —  —  2,109,355 
Total $ 7,826,189  $ 3,513  $ 637  $ 6,901  $ 11,051  $ 129,439  $ 7,966,679 
(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)Includes loans in consolidated trusts with beneficial interests owned by third parties that are 90 days or more past due.
(3)Includes loans 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.
(4)Includes $24.8 million of nonaccrual loans for which there was no associated allowance. During the three and nine months ended September 30, 2020, Farmer Mac received $1.2 million and $3.5 million, respectively, in interest on nonaccrual loans.
(5)Includes $105.3 million of unpaid principal balance related to Farm & Ranch loans that Farmer Mac has executed a COVID-19 payment deferment.

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The following tables present the unpaid principal balances of loans held and the related total allowance for losses by impairment method and commodity type as of December 31, 2019:

Table 5.5
   As of December 31, 2019
Crops Permanent
Plantings
Livestock Part-time
Farm
Ag. Storage and
Processing
Other Total
   (in thousands)
Ending Balance:              
Collectively evaluated for impairment $ 2,664,362  $ 1,161,900  $ 871,341  $ 356,920  $ 10,360  $ 4,597  $ 5,069,480 
Individually evaluated for impairment 108,815  51,256  39,962  7,044  —  —  207,077 
Total Farm & Ranch loans $ 2,773,177  $ 1,213,156  $ 911,303  $ 363,964  $ 10,360  $ 4,597  $ 5,276,557 
Allowance for Losses:              
Collectively evaluated for impairment $ 1,880  $ 1,362  $ 714  $ 249  $ 47  $ $ 4,256 
Individually evaluated for impairment 2,628  1,008  2,447  115  —  —  6,198 
Total Farm & Ranch loans $ 4,508  $ 2,370  $ 3,161  $ 364  $ 47  $ $ 10,454 


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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 December 31, 2019:

Table 5.6
   As of December 31, 2019
Crops Permanent
Plantings
Livestock Part-time
Farm
Ag. Storage and
Processing
Other Total
   (in thousands)
Impaired Loans:              
With no specific allowance:              
Recorded investment $ 30,846  $ 16,696  $ 3,195  $ 1,398  $ —  $ 56  $ 52,191 
Unpaid principal balance 30,741  16,638  3,185  1,394  —  56  52,014 
With a specific allowance:  
Recorded investment(1)
84,044  36,852  47,113  6,376  —  —  174,385 
Unpaid principal balance 83,772  36,732  46,984  6,356  —  —  173,844 
Associated allowance 2,725  1,051  2,636  129  —  —  6,541 
Total:              
Recorded investment 114,890  53,548  50,308  7,774  —  56  226,576 
Unpaid principal balance 114,513  53,370  50,169  7,750  —  56  225,858 
Associated allowance 2,725  1,051  2,636  129  —  —  6,541 
Recorded investment of loans on nonaccrual status(2)
$ 34,037  $ 22,849  $ 28,441  $ 2,454  $ —  $ —  $ 87,781 
(1)Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $159.1 million (70%) of impaired loans as of December 31, 2019, which resulted in a specific allowance of $3.0 million.
(2)Includes $30.1 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.

The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2019:

Table 5.7
September 30, 2019
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 $ 106,535  $ 45,197  $ 36,859  $ 8,265  $ —  $ 58  $ 196,914 
Income recognized on impaired loans 178  166  87  105  —  —  536 
For the Nine Months Ended:
Average recorded investment in impaired loans $ 93,088  $ 41,524  $ 31,189  $ 8,079  $ —  $ 63  $ 173,943 
Income recognized on impaired loans 879  586  504  227  —  —  2,196 

Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held are presented in the table below.  As of December 31, 2019, 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.

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Table 5.8
90-Day Delinquencies(1)
Net Credit Losses
  As of For the Nine Months Ended
  December 31, 2019 September 30, 2019
  (in thousands)
Farm & Ranch loans $ 57,719  $ 131 
(1)Includes loans 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 $57.7 million of on-balance sheet loans reported as 90-day delinquencies as of December 31, 2019, no loans were subject to "removal-of-account" provisions.

Rural Utilities

As of December 31, 2019, no allowance for losses had been provided for Farmer Mac's Rural Utilities line of business based on the performance of the loans in this line of business and the credit quality of the collateral supporting these loans, as well as Farmer Mac's counterparty risk analysis. As of December 31, 2019, there were no delinquencies or probable losses inherent in Farmer Mac's Rural Utilities loans held or underlying LTSPCs.


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Credit Quality Indicators

The following tables present credit quality indicators related to Farm & Ranch loans and Rural Utilities loans held as of September 30, 2020, by year of origination:

Table 5.9

As of September 30, 2020
Year of Origination:
2020 2019 2018 2017 2016 Prior Revolving Loans - Amortized Cost Basis Total
(in thousands)
Farm & Ranch(1):
Internally Assigned Risk Rating:
Acceptable $ 1,423,112  $ 765,367  $ 507,218  $ 557,095  $ 499,642  $ 1,157,633  $ 472,209  $ 5,382,276 
Special mention(2)
39,607  124,068  27,757  4,633  10,897  22,236  50,395  279,593 
Substandard(3)
7,556  5,926  19,682  57,541  36,490  59,330  8,930  195,455 
Total $ 1,470,275  $ 895,361  $ 554,657  $ 619,269  $ 547,029  $ 1,239,199  $ 531,534  $ 5,857,324 
For the Three Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Farm & Ranch net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
For the Nine Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ 394  $ —  $ 394 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Farm & Ranch net charge-offs $ —  $ —  $ —  $ —  $ —  $ 394  $ —  $ 394 
(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.



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As of September 30, 2020
Year of Origination:
2020 2019 2018 2017 2016 Prior Revolving Loans - Amortized Cost Basis Total
(in thousands)
Rural Utilities(1):
Internally Assigned Risk Rating:
Acceptable $ 502,873  $ 819,099  $ 8,260  $ 92,223  $ 31,275  $ 638,281  $ 12,870  $ 2,104,881 
Special mention(2)
—  —  —  —  —  —  —  — 
Substandard(3)
—  —  —  —  —  4,474  —  4,474 
Total $ 502,873  $ 819,099  $ 8,260  $ 92,223  $ 31,275  $ 642,755  $ 12,870  $ 2,109,355 
For the Three Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Rural Utilities net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
For the Nine Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Rural Utilities net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
(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.

The following table presents credit quality indicators related to Farm & Ranch loans held as of December 31, 2019:
Table 5.10
   As of December 31, 2019
Crops Permanent
Plantings
Livestock Part-time
Farm
Ag. Storage and
Processing
Other Total
   (in thousands)
Internally Assigned Risk Rating(1)
             
Acceptable $ 2,556,956  $ 1,050,160  $ 825,234  $ 343,329  $ 10,360  $ 4,597  $ 4,790,636 
Special mention(2)
107,406  111,739  46,107  13,591  —  —  278,843 
Substandard(3)
108,815  51,257  39,962  7,044  —  —  207,078 
Total $ 2,773,177  $ 1,213,156  $ 911,303  $ 363,964  $ 10,360  $ 4,597  $ 5,276,557 
Commodity analysis of past due loans(1)
$ 21,167  $ 15,828  $ 19,354  $ 1,370  $ —  $ —  $ 57,719 
(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.


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6.GUARANTEES

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, 2020 and December 31, 2019, 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, 2020 As of December 31, 2019
   (in thousands)
Farm & Ranch:    
Farmer Mac Guaranteed Securities $ 85,767  $ 107,322 
USDA Guarantees:
Farmer Mac Guaranteed USDA Securities 310,682  389,216 
Institutional Credit:    
AgVantage Securities 6,068  7,567 
Total off-balance sheet Farmer Mac Guaranteed Securities $ 402,517  $ 504,105 

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, 2020 September 30, 2019
   (in thousands)
Proceeds from new securitizations $ 64,612  $ 199,396 
Guarantee fees received 1,136  1,122 

Farmer Mac presents a liability for its obligation to stand ready under its guarantee in "Guarantee and commitment obligation" on the consolidated balance sheets.  The following table presents the liability and the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities:

Table 6.3
As of September 30, 2020 As of December 31, 2019
(dollars in thousands)
Guarantee and commitment obligation $ 1,780  $ 2,230 
Weighted average remaining maturity:
  Farmer Mac Guaranteed Securities 9.5 years 9.8 years
  AgVantage Securities 4.2 years 5.0 years


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Long-Term Standby Purchase Commitments

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.  The following table presents the liability, 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, as well as the weighted-average remaining maturity of all loans underlying LTSPCs:

Table 6.4
As of September 30, 2020 As of December 31, 2019
(dollars in thousands)
Guarantee and commitment obligation(1)
$ 33,360  $ 34,470 
Maximum principal amount 2,882,212  3,002,349 
Weighted-average remaining maturity 15.1 years 15.2 years
(1) Relates to LTSPCs issued or modified on or after January 1, 2003.


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Reserve for Losses

The following table is a summary, by asset type, of the reserve for losses as of September 30, 2020 and December 31, 2019:

Table 6.5
September 30, 2020(1)
December 31, 2019(2)
Reserve for Losses Reserve for Losses
(in thousands)
Farm & Ranch:
LTSPCs and Farmer Mac Guaranteed Securities $ 2,278  $ 2,164 
Rural Utilities
LTSPCs 1,290  — 
Total $ 3,568  $ 2,164 
(1)Reserve for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained a reserve for losses to cover estimated probable incurred losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Farmer Mac Guaranteed Securities.

The following is a summary of the changes in the reserve for losses for the three and nine month period ended September 30, 2020 and 2019:

Table 6.6
For the Three Months Ended For the Nine Months Ended
September 30, 2020(1)
September 30, 2019(2)
September 30, 2020(1)
September 30, 2019(2)
Reserve for Losses Reserve for Losses Reserve for Losses Reserve for Losses
(in thousands)
Farm & Ranch:
Beginning Balance $ 1,650  $ 1,880  $ 2,164  $ 2,167 
Cumulative effect adjustment from adoption of current expected credit loss standard —  —  (148) — 
Adjusted Beginning Balance 1,650  1,880  2,016  2,167 
Provision for/(release of) losses $ 628  $ (137) $ 262  $ (424)
Ending Balance $ 2,278  $ 1,743  $ 2,278  $ 1,743 
Rural Utilities:
Beginning Balance $ 1,370  $ —  $ —  $ — 
Cumulative effect adjustment from adoption of current expected credit loss standard —  —  1,011  — 
Adjusted Beginning Balance 1,370  —  1,011  — 
(Release of)/provision for losses $ (80) $ —  $ 279  $ — 
Ending Balance $ 1,290  $ —  $ 1,290  $ — 
(1)Reserve for losses reflects the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020.
(2)Prior to the adoption of ASU 2016-13, "Financial Instruments - Credit Losses," in first quarter 2020, Farmer Mac maintained a reserve for losses to cover estimated probable incurred losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Farmer Mac Guaranteed Securities.

The provision to the reserve for losses recorded during the three and nine months ended September 30, 2020 was primarily due to credit downgrades in the LTSPC portfolio.


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The release from the reserve for losses recorded during third quarter 2019 was primarily attributable to a net volume decrease in off-balance sheet Farm & Ranch LTSPCs and slight improvements in off-balance sheet portfolio credit quality.

The following table presents the unpaid principal balances by delinquency status of Farm & Ranch loans underlying LTSPCs. Farm & Ranch Farmer Mac Guaranteed Securities, Rural Utilities loans underlying LTSPCs, and non-performing assets as of September 30, 2020:

Table 6.7
As of September 30, 2020
Current(2)
30-59 Days 60-89 Days
90 Days and Greater(1)
Total Past Due Total Loans
(in thousands)
Farm and Ranch:
LTSPCs and Farmer Mac Guaranteed Securities $ 2,352,454  $ 2,934  $ 22,690  $ 13,947  $ 39,571  $ 2,392,025 
Rural Utilities:
LTSPCs $ 575,954  $ —  $ —  $ —  $ —  $ 575,954 
(1)Includes loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days of 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.
(2)Includes $185.4 million of unpaid principal balance related to Farm & Ranch LTSPCs for which the lender has notified Farmer Mac of an executed COVID-19 payment deferment.


The following tables present the unpaid principal balances of Farm & Ranch loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and the related reserve for losses by impairment method and commodity type as of December 31, 2019:

Table 6.8
   As of December 31, 2019
Crops Permanent
Plantings
Livestock Part-time
Farm
Ag. Storage and
Processing
Other Total
   (in thousands)
Ending Balance:              
Collectively evaluated for impairment: $ 1,151,983  $ 511,991  $ 581,377  $ 167,395  $ 66,106  $ 2,760  $ 2,481,612 
Individually evaluated for impairment: 5,698  2,114  10,207  706  —  56  18,781 
Total Farm & Ranch $ 1,157,681  $ 514,105  $ 591,584  $ 168,101  $ 66,106  $ 2,816  $ 2,500,393 
Allowance for Losses:              
Collectively evaluated for impairment: $ 599  $ 96  $ 308  $ 50  $ 767  $ $ 1,821 
Individually evaluated for impairment: 97  43  189  14  —  —  343 
Total Farm & Ranch $ 696  $ 139  $ 497  $ 64  $ 767  $ $ 2,164 


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Net credit losses and 90-day delinquencies as of and for the periods indicated for loans underlying off-balance sheet securities representing interests in pools of eligible Farm & Ranch LTSPCs are presented in the table below.  As of December 31, 2019, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities LTSPCs portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities LTSPCs.

Table 6.9
90-Day Delinquencies(1)
Net Credit Losses/(Recoveries)
  As of For the Nine Months Ended
  December 31, 2019 September 30, 2019
  (in thousands)
Farm & Ranch LTSPCs and Farmer Mac Guaranteed Securities $ 3,235  $ — 
(1)Includes 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.

Credit Quality Indicators

The following tables present credit quality indicators related to Farm & Ranch loans underlying LTSPCs, Farm & Ranch Farmer Mac Guaranteed Securities, and Rural Utilities loans underlying LTSPCs as of September 30, 2020, by year of origination:

Table 6.10
As of September 30, 2020
Year of Origination:
2020 2019 2018 2017 2016 Prior Revolving Loans - Amortized Cost Basis Total
(in thousands)
Farm & Ranch LTSPCs and Farmer Mac Guaranteed Securities:
Internally Assigned Risk Rating:
Acceptable $ 118,116  $ 207,202  $ 184,421  $ 245,490  $ 216,983  $ 1,021,400  $ 173,617  $ 2,167,229 
Special mention(1)
—  1,742  1,509  23,200  14,628  47,948  10,040  99,067 
Substandard(2)
264  10,821  12,676  15,614  14,401  67,338  4,615  125,729 
Total $ 118,380  $ 219,765  $ 198,606  $ 284,304  $ 246,012  $ 1,136,686  $ 188,272  $ 2,392,025 
For the Three Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Farm & Ranch net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
For the Nine Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Farm & Ranch net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
(1)Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  

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(2)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.
As of September 30, 2020
Year of Origination:
2020 2019 2018 2017 2016 Prior Revolving Loans - Amortized Cost Basis Total
(in thousands)
Rural Utilities LTSPCs:
Internally Assigned Risk Rating:
Acceptable $ —  $ —  $ —  $ —  $ —  $ 569,324  $ 6,630  $ 575,954 
Special mention(1)
—  —  —  —  —  —  —  — 
Substandard(2)
—  —  —  —  —  —  —  — 
Total $ —  $ —  $ —  $ —  $ —  $ 569,324  $ 6,630  $ 575,954 
For the Three Months Ended
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Rural Utilities net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
For the Nine Months Ended:
Current period charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Current period recoveries —  —  —  —  —  —  —  — 
Current period Rural Utilities net charge-offs $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
(1)Assets in the "Special mention" category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured.  
(2)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.

The following table presents credit quality indicators related to Farm & Ranch loans underlying LTSPCs and off-balance sheet Farm & Ranch Farmer Mac Guaranteed Securities as of December 31, 2019:

Table 6.11
   As of December 31, 2019
Crops Permanent
Plantings
Livestock Part-time
Farm
Ag. Storage and
Processing
Other Total
   (in thousands)
Internally Assigned Risk Rating(1)
             
Acceptable $ 1,033,002  $ 484,601  $ 521,341  $ 161,361  $ 66,106  $ 2,594  $ 2,269,005 
Special mention(2)
68,372  22,909  35,618  1,612  —  —  128,511 
Substandard(3)
56,307  6,595  34,625  5,128  —  222  102,877 
Total $ 1,157,681  $ 514,105  $ 591,584  $ 168,101  $ 66,106  $ 2,816  $ 2,500,393 
Commodity analysis of past due loans(1)
$ 1,493  $ 196  $ 1,066  $ 480  $ —  $ —  $ 3,235 
(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.



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7.NOTES PAYABLE

Farmer Mac's borrowings consist of discount notes and medium-term notes, both of which are unsecured general obligations of Farmer Mac.  Discount notes generally have original maturities of 1.0 year or less, whereas medium-term notes generally have maturities of 0.5 years to 15.0 years.

The following tables set forth information related to Farmer Mac's borrowings as of September 30, 2020 and December 31, 2019:

Table 7.1
  September 30, 2020
 Outstanding as of September 30 Average Outstanding During the First Nine Months
   Amount Weighted- Average Rate Amount Weighted- Average Rate
   (dollars in thousands)
Due within one year:        
Discount notes $ 2,358,943  0.21  % $ 2,313,477  0.79  %
Medium-term notes 2,065,148  0.27  % 1,312,909  0.81  %
Current portion of medium-term notes 6,510,992  0.90  %
 Total due within one year $ 10,935,083  0.63  %    
Due after one year:      
Medium-term notes due in:      
Two years $ 3,277,494  0.96  %    
Three years 2,326,812  1.44  %    
Four years 1,056,062  1.73  %    
Five years 1,242,150  1.35  %
Thereafter 2,751,684  2.07  %    
Total due after one year 10,654,202  1.47  %    
Total $ 21,589,285  1.05  %    


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  December 31, 2019
 Outstanding as of December 31 Average Outstanding During the Year
   Amount Weighted- Average Rate Amount Weighted- Average Rate
   (dollars in thousands)
Due within one year:        
Discount notes $ 2,194,177  1.72  % $ 1,977,214  2.25  %
Medium-term notes 1,152,770  1.98  % 1,780,517  2.33  %
Current portion of medium-term notes 6,672,135  1.85  %
 Total due within one year $ 10,019,082  1.84  %    
Due after one year:        
Medium-term notes due in:        
Two years $ 3,700,835  2.04  %    
Three years 1,594,709  2.15  %    
Four years 1,205,276  2.27  %    
Five years 760,887  2.25  %
Thereafter 1,817,859  2.89  %    
Total due after one year 9,079,566  2.28  %    
Total $ 19,098,648  2.05  %    

During the nine months ended September 30, 2020, Farmer Mac increased its use of short-term funding in order to fund the growth of short-term assets in its liquidity portfolio. The maximum amount of Farmer Mac's discount notes outstanding at any month end during the nine months ended September 30, 2020 and 2019 was $2.6 billion and $2.2 billion, respectively.

Callable medium-term notes give Farmer Mac the option to redeem the debt at par value on a specified call date or at any time on or after a specified call date.  The following table summarizes by maturity date the amounts and costs for Farmer Mac debt callable in 2020 as of September 30, 2020:

Table 7.2
Debt Callable in 2020 as of September 30, 2020, by Maturity
Amount Weighted-Average Rate
(dollars in thousands)
Maturity:
2021 $ 215,949  0.17  %
2022 122,918  0.59  %
2023 127,863  0.47  %
2024 59,941  1.33  %
Thereafter 374,144  1.84  %
 Total $ 900,815  1.04  %

The following schedule summarizes the earliest interest rate reset date, or debt maturities, of total borrowings outstanding as of September 30, 2020, including callable and non-callable medium-term notes, assuming callable notes are redeemed at the initial call date:


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Table 7.3
Earliest Interest Rate Reset Date, or Debt Maturities, of Borrowings Outstanding
Amount Weighted-Average Rate
   (dollars in thousands)
Debt with interest rate resets, or debt maturities in:    
2020 $ 10,523,446  0.31  %
2021 3,219,231  1.55  %
2022 1,787,566  1.59  %
2023 2,026,445  1.62  %
2024 919,753  1.77  %
Thereafter 3,112,844  2.09  %
Total $ 21,589,285  1.05  %

During the nine months ended September 30, 2020 and 2019, Farmer Mac called $2.7 billion and $0.7 billion of callable medium-term notes, respectively. The decrease in market interest rates throughout 2019 and continuing into the first half of 2020 led to an increase in called medium-term notes compared to the prior year.

Authority to Borrow from the U.S. Treasury

Farmer Mac's statutory charter authorizes it, upon satisfying certain conditions, to borrow up to $1.5 billion from the U.S. Treasury through the issuance of debt obligations to the U.S. Treasury. Any funds borrowed from the U.S. Treasury may be used solely for the purpose of fulfilling Farmer Mac's guarantee obligations.  Any debt obligations issued by Farmer Mac under this authority would bear interest at a rate determined by the U.S. Treasury, taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the last calendar month ending before the date of the purchase of the obligations from Farmer Mac.  The charter requires Farmer Mac to repurchase any of its debt obligations held by the U.S. Treasury within a reasonable time.  As of September 30, 2020, Farmer Mac had not used this borrowing authority.

Gains on Repurchase of Outstanding Debt

No outstanding debt repurchases were made in the nine months ended September 30, 2020 or 2019.

8.EQUITY

Preferred Stock

On August 20, 2020, Farmer Mac issued 4.8 million shares of 5.250% Non-Cumulative Preferred Stock, Series F ("Series F Preferred Stock"), which has a par value and liquidation preference of $25.00 per share, or $120.0 million aggregate outstanding. Farmer Mac incurred direct costs of $3.8 million related to the issuance of the Series F Preferred Stock. The dividend rate on the Series F Preferred Stock will remain at a non-cumulative, fixed rate of 5.250% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series F Preferred Stock remains outstanding. The Series F Preferred Stock has no maturity date, but Farmer Mac has the option to redeem the Series F Preferred Stock at any time on any dividend payment date on and after October 17, 2025.


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On September 19, 2020, Farmer Mac used part of the net proceeds from the sale of the Series F Preferred Stock to redeem and repurchase all $60.0 million aggregate outstanding of Farmer Mac's 5.875% Non-Cumulative Preferred Stock, Series A ("Series A Preferred Stock"), plus any declared and unpaid dividends through and including the redemption date. As a result of the retirement of the Series A Preferred Stock, Farmer Mac recognized $1.7 million of deferred issuance costs, which is presented as "Loss on retirement of preferred stock" on the consolidated statements of operations.

In May 2020, Farmer Mac issued 3.18 million shares of 5.750% Non-Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), which has a par value and liquidation preference of $25.00 per share, or $79.5 million aggregate outstanding. Farmer Mac incurred direct costs of $2.5 million related to the issuance of the Series E Preferred Stock. The dividend rate on the Series E Preferred Stock will remain at a non-cumulative, fixed rate of 5.750% per year, when, as, and if a dividend is declared by the Board of Directors of Farmer Mac, for so long as the Series E Preferred Stock remains outstanding. The Series E Preferred Stock has no maturity date, but Farmer Mac has the option to redeem the preferred stock at any time on any dividend payment date on and after July 17, 2025.

Common Stock

During each of the first, second, and third quarters in 2020, Farmer Mac paid a quarterly dividend of $0.80 per share on all classes of its common stock. For each quarter in 2019, Farmer Mac paid a quarterly dividend of $0.70 per share on all classes of its common stock.

Farmer Mac's board of directors approved a share repurchase program during third quarter 2015 authorizing Farmer Mac to repurchase up to $25.0 million of its outstanding Class C non-voting common stock. The share repurchase program, last modified on March 14, 2019, authorized Farmer Mac to repurchase up to $10.0 million of Farmer Mac's outstanding Class C non-voting common stock. During first quarter 2020, Farmer Mac repurchased approximately 4,000 shares of Class C non-voting common stock at a cost of approximately $0.2 million. Shortly after these repurchases were completed, Farmer Mac indefinitely suspended its share repurchase program in an effort to preserve capital and liquidity in view of market volatility and uncertainty caused by the COVID-19 pandemic. As of September 30, 2020, Farmer Mac had repurchased approximately 673,000 shares of Class C non-voting common stock at a cost of approximately $19.8 million under the share repurchase program since 2015. The program expires at the end of March 2021.

Capital Requirements

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, 2020 and December 31, 2019, 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, 2020, Farmer Mac's minimum capital requirement was $670.0 million and its core capital level was $984.2 million, which was $314.2 million above the minimum capital requirement as of that date. As of December 31, 2019, Farmer Mac's minimum capital requirement was $618.8 million and its core capital level was $815.4 million, which was $196.6 million above the minimum capital requirement as of that date.


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In accordance with the Farm Credit Administration'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 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.

9.FAIR VALUE DISCLOSURES

Fair Value Classification and Transfers

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 9.1
Assets and Liabilities Measured at Fair Value as of September 30, 2020
  Level 1 Level 2
Level 3(1)
Total
  (in thousands)
Recurring:  
Assets:        
Investment Securities:        
Available-for-sale:        
Floating rate auction-rate certificates backed by Government guaranteed student loans $ —  $ —  $ 19,072  $ 19,072 
Floating rate asset-backed securities —  9,201  —  9,201 
Floating rate Government/GSE guaranteed mortgage-backed securities —  2,286,033  —  2,286,033 
Fixed rate GSE guaranteed mortgage-backed securities —  318  —  318 
Fixed rate U.S. Treasuries 1,217,566  —  —  1,217,566 
Total Investment Securities 1,217,566  2,295,552  19,072  3,532,190 
Farmer Mac Guaranteed Securities:        
Available-for-sale:        
AgVantage —  —  7,511,638  7,511,638 
Total Farmer Mac Guaranteed Securities —  —  7,511,638  7,511,638 
USDA Securities:        
Trading —  —  6,830  6,830 
Total USDA Securities —  —  6,830  6,830 
Financial derivatives 12,828  —  12,837 
Total Assets at fair value $ 1,217,575  $ 2,308,380  $ 7,537,540  $ 11,063,495 
Liabilities:        
Financial derivatives $ —  $ 37,357  $ —  $ 37,357 
Total Liabilities at fair value $ —  $ 37,357  $ —  $ 37,357 
Non-recurring:
Assets
Loans held for sale $ —  $ —  $ 22,086  $ 22,086 
Total non-recurring assets at fair value $ —  $ —  $ 22,086  $ 22,086 
(1) Level 3 assets represent 32% of total assets and 68% of financial instruments measured at fair value.

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Assets and Liabilities Measured at Fair Value as of December 31, 2019
  Level 1 Level 2
Level 3(1)
Total
  (in thousands)
Recurring:  
Assets:        
Investment Securities:        
Available-for-sale:        
Floating rate auction-rate certificates backed by Government guaranteed student loans $ —  $ —  $ 18,912  $ 18,912 
Floating rate asset-backed securities —  11,085  —  11,085 
Floating rate Government/GSE guaranteed mortgage-backed securities —  1,632,583  —  1,632,583 
Fixed rate GSE guaranteed mortgage-backed securities —  340  —  340 
Fixed rate U.S. Treasuries 1,296,923  —  —  1,296,923 
Total available-for-sale 1,296,923  1,644,008  18,912  2,959,843 
Farmer Mac Guaranteed Securities:        
Available-for-sale:        
AgVantage —  —  7,143,025  7,143,025 
Total Farmer Mac Guaranteed Securities —  —  7,143,025  7,143,025 
USDA Securities:        
Trading —  —  8,913  8,913 
Total USDA Securities —  —  8,913  8,913 
Financial derivatives —  10,519  —  10,519 
Total Assets at fair value $ 1,296,923  $ 1,654,527  $ 7,170,850  $ 10,122,300 
Liabilities:        
Financial derivatives $ 51  $ 26,991  $ —  $ 27,042 
Total Liabilities at fair value $ 51  $ 26,991  $ —  $ 27,042 
(1) Level 3 assets represent 33% of total assets and 71% of financial instruments measured at fair value.

There were no significant assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2020 or December 31, 2019.

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 2020 and 2019, there were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives.

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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, 2020 and 2019.

Table 9.2

Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2020
   Beginning
Balance
Purchases Sales Settlements Allowance for losses Realized and
unrealized gains/(losses) included
in Income
Unrealized gains/(losses)
included in Other
Comprehensive
Income
Ending
Balance
  (in thousands)
Recurring:  
Assets:          
Investment Securities:          
Available-for-sale:          
Floating rate auction-rate certificates backed by Government guaranteed student loans $ 18,283  $ —  $ —  $ —  $ $ —  $ 788  $ 19,072 
Total available-for-sale 18,283  —  —  —  —  788  19,072 
Farmer Mac Guaranteed Securities:          
Available-for-sale:          
AgVantage 7,898,387  122,892  —  (513,864) (96) (41,832) 46,151  7,511,638 
Total available-for-sale 7,898,387  122,892  —  (513,864) (96) (41,832) 46,151  7,511,638 
USDA Securities:          
Trading 7,786  —  —  (697) —  (259) —  6,830 
Total USDA Securities 7,786  —  —  (697) (259) —  6,830 
Total Assets at fair value $ 7,924,456  $ 122,892  $ —  $ (514,561) $ (95) $ (42,091) $ 46,939  $ 7,537,540 



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Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended September 30, 2019
   Beginning
Balance
Purchases Sales Settlements Realized and
unrealized gains/(losses) included
in Income
Unrealized gains/(losses)
included in Other
Comprehensive
Income
Ending
Balance
  (in thousands)
Recurring:  
Assets:          
Investment Securities:          
Available-for-sale:          
Floating rate auction-rate certificates backed by Government guaranteed student loans $ 19,208  $ —  $ —  $ —  $ —  $ —  $ 19,208 
Total available-for-sale 19,208  —  —  —  —  —  19,208 
Farmer Mac Guaranteed Securities:          
Available-for-sale:          
AgVantage 7,035,668  340,148  —  (254,593) 84,164  (22,846) 7,182,541 
Total available-for-sale 7,035,668  340,148  —  (254,593) 84,164  (22,846) 7,182,541 
USDA Securities:          
Available-for-sale —  9,506  (9,506) —  —  —  — 
Trading 9,201  —  —  (307) 49  —  8,943 
Total USDA Securities 9,201  9,506  (9,506) (307) 49  —  8,943 
Total Assets at fair value $ 7,064,077  $ 349,654  $ (9,506) $ (254,900) $ 84,213  $ (22,846) $ 7,210,692 

Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2020
Beginning Balance Purchases Sales Settlements Allowance for Losses Realized and
unrealized gains/(losses) included
in Income
Unrealized gains/(losses)
included in Other
Comprehensive
Income
Ending Balance
(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans $ 18,912  $ —  $ —  $ —  $ (37) $ —  $ 197  $ 19,072 
Total available-for-sale 18,912  —  —  —  (37) —  197  19,072 
Farmer Mac Guaranteed Securities:
Available-for-sale:
AgVantage 7,143,025  958,368  —  (826,380) (330) 257,597  (20,642) 7,511,638 
Total available-for-sale 7,143,025  958,368  —  (826,380) (330) 257,597  (20,642) 7,511,638 
USDA Securities:
Trading 8,913  —  —  (1,910) —  (173) —  6,830 
Total USDA Securities 8,913  —  —  (1,910) (173) —  6,830 
Total Assets at fair value $ 7,170,850  $ 958,368  $ —  $ (828,290) $ (367) $ 257,424  $ (20,445) $ 7,537,540 

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Level 3 Assets and Liabilities Measured at Fair Value for the Nine Months Ended September 30, 2019
   Beginning
Balance
Purchases Sales Settlements Realized and
unrealized gains/(losses) included
in Income
Unrealized gains/(losses)
included in Other
Comprehensive
Income
Ending
Balance
  (in thousands)
Recurring:  
Assets:          
Investment Securities:          
Available-for-sale:          
Floating rate auction-rate certificates backed by Government guaranteed student loans $ 18,715  $ —  $ —  $ —  $ —  $ 493  $ 19,208 
Total available-for-sale 18,715  —  —  —  —  493  19,208 
Farmer Mac Guaranteed Securities:          
Available-for-sale:          
AgVantage 5,974,497  1,730,244  —  (724,906) 258,155  (55,449) 7,182,541 
Total available-for-sale 5,974,497  1,730,244  —  (724,906) 258,155  (55,449) 7,182,541 
USDA Securities:          
Available-for-sale —  57,853  (57,853) —  —  —  — 
Trading 9,999  —  —  (1,210) 154  —  8,943 
Total USDA Securities 9,999  57,853  (57,853) (1,210) 154  —  8,943 
Total Assets at fair value $ 6,003,211  $ 1,788,097  $ (57,853) $ (726,116) $ 258,309  $ (54,956) $ 7,210,692 


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, 2020 and December 31, 2019:

Table 9.3
As of September 30, 2020
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 $ 19,072  Indicative bids Range of broker quotes
97.0% - 97.0% (97.0%)
Farmer Mac Guaranteed Securities:
AgVantage $ 7,511,638  Discounted cash flow Discount rate
0.8% - 2.3% (1.2%)
USDA Securities $ 6,830  Discounted cash flow Discount rate
1.3% - 3.3% (2.6%)
CPR
23% - 49% (43%)


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As of December 31, 2019
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 $ 18,912  Indicative bids Range of broker quotes
96.0% - 96.0% (96.0%)
Farmer Mac Guaranteed Securities:
AgVantage $ 7,143,025  Discounted cash flow Discount rate
2.3% - 5.5% (2.6%)
USDA Securities $ 8,913  Discounted cash flow Discount rate
2.3% - 2.6% (2.1%)
CPR
10% - 21% (19%)

The significant unobservable input used in the fair value measurements of AgVantage Farmer Mac Guaranteed Securities is the discount rate commensurate with the risks involved. Typically, significant increases (decreases) in this input 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. Conversely, in a declining interest rate environment, Farmer Mac would expect average discount rates to decrease. Prepayment rates are not presented in the table above for AgVantage securities because they generally have fixed maturity dates when the secured general obligations are due and don't prepay.

The significant unobservable inputs used in the fair value measurements of USDA Securities are the prepayment rate and discount rate 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.


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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, 2020 and December 31, 2019:

Table 9.4
  As of September 30, 2020 As of December 31, 2019
  Fair Value Carrying
Amount
Fair Value Carrying
Amount
  (in thousands)
Financial assets:        
Cash and cash equivalents $ 910,592  $ 910,592  $ 604,381  $ 604,381 
Investment securities 3,578,375  3,577,222  3,005,828  3,004,875 
Farmer Mac Guaranteed Securities 8,739,103  8,712,208  8,606,451  8,590,476 
USDA Securities 2,522,001  2,417,678  2,294,671  2,241,073 
Loans 8,450,522  8,105,647  7,317,091  6,981,440 
Financial derivatives 12,837  12,837  10,519  10,519 
Guarantee and commitment fees receivable 34,801  36,664  36,732  38,442 
Financial liabilities:
Notes payable 21,893,043  21,589,285  19,234,079  19,098,648 
Debt securities of consolidated trusts held by third parties 1,337,741  1,292,416  1,663,177  1,616,504 
Financial derivatives 37,357  37,357  27,042  27,042 
Guarantee and commitment obligations 33,278  35,140  34,990  36,700 

The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as Level 1. The fair value of investments in U.S. Treasuries are valued based on unadjusted quoted prices in active markets and are classified as Level 1. A significant portion of Farmer Mac's investment portfolio is valued using a reputable nationally recognized third-party pricing service. The prices obtained are non-binding and generally representative of recent market trades 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 are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.


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10.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, 2020 and 2019:

Table 10.1


Core Earnings by Business Segment
For the Three Months Ended September 30, 2020
Farm & Ranch USDA Guarantees
Rural 
Utilities
Institutional Credit Corporate Reconciling
Adjustments
Consolidated Net Income
  (in thousands)
Net interest income $ 18,093  $ 4,747  $ 5,709  $ 14,171  $ 1,941  $ —    $ 44,661 
Less: reconciling adjustments(1)(2)(3)
(68) 1,118  1,230  4,430  431  (7,141) — 
Net effective spread 18,025  5,865  6,939  18,601  2,372  (7,141) — 
Guarantee and commitment fees(2)
4,111  213  328  —  (1,500) 3,159 
Other income/(expense)(3)
443  135  —  —  (125) (681) (228)
Non-interest income/(loss) 4,554  348  328  (125) (2,181) 2,931 
Release of/(provision for) losses 300  —  (1,182) 228  —    (653)
(Provision for)/release of reserve for losses (628) —  81  —  —  —    (547)
Other non-interest expense (5,381) (1,643) (1,438) (2,160) (3,938) —    (14,560)
Non-interest expense(4)
(6,009) (1,643) (1,357) (2,160) (3,938) —    (15,107)
Core earnings before income taxes 16,870  4,570  4,728  16,676  (1,690) (9,322)
(5)
31,832 
Income tax (expense)/benefit (3,543) (960) (993) (3,502) 701  1,957  (6,340)
Core earnings before preferred stock dividends 13,327  3,610  3,735  13,174  (989) (7,365)
(5)
25,492 
Preferred stock dividends —  —  —  —  (5,166) —    (5,166)
Loss on retirement of preferred stock —  —  —  —  —  (1,667) (1,667)
Segment core earnings/(losses) $ 13,327  $ 3,610  $ 3,735  $ 13,174  $ (6,155) $ (9,032)
(5)
$ 18,659 
Total assets at carrying value $ 5,961,307  $ 2,487,687  $ 2,256,011  $ 8,716,923  $ 4,576,909  $ —    $ 23,998,837 
Total on- and off-balance sheet program assets at principal balance $ 8,249,349  $ 2,735,128  $ 2,685,309  $ 8,319,502  $ —  $ —    $ 21,989,288 
(1)Includes 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 "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)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 reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.



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Core Earnings by Business Segment
For the Three Months Ended September 30, 2019
Farm & Ranch USDA Guarantees Rural 
Utilities
Institutional Credit Corporate
Reconciling
Adjustments
Consolidated Net Income
  (in thousands)
Net interest income $ 15,345  $ 4,491  $ 2,602  $ 14,853  $ 2,821  $ —    $ 40,112 
Less: reconciling adjustments(1)(2)(3)
(2,164) (177) 1,900  2,954  (164) (2,349) — 
Net effective spread 13,181  4,314  4,502  17,807  2,657  (2,349) — 
Guarantee and commitment fees(2)
4,523  250  348  87  —  (1,859) 3,349 
Other income/(expense)(3)
390  92  17  —  (110) (7,170) (6,781)
Non-interest income/(loss) 4,913  342  365  87  (110) (9,029) (3,432)
Provision for loan losses (760) —  —  —  —  —    (760)
Release of reserve for losses 137  —  —  —  —  —    137 
Other non-interest expense (5,062) (1,506) (913) (2,277) (3,837) —    (13,595)
Non-interest expense(4)
(4,925) (1,506) (913) (2,277) (3,837) —    (13,458)
Core earnings before income taxes 12,409  3,150  3,954  15,617  (1,290) (11,378)
(5)
22,462 
Income tax (expense)/benefit (2,606) (662) (830) (3,280) 360  2,389  (4,629)
Core earnings before preferred stock dividends 9,803  2,488  3,124  12,337  (930) (8,989)
(5)
17,833 
Preferred stock dividends —  —  —  —  (3,427) —    (3,427)
Segment core earnings/(losses) $ 9,803  $ 2,488  $ 3,124  $ 12,337  $ (4,357) $ (8,989)
(5)
$ 14,406 
Total assets at carrying value $ 4,934,887  $ 2,238,558  $ 1,692,835  $ 8,651,264  $ 3,797,690  $ —    $ 21,315,234 
Total on- and off-balance sheet program assets at principal balance $ 7,393,728  $ 2,567,763  $ 2,232,602  $ 8,738,266  $ —  $ —    $ 20,932,359 
(1)Includes 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 "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)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 reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.


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Core Earnings by Business Segment
For the Nine Months Ended September 30, 2020
Farm & Ranch USDA Guarantees
Rural 
Utilities
Institutional Credit Corporate Reconciling
Adjustments
Consolidated Net Income
  (in thousands)
Net interest income $ 53,768  $ 14,691  $ 12,778  $ 48,059  $ 5,025  $ —    $ 134,321 
Less: reconciling adjustments(1)(2)(3)
(4,072) 488  4,597  7,026  74  (8,113) — 
Net effective spread 49,696  15,179  17,375  55,085  5,099  (8,113) — 
Guarantee and commitment fees(2)
12,822  658  995  23  —  (5,003) 9,495 
Other income/(expense)(3)
2,197  864  12  —  (413) (3,048) (388)
Non-interest income/(loss) 15,019  1,522  1,007  23  (413) (8,051) 9,107 
(Release of)/provision for losses 412  —  (4,704) (222) (28) —    (4,542)
Provision for reserve for losses (262) —  (278) —  —  —    (540)
Other non-interest expense (16,632) (5,045) (4,428) (6,606) (12,171) —    (44,882)
Non-interest expense(4)
(16,894) (5,045) (4,706) (6,606) (12,171) —    (45,422)
Core earnings before income taxes 48,233  11,656  8,972  48,280  (7,513) (16,164)
(5)
93,464 
Income tax (expense)/benefit (10,129) (2,448) (1,884) (10,139) 1,689  3,395  (19,516)
Core earnings before preferred stock dividends 38,104  9,208  7,088  38,141  (5,824) (12,769)
(5)
73,948 
Preferred stock dividends —  —  —  —  (12,536) —    (12,536)
Loss on retirement of preferred stock —  —  —  —  —  (1,667) (1,667)
Segment core earnings/(losses) $ 38,104  $ 9,208  $ 7,088  $ 38,141  $ (18,360) $ (14,436)
(5)
$ 59,745 
Total assets at carrying value $ 5,961,307  $ 2,487,687  $ 2,256,011  $ 8,716,923  $ 4,576,909  $ —    $ 23,998,837 
Total on- and off-balance sheet program assets at principal balance $ 8,249,349  $ 2,735,128  $ 2,685,309  $ 8,319,502  $ —  $ —    $ 21,989,288 
(1)Includes 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 "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)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 reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.



61






Core Earnings by Business Segment
For the Nine Months Ended September 30, 2019
Farm & Ranch USDA Guarantees Rural 
Utilities
Institutional Credit Corporate
Reconciling
Adjustments
Consolidated Net Income
  (in thousands)
Net interest income $ 46,424  $ 13,045  $ 6,264  $ 49,425  $ 8,607  $ —    $ 123,765 
Less: reconciling adjustments(1)(2)(3)
(7,171) (670) 5,467  2,126  (900) 1,148  — 
Net effective spread 39,253  12,375  11,731  51,551  7,707  1,148  — 
Guarantee and commitment fees(2)
13,861  712  1,069  261  —  (5,638) 10,265 
Other income/(expense)(3)
1,058  92  31  —  494  1,050  2,725 
Non-interest income/(loss) 14,919  804  1,100  261  494  (4,588) 12,990 
Provision for loan losses (1,074) —  —  —  —  —    (1,074)
Release of reserve for losses 424  —  —  —  —  —    424 
Other non-interest expense (14,448) (4,279) (2,595) (6,470) (10,903) —    (38,695)
Non-interest expense(4)
(14,024) (4,279) (2,595) (6,470) (10,903) —    (38,271)
Core earnings before income taxes 39,074  8,900  10,236  45,342  (2,702) (3,440)
(5)
97,410 
Income tax (expense)/benefit (8,206) (1,870) (2,149) (9,522) 663  722  (20,362)
Core earnings before preferred stock dividends 30,868  7,030  8,087  35,820  (2,039) (2,718)
(5)
77,048 
Preferred stock dividends —  —  —  —  (10,508) —    (10,508)
Loss on retirement of preferred stock —  —  —  —  —  (1,956) (1,956)
Segment core earnings/(losses) $ 30,868  $ 7,030  $ 8,087  $ 35,820  $ (12,547) $ (4,674)
(5)
$ 64,584 
Total assets at carrying value $ 4,934,887  $ 2,238,558  $ 1,692,835  $ 8,651,264  $ 3,797,690  $ —    $ 21,315,234 
Total on- and off-balance sheet program assets at principal balance $ 7,393,728  $ 2,567,763  $ 2,232,602  $ 8,738,266  $ —  $ —    $ 20,932,359 
(1)Includes 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 "(Losses)/gains on financial derivatives" on the consolidated financial statements, to determine the effective funding cost for each operating segment.
(4)Includes directly attributable costs and an allocation of indirectly attributable costs based on employee headcount.
(5)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 reconciled to net income; and segment core earnings reconciled to net income attributable to common stockholders.

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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. 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, 2019, as filed with the SEC on February 25, 2020.

FORWARD-LOOKING STATEMENTS

In this report, the words "Farmer Mac," "we," "our," and "us" refer to the Federal Agricultural Mortgage Corporation unless otherwise stated or unless the context otherwise requires.

Some statements made in this report, such as in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 about management's current expectations for Farmer Mac's future financial results, business prospects, and business developments.  Forward-looking statements include, without limitation, any statement, including statements about COVID-19 and the impact of the pandemic on Farmer Mac, that may predict, forecast, indicate, or imply future results, performance, or achievements. These statements typically include terms such as "anticipates," "believes," "continues," "estimates," "expects," "forecasts," "intends," "outlook," "plans," "potential," "project," "target" and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will," and "would."  This report includes forward-looking statements addressing Farmer Mac's:
 
prospects for earnings;
prospects for growth in business volume;
assessment of the impact of the COVID-19 pandemic on our business, financial results, financial condition, and business plans and strategies;
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 assumptions, 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, 2019 filed with the

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SEC on February 25, 2020, the factors discussed under "Risk Factors" in Part II, Item 1A of this report, and uncertainties about:
 
the duration, spread, and severity of the COVID-19 pandemic;
the actions taken to address the COVID-19 pandemic, including government actions to mitigate the economic impact of the pandemic, how quickly and to what extent normal economic and operating conditions can resume, the possibility of future disruptions to economic recovery caused by additional outbreaks, regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, and the duration and efficacy of such restrictions;
the effects of the COVID-19 pandemic on the business operations of agricultural and rural borrowers, the capital markets, and Farmer Mac's business operations;
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;
fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
the level of 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 and geopolitics on agricultural mortgage or rural utilities lending, borrower repayment capacity, or collateral values, including fluctuations in interest rates, changes in U.S. trade policies, fluctuations in export demand for U.S. agricultural products, and volatility in commodity prices;
the degree to which Farmer Mac is exposed to interest rate risk resulting from fluctuations in Farmer Mac's borrowing costs relative to market indexes;
developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving government-sponsored enterprises, including Farmer Mac;
the effect of any changes in Farmer Mac's executive leadership; and
other factors that could have a negative effect on agricultural mortgage lending or borrower repayment capacity, including the effects of weather and fluctuations in agricultural real estate values.

Considering these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report.  Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements to reflect new information or any future events or circumstances, except as otherwise required by applicable law. The information in this report is not necessarily indicative of future results.

Overview

The discussion below of Farmer Mac's financial information includes "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."


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COVID-19 Update
Farmer Mac continues to closely monitor the effect of the COVID-19 pandemic on our financial condition and operations. We have maintained uninterrupted continuity of our operations while operating entirely remotely and our liquidity levels remain well above regulatory requirements, which has enabled us to execute our mission to support rural America during this pandemic. For example:

we have maintained uninterrupted access to the debt capital markets;
we provided a total of $1.3 billion in liquidity and lending capacity to lenders serving rural America during the quarter-ended September 30, 2020;
we are working with our loan servicers and other partners to respond to and facilitate COVID-19-related payment deferment requests from borrowers, and as of September 30, 2020, we had executed COVID-19 payment deferments for $374.5 million of unpaid principal balance related to Farm & Ranch loans, Farm & Ranch LTSPCs, and USDA Securities to provide relief to borrowers;
we are maintaining strong liquidity in our investment portfolio, as evidenced by our quarter-end cash position of $0.9 billion; and
we have built and preserved capital and liquidity by issuing net new preferred stock of $60.0 million in the third quarter, issuing preferred stock of $79.5 million in the second quarter, and indefinitely suspending our common stock repurchase program in the first quarter.

The economic impacts of the COVID-19 pandemic caused our total allowance for credit losses to remain elevated in the third quarter. On January 1, 2020, we adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Loss (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"). Under CECL, our allowances and reserve for credit losses reflect our estimate of expected losses over the lives of our financial instruments based on historical information and reasonable and supportable forecasts. Both the adoption of this new accounting standard and the economic effects from the COVID-19 pandemic combined to increase the amount of our total allowance for losses from December 31, 2019 to September 30, 2020. The economic effects from the COVID-19 pandemic that most affected our estimate of expected credit losses were the effects on credit spreads and expectations for continued elevated levels of unemployment. Of the $5.1 million credit loss provision that we recorded in the first nine months of 2020, $1.9 million was attributable to updated economic factors, predominantly related to COVID-19. For more information about the impact of COVID-19 on Farmer Mac's expected credit losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans & Guarantees."

We continue to observe a heightened level of payment deferment requests from our loan servicers on behalf of borrowers in our Farm & Ranch loan portfolio, as well as from our AgVantage counterparties for loans collateralizing their obligations. For more information about Farm & Ranch payment deferments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees." For more information about AgVantage loan collateral payment deferments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Institutional."

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Net Income and Core Earnings

The following table shows our net income attributable to common stockholders and core earnings for the periods presented. Core earnings and core earnings per share are non-GAAP measures that principally differ from net income attributable to common stockholders and earnings per common share, respectively, by excluding the effects of fair value fluctuations as well as the effects of specified infrequent or unusual transactions.

Table 1
For the Three Months Ended
September 30, 2020 June 30, 2020 September 30, 2019
(in thousands)
Net income attributable to common stockholders $ 18,659  $ 31,687  $ 14,406 
Core earnings 27,691  26,347  23,395 

The $13.0 million sequential decrease in net income attributable to common stockholders was primarily due to a $5.6 million after-tax decrease in the fair value of financial derivatives not designated as hedging instruments in hedge accounting relationships (undesignated financial derivatives) due to fluctuations in long-term interest rates, a $2.9 million after-tax decrease in net interest income, the recognition of $1.7 million in deferred issuance costs related to the redemption of the Series A Preferred Stock, a $1.2 million increase in preferred stock dividends, and a $0.9 million after-tax increase in the total provision for credit losses.

The $4.3 million year-over-year increase in net income attributable to common stockholders was primarily due to a $5.4 million after-tax increase in the fair value of undesignated financial derivatives due to fluctuations in long-term interest rates and a $3.6 million after-tax increase in net interest income. These increases were partially offset by a $1.7 million increase in preferred stock dividends, the recognition of $1.7 million in deferred issuance costs related to the redemption of the Series A Preferred Stock, and a $0.7 million after-tax increase in operating expenses.

The $1.3 million sequential increase in core earnings was primarily due to a $4.2 million after-tax increase in net effective spread, partially offset by a $0.9 million after-tax increase in the total provision for credit losses, a $1.2 million increase in preferred stock dividends, a $0.4 million after-tax increase in operating expenses, and a $0.5 million after-tax decrease in other income.
The $4.3 million year-over-year increase in core earnings was primarily due to a $7.4 million after-tax increase in net effective spread. This increase was partially offset by a $1.7 million increase in preferred stock dividends, a $0.8 million after-tax increase in operating expenses, and a $0.5 million after-tax increase in the total provision for credit losses.

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."


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Net Interest Income and Net Effective Spread

The following table shows our net interest income and net effective spread in both dollars and percentage yield or spread for the periods presented. Farmer Mac uses net effective spread, a non-GAAP measure, as an alternative to net 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.

Table 2
For the Three Months Ended
September 30, 2020 June 30, 2020 September 30, 2019
(in thousands)
Net interest income $ 44,661  $ 48,348  $ 40,112 
Net interest yield % 0.78  % 0.87  % 0.78  %
Net effective spread 51,802  46,469  42,461 
Net effective spread % 0.96  % 0.89  % 0.90  %

The $3.7 million sequential decrease in net interest income was primarily due to a $2.7 million decrease in net fair value losses from derivatives designated in fair value hedge accounting relationships (designated financial derivatives) and a $3.0 million increase in funding and liquidity costs. This was partially offset by a $2.3 million increase related to new business volume. In percentage terms, the decrease of 0.09% was primarily attributable to a decrease of 0.05% in net fair value changes from designated financial derivatives, an increase of 0.06% in funding and liquidity costs, and an increase of 0.01% related to new business volume.

The $4.5 million year-over-year increase in net interest income was primarily due to net growth across most lines of business, which contributed to a $6.5 million increase in net interest income. This increase was partially offset by a $1.8 million increase in funding and liquidity costs. In percentage terms, net interest income remained at 0.78% in both third quarter 2020 and third quarter 2019.

The $5.3 million sequential increase in net effective spread was primarily due to a $2.3 million increase related to new business volume and a $3.1 million decrease in non-GAAP funding costs. In percentage terms, the increase of 0.07% was primarily attributable to the decrease in non-GAAP funding costs of 0.05% and an increase of 0.01% related to new business volume.

The $9.3 million year-over-year increase in net effective spread was primarily due to net growth in outstanding business volume, which increased net effective spread by approximately $6.5 million and a $2.2 million decrease in non-GAAP funding costs. In percentage terms, the increase of 0.06% was primarily attributable to an increase of 0.03% related to net volume growth, and a decrease in non-GAAP funding costs of 0.03%.

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 11 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."


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Business Volume

Our outstanding business volume was $22.0 billion as of September 30, 2020, a net decrease of $52.8 million from June 30, 2020, after taking into account all new business, maturities, and paydowns on existing assets. This net decrease was primarily attributable to net decreases of $335.3 million in the Institutional Credit line of business and $6.3 million in Rural Utilities, which was partially offset by net increases of $231.5 million in Farm & Ranch and $57.3 million in USDA Guarantees.

Farmer Mac's net business volume decrease of $52.8 million in third quarter 2020 was primarily attributable to maturities of $547.2 million in our Institutional Credit line of business due to reduced financing demand from those counterparties and tightening spreads in the institutional market.

The $231.5 million net increase in our Farm & Ranch line of business was comprised of a $399.5 million net increase in outstanding loan purchase volume, partially offset by net decreases of $159.7 million in loans held in consolidated trusts and $8.3 million in loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. During third quarter 2020, Farmer Mac syndicated a $15.0 million position of a newly purchased $59.2 million agricultural loan. The transaction represents new activity for Farmer Mac to broaden its relationships across the agricultural lending spectrum.

The $6.3 million net decrease in our Rural Utilities line of business was comprised of a $14.1 million net decrease in loans under LTSPCs, partially offset by $7.8 million net increase in outstanding loan purchase volume. During the third quarter, as part of our renewable energy project finance strategic initiative, Farmer Mac purchased a $10.0 million loan in connection with a wind project financing.

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

Table 3
As of
September 30, 2020 December 31, 2019
(in thousands)
Core capital $ 984,182  $ 815,437 
Capital in excess of minimum capital level required 314,235  196,669 

The increase in capital in excess of the minimum capital level required was primarily due to the Board-authorized issuance of the Series E Preferred Stock and Series F Preferred Stock and the increase in retained earnings, partially offset by growth in our outstanding business volume and the Board-authorized redemption of the Series A Preferred Stock.


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Current Expected Credit Loss

As noted above, Farmer Mac adopted CECL on January 1, 2020. Under CECL, we estimate and recognize expected credit losses over the lives of our financial assets. We base our estimate of expected losses on historical loss information and reasonable and supportable forecasts. In third quarter 2020, our reasonable and supportable forecasts included the impact of the COVID-19 pandemic on economic factors such as credit spreads and unemployment. Thus, our total provision for credit losses during the three months ended September 30, 2020 was affected by the ongoing economic effects of the COVID-19 pandemic.

As of September 30, 2020, Farmer Mac's allowance for losses on its on-balance sheet loan portfolio was $15.8 million (0.19% of all loans), compared to $10.5 million (0.15% of all loans) as of December 31, 2019. As of January 1, 2020, Farmer Mac recorded a cumulative transition adjustment of $1.5 million. For the three and nine months ended September 30, 2020, Farmer Mac recorded a provision to its allowance for loan losses of $0.9 million and $4.3 million, respectively.

As of September 30, 2020, Farmer Mac's reserve for losses on its off-balance sheet LTSPCs and Guaranteed Securities was $3.6 million (0.11% of all off-balance sheet LTSPCs and Guaranteed Securities), compared to $2.2 million (0.06% of all off-balance sheet LTSPCs and Guaranteed Securities) on December 31, 2019. As of January 1, 2020, Farmer Mac recorded a cumulative transition adjustment of $0.9 million. For both the three and nine months ended September 30, 2020, Farmer Mac recorded a provision to its reserve for its off-balance sheet portfolio of $0.5 million.

Credit Quality

The following table presents Farm & Ranch substandard assets, in dollars and as a percentage of the Farm & Ranch portfolio, for both on- and off-balance sheet assets as of September 30, 2020, June 30, 2020, and December 31, 2019:

Table 4
Farm & Ranch Line of Business
On-Balance Sheet Off-Balance Sheet
Substandard Assets % of Portfolio Substandard Assets % of Portfolio
(dollars in thousands)
September 30, 2020 $ 195,455  3.3  % $ 125,729  5.3  %
June 30, 2020 209,690  3.7  % 95,174  4.0  %
December 31, 2019 207,078  3.9  % 102,877  4.1  %
Increase/(decrease) from prior quarter-ending $ (14,235) (0.4) % $ 30,555  1.3  %
Increase/(decrease) from prior year-ending $ (11,623) (0.6) % $ 22,852  1.2  %
The decrease of $14.2 million in on-balance sheet substandard assets during third quarter 2020 was primarily driven by credit upgrades during the quarter. The overall Farm & Ranch portfolio grew by $239.8 million, which caused substandard assets as a percentage of the total on-balance sheet Farm & Ranch portfolio to decrease. The $30.6 million increase in substandard assets in our off-balance sheet Farm & Ranch portfolio during third quarter 2020 was primarily due to credit downgrades during the quarter. For an analysis of current loan-to-value ratios across substandard and other internally assigned risk ratings, see Table 27 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

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The following table presents Farm & Ranch 90-day delinquencies, in dollars and as a percentage of the Farm & Ranch portfolio, for both on- and off-balance sheet assets as of September 30, 2020, June 30, 2020, and December 31, 2019:
Table 5
Farm & Ranch Line of Business
On-Balance Sheet Off-Balance Sheet
90-Day
Delinquencies
% of Portfolio 90-Day
Delinquencies
% of Portfolio
(dollars in thousands)
September 30, 2020 $ 74,040  1.26  % $ 14,001  0.59  %
June 30, 2020 65,866  1.17  % 2,816  0.12  %
December 31, 2019 57,719  1.09  % 3,235  0.13  %
Increase/(decrease) from prior quarter-ending $ 8,174  0.09  % $ 11,185  0.47  %
Increase/(decrease) from prior year-ending $ 16,321  0.17  % $ 10,766  0.46  %
The sequential increase in 90-day delinquencies is primarily due to the seasonal payment pattern 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. The sequential increase was primarily driven by two commodity groups – crops and livestock. Other commodity groups experienced small decreases in 90-day delinquencies or remained stable. The top ten borrower exposures over 90 days delinquent represented over half of the 90-day delinquencies as of September 30, 2020.

In the Rural Utilities portfolio, one $4.5 million loan was downgraded to substandard in the previous quarter and remained substandard in third quarter 2020. There were no delinquencies in the Rural Utilities portfolio as of September 30, 2020.

For more information about Farmer Mac's credit metrics, including 90-day delinquencies, the total allowance for losses, and substandard assets, as well as the effects of the COVID-19 pandemic on loan payment deferments, 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 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.


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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.

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 we believe are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. For example, we have excluded from core earnings losses on retirement of preferred stock and, in prior periods, the re-measurement of the deferred tax asset. 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) the fair value changes of financial derivatives and the corresponding assets or liabilities designated in a fair value hedge accounting 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 in determining Farmer Mac's core earnings. Farmer Mac also excludes from net effective spread the 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, as we expect to hold the financial derivatives and corresponding hedged items to maturity.

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 accounting relationships ("undesignated financial derivatives"). Farmer Mac uses interest rate swaps to manage its interest rate risk exposure by synthetically modifying the

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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 accounting 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 "(Losses)/gains on financial derivatives" 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 differs from net interest income and net interest yield because it includes the net effects of terminations or net settlements on financial derivatives, which consist of: (1) the net effects of cash settlements on agency forward contracts on the debt of other GSEs and U.S. Treasury security futures that we use as short-term economic hedges on the issuance of debt; and (2) the net effects of initial cash payments that Farmer Mac receives upon the inception of certain swaps. The inclusion of these items in net effective spread is intended to reflect our 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 accounting relationship.

For a reconciliation of net interest income and net interest yield to net effective spread, see Table 11 in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Net Interest Income."

Results of Operations

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 6
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
For the Three Months Ended
September 30, 2020 September 30, 2019
(in thousands, except per share amounts)
Net income attributable to common stockholders $ 18,659  $ 14,406 
Less reconciling items:    
Losses on undesignated financial derivatives due to fair value changes (see Table 14) (4,149) (7,117)
Losses on hedging activities due to fair value changes (5,245) (4,535)
Unrealized (losses)/gains on trading securities (258) 49 
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 97  (7)
Net effects of terminations or net settlements on financial derivatives 233  232 
Issuance costs on the retirement of preferred stock (1,667) — 
Income tax effect related to reconciling items 1,957  2,389 
Sub-total (9,032) (8,989)
Core earnings $ 27,691  $ 23,395 
Composition of Core Earnings:
Revenues:
Net effective spread(1)
$ 51,802  $ 42,461 
Guarantee and commitment fees(2)
4,659  5,208 
Other(3)
453  389 
Total revenues 56,914  48,058 
Credit related expense (GAAP):
Provision for losses 1,200  623 
Total credit related expense 1,200  623 
Operating expenses (GAAP):
Compensation and employee benefits 8,791  7,654 
General and administrative 5,044  5,253 
Regulatory fees 725  688 
Total operating expenses 14,560  13,595 
Net earnings 41,154  33,840 
Income tax expense(4)
8,297  7,018 
Preferred stock dividends (GAAP) 5,166  3,427 
Core earnings $ 27,691  $ 23,395 
Core earnings per share:
  Basic $ 2.58  $ 2.19 
  Diluted 2.57  2.17 
Weighted-average shares:
  Basic 10,734  10,706 
  Diluted 10,785  10,776 
(1)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 11 for a reconciliation of net interest income to net effective spread.
(2)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.

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(3)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 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.
(4)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, 2020 September 30, 2019
(in thousands, except per share amounts)
Net income attributable to common stockholders $ 59,745  $ 64,584 
Less reconciling items:    
(Losses)/gains on undesignated financial derivatives due to fair value changes (see Table 14) (1,933) 5,608 
Losses on hedging activities due to fair value changes (13,846) (8,790)
Unrealized (losses)/gains on trading securities (173) 154 
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 135  (162)
Net effects of terminations or net settlements on financial derivatives (346) (250)
Issuance costs on the retirement of preferred stock (1,667) (1,956)
Income tax effect related to reconciling items 3,394  722 
Sub-total (14,436) (4,674)
Core earnings $ 74,181  $ 69,258 
Composition of Core Earnings:
Revenues:
Net effective spread(1)
$ 142,434  $ 122,617 
Guarantee and commitment fees(2)
14,498  15,903 
Other(3)
2,175  1,675 
Total revenues 159,107  140,195 
Credit related expense (GAAP):
Provision for losses 5,082  650 
REO operating expenses —  64 
Gains on sale of REO (485) — 
Total credit related expense 4,597  714 
Operating expenses (GAAP):
Compensation and employee benefits 27,005  22,030 
General and administrative 15,702  14,538 
Regulatory fees 2,175  2,063 
Total operating expenses 44,882  38,631 
Net earnings 109,628  100,850 
Income tax expense(4)
22,911  21,084 
Preferred stock dividends (GAAP) 12,536  10,508 
Core earnings $ 74,181  $ 69,258 
Core earnings per share:
  Basic $ 6.92  $ 6.48 
  Diluted 6.88  6.43 
Weighted-average shares:
  Basic 10,725  10,691 
  Diluted 10,781  10,774 
(1)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 11 for a reconciliation of net interest income to net effective spread.

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(2)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.
(3)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 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.
(4)Includes the tax impact of non-GAAP reconciling items between net income attributable to common stockholders and core earnings.

Table 7
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, 2020 September 30, 2019 September 30, 2020 September 30, 2019
(in thousands, except per share amounts)
GAAP - Basic EPS $ 1.74  $ 1.34  $ 5.57  $ 6.04 
Less reconciling items:
(Losses)/gains on undesignated financial derivatives due to fair value changes (see Table 14) (0.39) (0.66) (0.18) 0.52 
Losses on hedging activities due to fair value changes (0.49) (0.42) (1.29) (0.82)
Unrealized (losses)/gains on trading securities (0.02) —  (0.02) 0.01 
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 0.01  —  0.01  (0.02)
Net effects of terminations or net settlements on financial derivatives 0.02  0.02  (0.03) (0.02)
Issuance costs on the retirement of preferred stock (0.15) —  (0.16) (0.18)
Income tax effect related to reconciling items 0.18  0.21  0.32  0.07 
Sub-total (0.84) (0.85) (1.35) (0.44)
Core Earnings - Basic EPS $ 2.58  $ 2.19  $ 6.92  $ 6.48 
Shares used in per share calculation (GAAP and Core Earnings) 10,734  10,706  10,725  10,691 

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, 2020 September 30, 2019 September 30, 2020 September 30, 2019
(in thousands, except per share amounts)
GAAP - Diluted EPS $ 1.73  $ 1.33  $ 5.54  $ 5.99 
Less reconciling items:
(Losses)/gains on undesignated financial derivatives due to fair value changes (see Table 14) (0.39) (0.66) (0.18) 0.52 
Losses on hedging activities due to fair value changes (0.49) (0.42) (1.28) (0.82)
Unrealized (losses)/gains on trading securities (0.02) —  (0.02) 0.01 
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 0.01  —  0.01  (0.02)
Net effects of terminations or net settlements on financial derivatives 0.02  0.02  (0.03) (0.02)
Issuance costs on the retirement of preferred stock (0.15) —  (0.15) (0.18)
Income tax effect related to reconciling items 0.18  0.22  0.31  0.07 
Sub-total (0.84) (0.84) (1.34) (0.44)
Core Earnings - Diluted EPS $ 2.57  $ 2.17  $ 6.88  $ 6.43 
Shares used in per share calculation (GAAP and Core Earnings) 10,785  10,776  10,781  10,774 


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

1. Losses on financial derivatives due to fair value changes are presented by two reconciling items in Table 6 above: (a) (Losses)/gains on undesignated financial derivatives due to fair value changes; and (b) Losses on hedging activities due to fair value changes. The table below calculates the non-GAAP reconciling item for losses on hedging activities due to fair value changes:

Table 8
Non-GAAP Reconciling Items for (Losses)/Gains on Hedging Activities due to Fair Value Changes
   For the Three Months Ended For the Nine Months Ended
   September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
(in thousands)
Losses due to fair value changes (see Table 4.2) $ (5,047) $ (4,490) $ (13,109) $ (8,617)
Initial cash payment (received) at inception of swap (198) (45) (737) (173)
Losses on hedging activities due to fair value changes $ (5,245) $ (4,535) $ (13,846) $ (8,790)

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. 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 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," while the economically offsetting discount on the associated hedged debt is amortized over the term of the debt as an adjustment to its yield. For purposes of core earnings, 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.

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5. The recognition of deferred issuance costs on the retirements of the Series A Preferred Stock and Series B Preferred Stock in third quarter 2020 and second quarter 2019, respectively, has been excluded from core earnings because they are not frequently occurring transactions, nor are they indicative of future operating results. This is consistent with Farmer Mac's previous treatment of deferred issuance costs associated with the retirement of preferred stock.
The following sections provide more detail about specific components of Farmer Mac's results of operations.

Net Interest Income.  The following table provides information about interest-earning assets and funding for the nine months ended September 30, 2020 and 2019. 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 9
   For the Nine Months Ended
  September 30, 2020 September 30, 2019
Average
Balance
Income/
Expense
Average
Rate
Average
Balance
Income/
Expense
Average
Rate
  (dollars in thousands)
Interest-earning assets:          
Cash and investments $ 3,965,371  $ 35,236  1.18  % $ 3,118,378  $ 61,718  2.64  %
Loans, Farmer Mac Guaranteed Securities and USDA Securities(1)
16,780,558  309,051  2.46  % 15,019,083  374,767  3.33  %
Total interest-earning assets 20,745,929  344,287  2.21  % 18,137,461  436,485  3.21  %
Funding:          
Notes payable due within one year 3,626,550  21,654  0.80  % 3,785,429  67,930  2.39  %
Notes payable due after one year(2)
16,828,032  193,315  1.53  % 13,760,960  250,428  2.43  %
Total interest-bearing liabilities(3)
20,454,582  214,969  1.40  % 17,546,389  318,358  2.42  %
Net non-interest-bearing funding 291,347  —    591,072  —   
Total funding 20,745,929  214,969  1.38  % 18,137,461  318,358  2.34  %
Net interest income/yield prior to consolidation of certain trusts 20,745,929  129,318  0.83  % 18,137,461  118,127  0.87  %
Net effect of consolidated trusts(4)
1,436,353  5,003  0.46  % 1,546,443  5,638  0.49  %
Net interest income/yield $ 22,182,282  $ 134,321  0.81  % $ 19,683,904  $ 123,765  0.84  %
(1)Excludes interest income of $41.8 million and $45.7 million, in the first nine months of 2020 and 2019, 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 $36.8 million and $40.0 million in the first nine months of 2020 and 2019, 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.

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The $10.6 million year-over-year increase in net interest income was primarily due to net growth across most lines of business, which contributed $16.6 million towards the increase in net interest income. This increase was partially offset by the decrease of $4.5 million in net fair value changes from fair value hedge accounting relationships as a result of material changes in market interest rates and a $1.8 million increase in funding and liquidity costs. In percentage terms, the decrease of 0.03% was primarily attributable to an increase of 0.04% in funding and liquidity costs and a decrease of 0.03% in net fair value changes from fair value hedge accounting relationships. These decreases were partially offset by an increase of 0.03% related to net volume growth.

The following table sets forth information about 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 10
   For the Nine Months Ended September 30, 2020 Compared to Same Period in 2019
  Increase/(Decrease) Due to
  Rate Volume Total
  (in thousands)
Income from interest-earning assets:      
Cash and investments $ (40,196) $ 13,714  $ (26,482)
Loans, Farmer Mac Guaranteed Securities and USDA Securities (106,109) 40,393  (65,716)
Total (146,305) 54,107  (92,198)
Expense from other interest-bearing liabilities (149,880) 46,491  (103,389)
Change in net interest income prior to consolidation of certain trusts(1)
$ 3,575  $ 7,616  $ 11,191 
(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, 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 accounting relationships is already included in net interest income), and (2) the amortization of losses due to terminations or net settlements of financial derivatives; 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) 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 about net effective spread.

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Table 11
   For the Three Months Ended For the Nine Months Ended
  September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
  Dollars Yield Dollars Yield Dollars Yield Dollars Yield
  (dollars in thousands)
Net interest income/yield $ 44,661  0.78  % $ 40,112  0.78  % $ 134,321  0.80  % $ 123,765  0.84  %
Net effects of consolidated trusts (1,500) 0.02  % (1,859) 0.02  % (5,003) 0.03  % (5,638) 0.03  %
Expense related to undesignated financial derivatives 3,613  0.07  % (268) —  % —  % (4,370) (0.03) %
Amortization of premiums/discounts on assets consolidated at fair value (81) —  % 28  —  % (92) —  % 341  —  %
Amortization of losses due to terminations or net settlements on financial derivatives 62  —  % (42) —  % 90  —  % (98) —  %
Fair value changes on fair value hedge relationships 5,047  0.09  % 4,490  0.10  % 13,109  0.09  % 8,617  0.06  %
Net effective spread $ 51,802  0.96  % $ 42,461  0.90  % $ 142,434  0.92  % $ 122,617  0.90  %

For the three months ended September 30, 2020 compared to the same period in 2019, the $9.3 million increase in net effective spread in dollars was primarily due to net growth in outstanding business volume, which increased net effective spread by approximately $6.5 million, and a $2.2 million decrease in non-GAAP funding costs.

For the first nine months of 2020 compared to the same period in 2019, the $19.8 million increase in net effective spread in dollars was primarily due to net growth in outstanding business volume, which increased net effective spread by approximately $16.6 million, and a $2.8 million decrease in non-GAAP funding costs.

See Note 10 to the consolidated financial statements for more information about 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.


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Provision for and Release of Allowance for 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, 2020 and 2019:

Table 12
As of September 30, 2020 As of September 30, 2019
Allowance
for
Losses
Reserve
for Losses
Total
Allowance
for Losses
Allowance
for
Losses
Reserve
for Losses
Total
Allowance
for Losses
(in thousands)
For the Three Months Ended:
Beginning balance $ 15,758  $ 3,020  $ 18,778  $ 7,264  $ 1,880  $ 9,144 
Provision for/(release of) losses 646  548  1,194  760  (137) 623 
Ending Balance $ 16,404  $ 3,568  $ 19,972  $ 8,024  $ 1,743  $ 9,767 
For the Nine Months Ended:
Beginning balance $ 10,454  $ 2,164  $ 12,618  $ 7,017  $ 2,167  $ 9,184 
Cumulative effect adjustment from adoption of current expected credit loss standard 1,793  863  2,656  —  —  — 
Adjusted beginning balance 12,247  3,027  15,274  7,017  2,167  9,184 
Provision for/(release of) losses 4,551  541  5,092  1,074  (424) 650 
Charge-offs (394) —  (394) (67) —  (67)
Ending balance $ 16,404  $ 3,568  $ 19,972  $ 8,024  $ 1,743  $ 9,767 

The cumulative effect adjustment from the adoption of CECL on January 1, 2020 was $2.7 million and was recorded directly to retained earnings, net of tax. The transition adjustment was the difference between (1) the total allowance for losses on December 31, 2019 that reflected probable incurred losses and (2) the total allowance for losses on January 1, 2020 that reflected expected losses.

The cumulative effect adjustment for credit losses on on-balance sheet assets was $1.8 million and was comprised of an increase of $5.4 million to the allowance for losses on Rural Utilities loans and Farmer Mac Guaranteed Securities and a $3.6 million decrease in the allowance for losses on Farm & Ranch loans and Farmer Mac Guaranteed Securities. Although Farmer Mac has never experienced any credit losses in its portfolio of Rural Utilities loans and Farmer Mac Guaranteed Securities, our estimate of expected losses is based upon reasonable and supportable forecasts over the expected lives of these assets. The reduction in the allowance for losses on Farm & Ranch loans and Farmer Mac Guaranteed Securities reflects the expected recovery rate based on loan-to-value ratios in those portfolios.

The cumulative effect adjustment for credit losses on LTSPCs was $0.9 million and was comprised of an increase of $1.0 million on Rural Utilities LTSPCs and a decrease of $0.1 million on Farm & Ranch LTSPCs.

For third quarter 2020, our forecasts continued to include the effects of the COVID-19 pandemic on economic factors such as land values, gross domestic product, credit spreads, and unemployment. The provision to Farmer Mac's allowance for losses for on-balance sheet assets was $0.6 million and was comprised of $1.2 million for expected losses on Rural Utilities loans and Farmer Mac Guaranteed Securities and a release of $0.5 million on Farm & Ranch loans and Farmer Mac Guaranteed Securities. Our economic factor forecast in the third quarter 2020 improved from our second quarter 2020 forecast. However, the impact of our updated economic factor forecast on our Rural Utilities portfolio was more

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than offset by net business volume growth. Similarly, updated third quarter economic factors had an impact on our Farm & Ranch portfolio where improving commodity prices and lower expected volatility in land values decreased expected losses for our lowest risk-rated assets. The provision to Farmer Mac's reserve for losses on our off-balance sheet portfolio was $0.5 million, primarily related to Farm & Ranch LTSPCs, and was driven by deteriorated credit quality in that portfolio in the third quarter.

Our estimates of expected losses are based on historical information and reasonable and supportable forecasts. Our reasonable and supportable forecasts incorporate economic factor forecasts and are sensitive to changes in those economics factor forecasts. As of September 30, 2020, our estimate of expected credit losses considered the economic volatility from the COVID-19 pandemic. In particular, the continued stabilization of credit spreads and uncertainty in unemployment expectations were the two economic factors that had the most significant impact. These economic factors also had a more significant impact on our estimate of expected losses in Farmer Mac's Rural Utilities portfolio than in the Farm & Ranch portfolio because of stable farm land values and stable credit quality in the Farm & Ranch portfolio during the first, second, and third quarters.

See Notes 5 and 6 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.  The following table presents 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, for the three and nine months ended September 30, 2020 and 2019:

Table 13
For the Three Months Ended For the Nine Months Ended
Change Change
September 30, 2020 September 30, 2019 $ % September 30, 2020 September 30, 2019 $ %
(dollars in thousands)
Guarantee and commitment fees $ 3,159  $ 3,349  $ (190) (6) % $ 9,495  $ 10,265  $ (770) (8) %

In Farmer Mac's presentation of core earnings, guarantee and commitment fees 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. The decrease in guarantee and commitment fees for the three and nine months ended September 30, 2020 compared to the same periods in 2019 was primarily due to decreased LTSPC volume. As adjusted for the core earnings presentation, guarantee and commitment fees were $4.7 million and $14.5 million for the three and nine months ended September 30, 2020, respectively, compared to $5.2 million and $15.9 million for the three and nine months ended September 30, 2019, respectively.

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."

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(Losses)/gains on financial derivatives.  The components of gains and losses on financial derivatives for the three and nine months ended September 30, 2020 and 2019 are summarized in the following table:

Table 14
  For the Three Months Ended For the Nine Months Ended
Change Change
  September 30, 2020 September 30, 2019 $ % September 30, 2020 September 30, 2019 $ %
  (dollars in thousands)
(Losses)/gains due to fair value changes $ (4,149) $ (7,117) $ 2,968  (42) % $ (1,933) $ 5,608  $ (7,541) (134) %
Accrual of contractual payments 3,613  (268) 3,881  (1448) % 10  (4,370) 4,380  (100) %
(Losses)/gains due to terminations or net settlements (28) 25  (53) (212) % (1,416) (45) (1,371) 3,047  %
(Losses)/gains on financial derivatives $ (564) $ (7,360) $ 6,796  (92) % $ (3,339) $ 1,193  $ (4,532) (380) %

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 undesignated financial derivatives is shown as expense related to financial derivatives. Payments or receipts to terminate undesignated derivative positions or net cash settled forward sales contracts on the debt of other GSEs and undesignated U.S. Treasury security futures and initial cash payments received upon the inception of certain undesignated swaps are included in "(Losses)/gains due to terminations or net settlements" in the table above. For undesignated 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 amount of the discount on the associated hedged debt. Changes in the fair value of these swaps are recognized immediately in "(Losses)/gains on financial derivatives," while 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 on the number of the aforementioned type of swaps it executes during a quarter.

Other Income. The following table presents other income for the three and nine months ended September 30, 2020 and 2019:

Table 15
  For the Three Months Ended For the Nine Months Ended
Change Change
  September 30, 2020 September 30, 2019 $ % September 30, 2020 September 30, 2019 $ %
  (dollars in thousands)
Late fees $ 236  $ 360  $ (124) (34) % $ 1,124  $ 929  $ 195  21  %
Other 358  170  188  111  % 1,515  449  1,066  237  %
Total other income $ 594  $ 530  $ 64  12  % $ 2,639  $ 1,378  $ 1,261  92  %


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The increase in other fees is primarily due to an increase in the fees received from borrowers to modify their long-term fixed borrowing rate to a new lower rate.

Operating Expenses. The components of operating expenses for the three and nine months ended September 30, 2020 and 2019 are summarized in the following table:

Table 16
  For the Three Months Ended For the Nine Months Ended
Change Change
  September 30, 2020 September 30, 2019 $ % September 30, 2020 September 30, 2019 $ %
  (dollars in thousands)
Compensation and employee benefits $ 8,791  $ 7,654  $ 1,137  15  % $ 27,005  $ 22,030  $ 4,975  23  %
General and administrative 5,044  5,253  (209) (4) % 15,702  14,538  1,164  %
Regulatory fees 725  688  37  % 2,175  2,063  112  %
Total Operating Expenses $ 14,560  $ 13,595  $ 965  % $ 44,882  $ 38,631  $ 6,251  16  %

a.Compensation and Employee Benefits. The increase in compensation and employee benefits expenses for the three months ended September 30, 2020 compared to the same period in 2019 was primarily due to lower than expected bonus payments in the prior year period and increased headcount in the current period. The increase in compensation and employee benefits expenses for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to an increase in bonus expense in first quarter 2020 due to 2019 financial performance and the severance payments made to an executive who resigned in first quarter 2020.

b.General and Administrative Expenses (G&A). The decrease in G&A expenses for the three months ended September 30, 2020 compared to the same period in 2019 was primarily due to reduced travel to attend in-person meetings and industry events. The increase in G&A expenses for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to increased spending on software licenses and information technology consultants to support growth and strategic initiatives.

Income Tax Expense. The following table presents income tax expense and the effective income tax rate for the three and nine months ended September 30, 2020 and 2019:

Table 17
  For the Three Months Ended For the Nine Months Ended
Change Change
  September 30, 2020 September 30, 2019 $ % September 30, 2020 September 30, 2019 $ %
  (dollars in thousands)
Income tax expense $ 6,340  $ 4,629  $ 1,711  37  % $ 19,516  $ 20,362  $ (846) (4) %
Effective tax rate 19.9  % 20.6  % (0.7) % 20.9  % 20.9  % —  %



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Business Volume.  

The following table sets forth the net growth or decrease under Farmer Mac's lines of business for the three and nine months ended September 30, 2020 and 2019:

Table 18
Net New Business Volume – Farmer Mac Loan Purchases, Guarantees, LTSPCs, and AgVantage Securities
  For the Three Months Ended For the Nine Months Ended
  September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Net Growth/(Decrease) Net Growth/(Decrease) Net Growth/(Decrease) Net Growth/(Decrease)
  (in thousands)
Farm & Ranch:
Loans $ 239,812  $ 82,707  $ 580,768  $ 248,643 
LTSPCs (8,313) 19,668  (108,368) (88,888)
USDA Guarantees:
USDA Securities 76,949  41,027  193,487  15,775 
Farmer Mac Guaranteed USDA Securities (19,626) 5,342  (78,533) 36,368 
Rural Utilities:
Loans 7,786  85,623  438,062  673,930 
LTSPCs (14,100) (8,692) (33,326) (33,444)
Institutional Credit:
AgVantage securities (335,328) (40,051) (120,744) 355,450 
Total purchases, guarantees, LTSPCs, and AgVantage securities $ (52,820) $ 185,624  $ 871,346  $ 1,207,834 

Our outstanding business volume was $22.0 billion as of September 30, 2020, a net decrease of $52.8 million from June 30, 2020 after taking into account all new business, maturities, and repayments on existing assets. This net decrease consisted of decreases of $335.3 million in Institutional Credit and $6.3 million in Rural Utilities, partially offset by increases of $231.5 million in Farm & Ranch and $57.3 million in USDA Guarantees.

The $231.5 million net increase in our Farm & Ranch line of business was comprised of a $399.5 million net increase in outstanding loan purchase volume, partially offset by net decreases of $159.7 million in loans held in consolidated trusts and $8.3 million in loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities. The net growth in third quarter 2020 reflected our ability to retain borrowers in a decreasing interest rate environment by proactively engaging with our customers and adjusting their rates and loan sizes to reflect current market conditions and their specific funding needs. Our net growth of 21.1% in Farm & Ranch loan purchases over the twelve months ended September 30, 2020 is significantly higher than the 3.5% net growth of the overall agricultural mortgage loan market over the twelve months ended June 30, 2020 (based on our analysis of bank and Farm Credit System call report data). During third quarter 2020, Farmer Mac syndicated a $15.0 million position of a newly purchased $59.2 million agricultural loan. This transaction represents new activity for Farmer Mac to broaden its relationships across the agricultural lending spectrum.

Our USDA Guarantees line of business grew by $57.3 million in third quarter 2020. The third quarter gross volume of $225.5 million was the highest gross volume that we have ever recorded in any quarter. This growth reflected the positive effect of adjustments that we made to our product structure in the

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second half of 2019 to more effectively meet customer demands in an increasingly competitive environment and in response to increased loan limits mandated by the 2018 Farm Bill described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook" in this report.

The $335.3 million net decrease in the Institutional Credit line of business during third quarter 2020 was due primarily to three large counterparties who reduced their amount of outstanding credit in connection with scheduled maturities and payments on multiple AgVantage bonds. Changes in quarterly AgVantage securities volume are primarily driven by the generally larger transaction sizes for that product, scheduled maturity amounts for a particular quarter, the liquidity needs of Farmer Mac’s AgVantage counterparties, and changes in the pricing and availability of wholesale funding.

The $6.3 million net decrease in our Rural Utilities line of business was comprised of a $14.1 million net decrease in loans under LTSPCs, partially offset by $7.8 million net increase in outstanding loan purchase volume. During the third quarter, as part of our renewable energy project finance strategic initiative, Farmer Mac purchased a $10.0 million loan in connection with a wind project financing.

The level and composition of Farmer Mac’s outstanding business volume is based on the relationship between new business, maturities, and repayments on existing assets from quarter to quarter. This relationship in turn depends on a variety of factors both internal and external to Farmer Mac. The external factors include general market forces, competition, and our counterparties’ liquidity needs, access to alternative funding, desired products, and assessment of strategic factors. The internal factors include our assessment of profitability, mission fulfillment, credit risk, and customer relationships. 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 information about the Farmer Mac Guaranteed Securities issued during the periods indicated:

Table 19
  For the Three Months Ended For the Nine Months Ended
  September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
  (in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities $ 36,562  $ 23,539  $ 64,612  $ 141,543 
Farmer Mac Guaranteed USDA Securities —  9,506  —  57,853 
AgVantage securities 211,908  402,611  1,202,327  1,887,475 
Total Farmer Mac Guaranteed Securities Issuances $ 248,470  $ 435,656  $ 1,266,939  $ 2,086,871 

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 third quarter 2020 and 2019 was less than one year. Of those loans, 68% and 57% had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 23.2 years and 15.7 years for each period, respectively.

During third quarter 2020 and 2019, Farmer Mac securitized some of the Farm & Ranch loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities, as shown above. During the three

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and nine months ended September 30, 2020 and 2019, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities or USDA Securities. 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, 2020, no Farmer Mac Guaranteed Securities were sold to a related party to Farmer Mac. For the same periods in 2019, none and $63.1 million, respectively, of Farmer Mac Guaranteed Securities were sold to a related party (related by virtue of its owning more than 10% of Farmer Mac's Class A voting common stock).

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 20
Lines of Business - Outstanding Business Volume
  As of September 30, 2020 As of December 31, 2019
  (in thousands)
Farm & Ranch:
Loans $ 4,580,917  $ 3,675,640 
Loans held in trusts:
Beneficial interests owned by third party investors 1,276,407  1,600,917 
LTSPCs 2,306,258  2,393,071 
Guaranteed Securities 85,767  107,322 
USDA Guarantees:
USDA Securities 2,388,033  2,199,072 
Farmer Mac Guaranteed USDA Securities 347,095  421,103 
Rural Utilities:
Loans 2,109,355  1,671,293 
LTSPCs(1)
575,954  609,278 
Institutional Credit
AgVantage Securities 8,319,502  8,440,246 
Total $ 21,989,288  $ 21,117,942 
(1)As of both September 30, 2020 and December 31, 2019, includes $20.0 million related to one-year loan purchase commitments on which Farmer Mac receives a nominal unused commitment fee.



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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, 2020:

Table 21
Schedule of Principal Amortization as of September 30, 2020
Loans Held Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs  USDA Securities and Farmer Mac Guaranteed USDA Securities Total
(in thousands)
2020 $ 45,391  $ 49,343  $ 28,755  $ 123,489 
2021 345,908  284,701  117,967  748,576 
2022 329,020  229,875  118,498  677,393 
2023 336,023  207,961  122,972  666,956 
2024 338,270  180,155  122,258  640,683 
Thereafter 6,572,067  2,015,944  2,224,678  10,812,689 
Total $ 7,966,679  $ 2,967,979  $ 2,735,128  $ 13,669,786 

Of the $22.0 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of September 30, 2020, $8.3 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, 2020:

Table 22
AgVantage Balances by Year of Maturity
  As of
  September 30, 2020
  (in thousands)
2020 $ 633,585 
2021 1,830,376 
2022 1,585,268 
2023 1,012,894 
2024 828,108 
Thereafter(1)
2,429,271 
Total $ 8,319,502 
(1)Includes various maturities ranging from 2025 to 2044.


The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 4.7 years as of September 30, 2020.  


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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. The pace of Farmer Mac’s growth will depend on the capital and liquidity needs of the lending institutions in the agricultural and rural financing business as well as the overall health of agriculture and rural borrowers in the sectors we serve.
Farmer Mac foresees opportunities for profitable growth across our lines of business driven by several key factors:

As agricultural and rural utilities lenders seek to manage equity capital and return on equity capital requirements or seek to reduce exposure due to lending or concentration limits, Farmer Mac can provide relief for those institutions through loan and portfolio purchases, participations, guarantees, LTSPCs, or wholesale funding.

While overall loan growth within the rural utilities industry appears to be moderate in the near term due to generally flat demand for capital, future growth opportunities may increase in Farmer Mac’s Rural Utilities line of business from deepening business relationships with eligible counterparties, broadband-related capital expenditures, and the exploration of new types of loan products. These opportunities may be limited by sector growth, credit quality, and the competitiveness of Farmer Mac’s products.

As a result of business and product development efforts, and continued interest in the agricultural asset class from institutional investors, Farmer Mac’s customer base and product set continue to expand, which may generate more demand for Farmer Mac’s products from new sources.

Consolidation within the agricultural finance industry, coupled with Farmer Mac’s relationships with larger regional and national lenders, continue to provide opportunities that could influence Farmer Mac’s loan demand and increase the average transaction size within Farmer Mac’s Farm & Ranch line of business.

Expansion and refinancing opportunities for agricultural producers resulting from a decrease in interest rates have increased financing requirements for mergers and acquisitions, consolidation, and vertical integration across many sectors of the agricultural industry, which may also generate demand for Farmer Mac’s loan products.

The COVID-19 pandemic and related efforts to contain it continue to create disruptions to the global economy. Government stimulus programs designed to mitigate the economic impacts of the pandemic as well as significant liquidity support by the Federal Reserve to facilitate the functioning of the capital markets has reduced volatility to the economy and the sectors we serve. However, the duration, severity, and continued spread of the pandemic and the ongoing effectiveness of government efforts taken to contain COVID-19 and mitigate public health and economic effects continue to evolve and remain uncertain. For a further discussion of the uncertainties and risks associated with the COVID-19 pandemic on Farmer Mac and its business, see the factors discussed under "Risk Factors" in Part II, Item 1A of this report

Farmer Mac’s mission is to support rural America during this pandemic, and the disruptions caused by COVID-19 may present some new and expanded opportunities for Farmer Mac to help meet the financing needs of rural America as well as presenting uncertainties and risks. The pandemic's effect on our growth objectives and outlook will depend on many factors, including:

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The potential negative economic impact to rural and agricultural borrowers due to a resurgence and prolonging of the pandemic and recession, the length of time before normal economic and operating conditions can resume, and whether there are lingering effects to the economy after the COVID-19 pandemic is over as a result of the disruption to the global economy, the domestic agricultural economy, and recession.

Increasing borrower payment deferral requests and the duration of approved deferrals, including payments made to holders of Farmer Mac Guaranteed Securities to cover principal and interest shortfalls, could consume some capital which would otherwise have been available for certain planned growth initiatives. For more information about the impact of COVID-19 on Farmer Mac's payment deferral requests received to date, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Stress on commodity and agriculture exports as a result of global trade disruptions caused by a resurgence of the COVID-19 pandemic and geopolitical trade disputes, which could create downward pressure on commodity prices and further stress borrowers’ liquidity and negatively impact loan growth opportunities.

The inability of borrowers in the pandemic to close on agricultural or renewable energy loans due to limited access to local or state administrative offices, delays in receiving equipment components, installation inefficiencies caused by social distancing among workers, and difficulties in obtaining inspections and grid interconnection on a timely basis could limit our opportunities to purchase agricultural or renewable energy loans.

Delays and postponements of planned or potential mergers and acquisitions, consolidations, and vertical integrations as a result of the COVID-19 pandemic and, consequently, a potential reduction in the need for Farmer Mac’s products and services until the global economy recovers and the flow of transactions returns to pre-pandemic levels.

Disruptions in the capital markets and the widening of credit spreads could impact Farmer Mac’s funding costs and could result in higher interest rates charged for our products and services, which could adversely affect our competitiveness in the sectors we serve.

If borrowers seek to obtain additional financing and liquidity from lenders to maintain operations and production during this time, or to make up for lost productivity due to shutdowns, delays, and social distancing requirements, these short-term funding requirements could create additional growth opportunities for Farmer Mac as other lenders look to manage lending limits and credit concentrations as short-term financing demands arise.

Financial market volatility, coupled with uncertainty regarding the long-term impacts of the pandemic, is causing some financial institutions to delay or cease capital deployment to many sectors that Farmer Mac serves. While these reductions could reduce our loan purchase opportunities, Farmer Mac could also provide a much-needed source of secondary market liquidity to help stimulate capital deployment during this time of uncertainty.


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Operating Expense. 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 continued increases in its operating expenses over the next several years corresponding to business and revenue growth. We expect these efforts to continue and increase over the next 12 - 18 months as we innovate and grow our business.

Operations. On March 12, 2020, Farmer Mac activated its business continuity plan and has been operating uninterruptedly since then, with all of its employees working remotely from their homes. Farmer Mac has provided guidance and support to all of its employees to ensure that they have the tools and knowledge needed to effectively work from home, and Farmer Mac’s technology platform and business continuity plan have been functioning as designed in support of all functions of the organization with no material disruption of business. As a secondary market participant in the agricultural and rural utility lending space, Farmer Mac's business model is already based on a remote interface with its customers and vendors. We do not expect Farmer Mac's remote-working environment to have a material effect on our operations either in the near term or for the foreseeable future.

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. The interconnectedness between sectors typically results in cycles where one or more segments may be under stress while others are not.

The COVID-19 pandemic continues to impact the agricultural sector, although economic conditions continued to improve during third quarter 2020. Sudden school and restaurant closures in March and April dramatically altered the supply and demand functions for food. U.S. Census Advance Retail Sales Data indicates that, after dropping 50 percent in April, U.S. consumer spending for food services away from home rebounded to 85 percent of pre-pandemic levels. Much of the decline has been picked up in consumer spending at grocery stores, which was up more than 10 percent in September 2020 compared to the prior year. Farm production and food processing take a higher net margin of the food dollar spent at home, so the shift of consumer spending on food at home could offset some of the losses from sales to restaurants and schools. According to data from the U.S. Energy Information Administration, after dropping nearly 50 percent in April, ethanol production rebounded to over 90 percent of pre-pandemic levels through October as drivers returned to the roads. Ethanol is a primary demand driver for corn. Many agricultural commodity prices, rebounded significantly in September and October on reduced global supplies and increased foreign demand, particularly from China. Farm labor and food processing worker health and availability remain a top industry concern as a resurgence of COVID-19 cases could adversely affect the food processing industry again this year and into 2021.

The decline in revenue experienced by many agricultural producers during the first nine months of 2020 had multiple offsets to help support producers’ profitability. First, farm expenses fell for many producers during the first half of 2020. Lower energy prices improved the cost of fuel and fertilizer ahead of the planting season. Lower grain prices in the second quarter led to a temporary decrease in animal feed input costs, and lower replacement animal prices improved the cost structure for many protein producers. Second, USDA issued a final $3.7 billion Market Facilitation Program (MFP) cash payment in April and May 2020 to address market losses from trade disruptions. Third, in response to the COVID-19 pandemic, Congress passed a series of measures, including the CARES Act on March 27, 2020, which provided over $2 trillion in economic stimulus to support various aspects of the U.S. economy. The

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CARES Act contained a $9.5 billion emergency fund for the USDA aimed toward providing help to livestock, dairy, and produce providers who sell locally. It also included a $14 billion replenishment of the Commodity Credit Corporation ("CCC"), a line of credit at the U.S. Treasury Department that USDA can use to help crop and livestock producers. In April 2020, the USDA announced that it would provide $19 billion of assistance through the Coronavirus Food Assistance Program ("CFAP"). CFAP used the funding and authorities provided in the CARES Act, the Families First Coronavirus Response Act, and other USDA existing authorities to provide $16 billion in direct payments to distribute to producers and $3 billion in food purchases. As of October 25, 2020, the USDA had distributed $10.3 billion in CFAP payments. Farmers and ranchers were also eligible to participate in the Small Business Administration’s Paycheck Protection Program (PPP). Through the close of the PPP application period of August 8, 2020, more than $8.1 billion in PPP loans had been disbursed to businesses involved in agriculture, forestry, fishing, and hunting. Finally, on September 17, 2020, the USDA announced the second round of CFAP funding through the authorities of the CCC for up to $14 billion in direct support for eligible commodities ("CFAP 2"). As of October 25, 2020, the USDA had distributed more than $7.6 billion in payments through CFAP 2.

Farmland values have held steady in early 2020 after rising at approximately the rate of inflation for the last two years. Data released in 2020 by the USDA indicates an average increase in farm real estate values of 0.2% in 2020 in Corn Belt states (Illinois, Indiana, Iowa, Missouri, and Ohio), but a decrease of 2.3% 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. The COVID-19 pandemic has slowed public auctions and sales in 2020, but transactions have picked up in the third quarter, and values have been largely level through much of the year. 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 prolonged decline in global economic growth or continued tightening in trade policies and agreements could adversely affect the demand for certain U.S. agricultural exports, which may result in downward pressure on commodity prices. Also, the strength of the U.S. dollar relative to trading-partner currencies has been elevated since 2016 (as measured by the U.S. Dollar Index). A strong U.S. dollar decreases the competitiveness of U.S. agricultural exports by raising U.S. prices relative to other countries’ producers. The value of the U.S. dollar weakened in the second and third quarters, providing some relief to export sales. However, the COVID-19 pandemic has the potential to disrupt global demand for U.S. agriculture into 2021 due to lower incomes and reduced economic activity. Many of the primary trading partners and the U.S. maintain good trade relations evidenced by recently-enacted free trade agreements (e.g., Canada, Mexico, and Japan). Agricultural export sales to China are up year-to-date in 2020 compared to 2019, but there exists considerable uncertainty surrounding growth expectations for this market.

Weather conditions also play a sizable role in agricultural economic conditions. While growing conditions were generally favorable in the Midwest for much of the year, severe storms can significantly damage crops. An intense derecho thunderstorm in August 2020 affected thousands of acres across Iowa and Illinois, lowering state-specific grain yield expectations. Damage from those types of weather events is generally covered by federal crop insurance policies, and roughly 95 percent of corn and soybean acres in Iowa and Illinois are covered by crop insurance according to USDA data. Wildfires are another weather event that can adversely affect agricultural production. The 2020 California wildfire season has been one

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of the worst in recent history, and the California Department of Forestry and Fire Protection estimates that over four million acres have burned through October 25, 2020. Much of California agriculture lies in valleys that were not directly affected by active fires. Approximately 1% of Farmer Mac’s Farm & Ranch portfolio is located in Napa or Sonoma Counties, where the Glass Fire caused significant direct and indirect damage to vineyards and wineries. Farmer Mac will continue to monitor exposure to the wildfires, but initial indications show limited exposure.

Farmer Mac has experienced higher 90-day delinquencies and substandard asset ratings in recent quarters. The increase is a function of agricultural cycles trending toward tighter industry profitability levels compared to peaks experienced from 2012 to 2015. To date, the fluctuations in 90-day delinquencies and the increase in substandard assets have not yet translated into rising credit losses. Farmer Mac believes that its portfolio is highly diversified, both geographically and by commodity and that its portfolio has been underwritten to high credit quality standards. Therefore, Farmer Mac believes that its portfolio is well-positioned to endure reasonably foreseeable volatility in commodity prices and farmland values. However, the COVID-19 pandemic and a subsequent economic downturn increases the level of uncertainty inherent in the agricultural credit sector and could alter the trajectory of the current agricultural cycle. A prolonged disruption may result in elevated loan delinquencies, and a higher percentage of loans rated substandard as more payments reach 90-days past their July 1 payment due date. Loan deferments approved by Farmer Mac through September 30, 2020 represent 1.7% of our total outstanding business volume, as measured by unpaid principal balance. This amount could fluctuate in future quarters based on loan performance and economic conditions in the coming months, but roughly 80 percent of Farm & Ranch and USDA loans made a payment between April 1 and September 30. 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, 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

The Agricultural Improvement Act of 2018, also referred to as the "Farm Bill," increased the authorized limit for the amount of new guarantees issued by the USDA under the Consolidated Farm and Rural Development Act (which are eligible for Farmer Mac's USDA Guarantees line of business) from $3.026 billion to $7.0 billion for each government fiscal year through September 2023. Also, the limit for the size of individual loans to which these guarantees are applied was increased from $1.399 million to $1.75 million, which thereby increases the authorized amount of the USDA-guaranteed portion for an individual loan. These higher loan limits contributed to additional growth in the USDA Guarantees purchased by Farmer Mac in 2020.

Farmer Mac also continues to monitor state legislation and regulations that could impact U.S. agriculture. For example, groundwater management regulations, including in California, may result in tighter restrictions on groundwater usage that could affect agricultural producers in the future. Farmer Mac will monitor the effects that any changes in legislation or regulation (federal or state) could have on Farmer Mac or its customers.

Rural Utilities Industry.

The rural energy industry has less cyclicality than the agricultural sector, but does trend with conditions in the general economy. Higher levels of unemployment and adverse credit markets are typically associated with drops in energy demand (i.e., lower commercial, industrial, or residential demand) and increases in industry ratings downgrades. The economic distress caused by the COVID-19 pandemic has led to

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historic levels of unemployment as well as reduced demand from the commercial and industrial sectors. According to data from the U.S. Energy Information Administration, electricity sales to commercial and industrial consumers dropped 8 percent year-to-date through August 2020 compared to 2019. However, residential sales during the same period were up 3 percent compared to 2019 as residents spent more time at home during state, local, and self-imposed quarantines. Residential power sales are typically significantly more profitable than those for commercial and industrial consumers, thus some of the profitability reduction from the loss of commercial and industrial sales can be offset by the change in sales mix. Sector sales mix varies from utility to utility based on the characteristics of the region served by the utility, so the degree of profitability offset will differ. Some rural electric cooperatives participated in the Paycheck Protection Program (PPP) and received forgivable loans through that program, which are another potential source to offset any profitability reduction. The COVID-19 pandemic has also highlighted the greater need for and interest in access to broadband internet in rural areas, and there was more than $300 million in support authorized in the CARES Act to support healthcare industry telecommunications and rural broadband grants. Farmer Mac expects the heightened level of uncertainty surrounding the economic impacts of COVID-19 to continue throughout 2020, however through mid-2020 Farmer Mac has not observed material degradation in the financial performance of its Rural Utilities portfolio.

During the first nine months of 2020, the sudden decrease of interest rates to historic lows drove a significant amount of financing activity on the part of rural electric cooperatives. Prospects for loan growth within the rural utilities industry overall appear to be moderate in the short to medium term as ongoing normal-course capital expenditures related to maintaining and upgrading utility infrastructure continue at typical levels. Farmer Mac's future growth opportunities for lending to the electrical cooperative industry may be affected by the demand for electric power in rural areas, capital expenditures by electric cooperatives driven by regulatory or technological changes, the continuation of a low interest rate environment, and competitive dynamics within the rural utilities cooperative finance industry. However, the Federal Communication Commission’s upcoming Rural Development Opportunity Fund (RDOF) auction for up to $16 billion in broadband-related operating cost subsidies may provide a catalyst for capital demands from rural electric cooperatives who seek to develop and deploy broadband services. The growth in renewable energy generation, deployment of energy storage technologies, expansion of broadband service in rural areas, and the deepening of relationships with new and existing counterparties, all may provide new business opportunities for Farmer Mac. To address some of these trends, Farmer Mac has deployed new financing products tailored to the renewable energy sector, which represents a new market opportunity for Farmer Mac. Under this new program, Farmer Mac purchased solar project participation interests from a new counterparty during first quarter 2020 as well as wind project participation interests from an existing counterparty in third quarter 2020. Farmer Mac anticipates further growth in this area during the remainder of 2020.



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Balance Sheet Review

The following table summarizes the balance sheet as of the periods indicated:

Table 23
As of Change
September 30, 2020 December 31, 2019 $ %
(in thousands)
Assets
Cash and cash equivalents $ 910,592  $ 604,381  $ 306,211  51  %
Investment securities, net of allowance 3,577,222  3,004,875  572,347  19  %
Farmer Mac Guaranteed Securities, net of allowance 8,712,208  8,590,476  121,732  %
USDA Securities 2,417,678  2,241,073  176,605  %
Loans, net of allowance 8,105,647  6,981,440  1,124,207  16  %
Other 275,490  287,129  (11,639) (4) %
Total assets $ 23,998,837  23,998,837  $ 21,709,374  $ 2,289,463  11  %
Liabilities
Notes Payable 21,589,285  19,098,648  2,490,637  13  %
Other 1,479,207  1,811,450  (332,243) (18) %
Total liabilities $ 23,068,492  $ 20,910,098  $ 2,158,394  2158394 10  %
Total equity 930,345  799,276  131,069  16  %
Total liabilities and equity $ 23,998,837  $ 21,709,374  $ 2,289,463  11  %

Assets. The increase in total assets was primarily attributable to the net growth in our outstanding business volume across most lines of business.

The increase in cash and cash equivalents and investment securities was primarily due to a decision to increase our liquidity investment portfolio due to the COVID-19 pandemic and to support our program asset growth.

Liabilities. The increase in total liabilities was primarily due to an increase in total notes payable to support our program asset growth.

Equity. The increase in total equity was primarily due to the issuance of the Series E Preferred Stock and the Series F Preferred Stock and an increase in net income. These increases were partially offset by the redemption of the Series A Preferred stock and an increase in other comprehensive losses, net of tax, primarily due to decreases in the fair value of available-for-sale securities and financial derivatives designated in cash flow hedge accounting relationships.

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

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alternatives create 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.  

COVID-19

Farmer Mac continues to monitor the effects of the COVID-19 pandemic on Farmer Mac's credit risk related to Farmer Mac's borrower exposures. Since first quarter 2020, Farmer Mac has seen an increase in payment deferment requests from its network of loan servicers on behalf of borrowers in Farmer Mac's Farm & Ranch loan portfolio, although deferment requests have been below our expectations. Our early expectations for payment deferment requests were based on forecasts provided by other GSEs and other Farm Credit System institutions. To address the requests that we have received, Farmer Mac has established criteria for approval of payment deferments for borrowers impacted by the COVID-19 pandemic and have communicated these criteria to key counterparties. Farmer Mac will monitor the criteria as the impact of the pandemic continues to unfold and determine if any changes should be made. Most of the payment deferments Farmer Mac has approved and executed for loans it has purchased or securitized in its Farm & Ranch portfolio have been for up to six months, with the deferred principal and interest payments capitalized into the unpaid principal balance of the loan. The unpaid principal balance is then re-amortized over the remaining term of the loan. Approved and executed payment deferments for loans in LTSPCs have varied from three-month payment deferments for principal and interest to deferred interest-only payments for up to twelve months, depending on the applicable LTSPC lender's deferment policy. As of September 30, 2020, we have executed payment deferments in the Farm & Ranch and USDA Securities portfolios related to an aggregate of $374.5 million of unpaid principal balances, which represents 1.70% of our total outstanding business volume. The period of time covered by the payment deferments is typically in the range of three to six months. At the end of each payment deferment, the principal and interest related to the approved deferments will be capitalized into the outstanding unpaid principal balance and amortized over the remaining life of the loan. As of October 15, 2020, $4.6 million of Farm & Ranch COVID-19 deferments have been repaid in full, and another $153.3 million of Farm & Ranch COVID-19 deferments have ended their deferment periods and none are delinquent.

In addition, FCA has issued regulatory guidance encouraging Farmer Mac to work with its lending and servicing partners in approving and executing servicing actions for borrowers impacted by COVID-19. The table below presents a cumulative summary of COVID-19 payment deferments through September 30, 2020 in the Farm & Ranch line of business. Farmer Mac has not received any payment deferment requests in the Rural Utilities line of business. For more information about FCA's regulatory guidance related to the COVID-19 pandemic, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters."


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Table 24
Farm & Ranch COVID-19 Deferments Summary
As of September 30, 2020(1)
Unpaid Principal Balance
Requested, but not yet Approved Approved, but not yet Executed Not Approved Approved and Executed
Farm & Ranch: (in thousands)
On-balance sheet:
Loans held for investment $ 289  $ 34,451  $ 445  $ 72,875 
Loans held in consolidated trusts —  4,469  1,153  32,402 
On-balance sheet total $ 289  $ 38,920  $ 1,598  $ 105,277 
Off-balance sheet:
LTSPCs 578  27,956  4,369  185,364 
Farm & Ranch Total $ 867  $ —  $ 66,876  $ 5,967  $ 290,641 
USDA:
USDA Securities $ 17,707  $ 816  $ 5,985  $ 78,233 
Farmer Mac Guaranteed USDA Securities 333  —  2,129  5,577 
USDA Total $ 18,040  $ 816  $ 8,114  $ 83,810 
Farm & Ranch and USDA Total Deferments $ 18,907  $ 67,692  $ 14,081  $ 374,451 

(1) Loans under a COVID-19 deferment are not considered to be past due.

Farm & Ranch

Farmer Mac's direct credit exposure to Farm & Ranch loans held and loans underlying Farm & Ranch Guaranteed Securities and LTSPCs as of September 30, 2020 was $8.2 billion across 48 states. 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, 2019 filed with the SEC on February 25, 2020.

Farmer Mac has indirect credit exposure to the Farm & Ranch loans that secure AgVantage securities included in the Institutional Credit line of business. As of September 30, 2020, Farmer Mac had not experienced any credit losses on any AgVantage securities. 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.

Farmer Mac considers a loan's original loan-to-value ratio as one of many factors in evaluating loss severity. Loan-to-value ratios depend on the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards.  As of September 30, 2020 and December 31, 2019, the average unpaid principal balances for loans outstanding in the Farm & Ranch line of business was $731,000 and $683,000, respectively. Farmer Mac calculates the "original loan-to-value" ratio of a loan by dividing the original loan principal balance by the original appraised property value. This calculation does not reflect any amortization of the original loan balance or any adjustment to the original appraised value to provide a current market value. The original loan-to-value ratio of any cross-collateralized loans is calculated on a combined basis rather than on a loan-by-loan basis. The weighted-average original loan-to-value ratio for Farm & Ranch loans purchased during third quarter 2020 was 43%, compared to 51% for

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loans purchased during third quarter 2019. 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 52% and 51% as of September 30, 2020 and December 31, 2019, respectively. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 50% and 53% as of September 30, 2020 and December 31, 2019, respectively.

The weighted-average current loan-to-value ratio (the loan to-value ratio based on original appraised value and current outstanding loan amount adjusted to reflect amortization) for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was 45% as of both September 30, 2020 and December 31, 2019.

For more information about the credit quality of Farmer Mac's Farm & Ranch portfolio and the associated allowance for losses please refer to Note 5 to the consolidated financial statements. 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."

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, 2020, Farmer Mac's 90-day delinquencies were $88.0 million (1.07% of the Farm & Ranch portfolio), compared to $68.7 million (0.86% of the Farm & Ranch portfolio) as of June 30, 2020 and $61.0 million (0.78% of the Farm & Ranch portfolio) as of December 31, 2019. Those 90-day delinquencies were comprised of 62 delinquent loans as of September 30, 2020, compared to 54 delinquent loans as of June 30, 2020 and 57 delinquent loans as of December 31, 2019. The sequential increase in 90-day delinquencies is primarily due to the seasonal payment pattern 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. 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. The sequential increase in 90-day delinquencies was driven by two commodity groups – crops and livestock. The other commodity groups either experienced decreases or remained stable. The top ten borrower exposures over 90 days delinquent represented over half of the 90-day delinquencies as of September 30, 2020. Loans under COVID-19 deferment are not considered past due and are not included in our delinquent loan statistics. Farmer Mac believes that it remains adequately collateralized on its delinquent loans.

Our 90-day delinquency rate as of September 30, 2020 exceeded Farmer Mac's historical average. In the near-term, our delinquency rate is expected to exceed our historical average due to the expected impact of the COVID-19 pandemic on 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%. The highest 90-day delinquency rate observed during that period occurred in 2009 at approximately 2%, which coincided with increased delinquencies in loans within Farmer Mac's then-held ethanol loan portfolio that Farmer Mac no longer holds.


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

Table 25
Farm & Ranch Line of Business 90-Day
Delinquencies
Percentage
  (dollars in thousands)
As of:      
September 30, 2020 $ 8,249,349  $ 88,041  1.07  %
June 30, 2020 8,017,850  68,682  0.86  %
March 31, 2020 7,811,594  79,722  1.02  %
December 31, 2019 7,776,950  60,954  0.78  %
September 30, 2019 7,393,728  59,691  0.81  %
June 30, 2019 7,291,352  28,045  0.38  %
March 31, 2019 7,215,585  52,366  0.73  %
December 31, 2018 7,233,971  26,881  0.37  %
September 30, 2018 7,072,018  37,545  0.53  %

Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.40% of total outstanding business volume as of September 30, 2020, compared to 0.29% as of December 31, 2019 and 0.29% as of September 30, 2019. 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, 2020 by year of origination, geographic region, commodity/collateral type, original loan-to-value ratio, and range in the size of borrower exposure:


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Table 26
Farm & Ranch 90-Day Delinquencies as of September 30, 2020
  Distribution of Farm & Ranch Line of Business Farm & Ranch Line of Business
90-Day Delinquencies(1)
Percentage
  (dollars in thousands)
By year of origination:        
2010 and prior % $ 629,983  $ 6,095  0.97  %
2011 % 141,080  921  0.65  %
2012 % 345,488  —  —  %
2013 % 495,888  2,548  0.51  %
2014 % 415,424  1,383  0.33  %
2015 % 579,321  6,600  1.14  %
2016 11  % 917,149  24,209  2.64  %
2017 12  % 985,401  25,327  2.57  %
2018 10  % 867,825  8,604  0.99  %
2019 15  % 1,205,009  10,250  0.85  %
2020 20  % 1,666,781  2,104  0.85  %
Total 100  % $ 8,249,349  $ 88,041  1.07  %
By geographic region(2):
       
Northwest 12  % $ 1,015,736  $ 12,122  1.19  %
Southwest 34  % 2,802,361  13,036  0.47  %
Mid-North 29  % 2,362,710  30,314  1.28  %
Mid-South 13  % 1,068,422  17,168  1.61  %
Northeast % 357,810  4,013  1.12  %
Southeast % 642,310  11,388  1.77  %
Total 100  % $ 8,249,349  $ 88,041  1.07  %
By commodity/collateral type:      
Crops 51  % $ 4,200,252  $ 49,766  1.18  %
Permanent plantings 23  % 1,922,741  8,388  0.44  %
Livestock 19  % 1,513,137  16,823  1.11  %
Part-time farm % 485,778  145  0.03  %
Ag. Storage and Processing % 109,369  12,865  11.76  %
Other —  18,072  54  0.30  %
Total 100  % $ 8,249,349  $ 88,041  1.07  %
By original loan-to-value ratio:
0.00% to 40.00% 17  % $ 1,433,215  $ 6,627  0.46  %
40.01% to 50.00% 25  % 2,043,177  40,791  2.00  %
50.01% to 60.00% 35  % 2,883,327  38,041  1.32  %
60.01% to 70.00% 19  % 1,574,042  2,472  0.16  %
70.01% to 80.00%(3)
% 299,582  —  —  %
80.01% to 90.00%(3)
—  % 16,006  110  0.69  %
Total 100  % $ 8,249,349  $ 88,041  1.07  %
By size of borrower exposure(4):
Less than $1,000,000 29  % $ 2,426,763  $ 12,878  0.53  %
$1,000,000 to $4,999,999 35  % 2,868,618  33,358  1.16  %
$5,000,000 to $9,999,999 15  % 1,198,942  12,559  1.05  %
$10,000,000 to $24,999,999 12  % 968,893  29,246  3.02  %
$25,000,000 and greater % 786,133  —  —  %
Total 100  % $ 8,249,349  $ 88,041  1.07  %
(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.
(2)Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(3)Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.
(4)Includes aggregated loans to single borrowers or borrower-related entities.

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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, 2020, Farmer Mac's substandard assets were $321.2 million (3.9% of the Farm & Ranch portfolio), compared to $304.9 million (3.8% of the Farm & Ranch portfolio) as of June 30, 2020 and $310.0 million (4.0% of the Farm & Ranch portfolio) as of December 31, 2019. Those substandard assets were comprised of 361 loans as of September 30, 2020, 368 loans as of June 30, 2020, and 353 loans as of December 31, 2019.

The increase of $16.3 million in substandard assets during third quarter 2020 was primarily driven by credit downgrades in our off-balance sheet portfolio, partially offset by credit upgrades in our on-balance sheet portfolio during the quarter. Substandard assets increased as a percentage of the total on- and off-balance sheet portfolio primarily due to the credit downgrades in our off-balance sheet portfolio. The percentage of substandard assets within the portfolio closely approximates the historical average.

Farmer Mac's average substandard assets as a percentage of its Farm & Ranch portfolio over the last 15 years is approximately 4%. Due to the COVID-19 pandemic, we believe that the substandard rate may rise above that historical average in the short-term. The full extent of the impact of the COVID-19 pandemic remains to be seen, and we will continue to monitor its impact on our substandard asset rate. The highest substandard asset rate observed during the last 15 years occurred in 2010 at approximately 8%, 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 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.

The following table presents the current loan-to-value ratios for the Farm & Ranch portfolio, as disaggregated by internally assigned risk ratings:

Table 27
Farm & Ranch current loan-to-value ratio by internally assigned risk rating as of September 30, 2020
Acceptable Special Mention Substandard Total
(in thousands)
Current loan-to-value ratio(1):
0.00% to 40.00% $ 2,535,414  $ 91,379  $ 100,905  $ 2,727,698 
40.01% to 50.00% 2,004,659  142,067  80,324  2,227,050 
50.01% to 60.00% 1,812,255  77,716  85,615  1,975,586 
60.01% to 70.00% 974,306  43,893  19,739  1,037,938 
70.01% to 80.00% 209,385  18,895  19,019  247,299 
80.01% and greater 13,486  4,710  15,582  33,778 
Total $ 7,549,505  $ 378,660  $ 321,184  $ 8,249,349 
(1)The current loan-to-value ratio is based on original appraised value (or most recently obtained appraisal, if available) and current outstanding loan amount adjusted to reflect loan amortization.


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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, 2020 by year of origination, geographic region, and commodity/collateral type.  The purpose of this information is to present information about realized losses relative to original Farm & Ranch purchases, guarantees, and commitments.

Table 28
Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of September 30, 2020
Cumulative Original Loans, Guarantees and LTSPCs  Cumulative Net Credit Losses/(Recoveries)  Cumulative Loss Rate
  (dollars in thousands)
By year of origination:      
2010 and prior $ 15,321,174  $ 30,103  0.20  %
2011 780,955  3,661  0.47  %
2012 1,159,460  —  —  %
2013 1,451,375  —  —  %
2014 1,030,669  —  —  %
2015 1,189,515  (516) (0.04) %
2016 1,487,986  —  —  %
2017 1,562,656  —  —  %
2018 1,282,915  —  —  %
2019 1,468,215  —  —  %
2020 1,800,179  —  %
Total $ 28,535,099  $ 33,248  0.12  %
By geographic region(1):
     
Northwest $ 3,706,610  $ 11,191  0.30  %
Southwest 10,076,495  8,520  0.08  %
Mid-North 7,177,705  12,855  0.18  %
Mid-South 3,509,487  (613) (0.02) %
Northeast 1,589,015  323  0.02  %
Southeast 2,475,787  972  0.04  %
Total $ 28,535,099  $ 33,248  0.12  %
By commodity/collateral type:      
Crops $ 13,207,554  $ 2,887  0.02  %
Permanent plantings 6,329,212  9,762  0.15  %
Livestock 6,414,242  3,836  0.06  %
Part-time farm 1,637,536  1,090  0.07  %
Ag. Storage and Processing 780,390  15,673  2.01  %
Other 166,165  —  —  %
Total $ 28,535,099  $ 33,248  0.12  %
(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).



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Analysis of portfolio performance indicates that commodity type is the primary determinant of Farmer Mac's exposure to loss on a given loan. 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 29
As of September 30, 2020
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 $ 473,738  $ 178,777  $ 279,427  $ 78,696  $ 5,039  $ 59  $ 1,015,736 
5.7  % 2.2  % 3.3  % 1.0  % 0.1  % —  % 12.3  %
Southwest 676,122  1,447,146  511,801  94,470  57,156  15,666  2,802,361 
8.2  % 17.6  % 6.2  % 1.1  % 0.7  % 0.2  % 34.0  %
Mid-North 1,992,828  11,235  221,150  117,430  18,064  2,003  2,362,710 
24.2  % 0.1  % 2.7  % 1.4  % 0.2  % —  % 28.6  %
Mid-South 661,234  43,170  301,146  55,875  6,977  20  1,068,422 
8.0  % 0.5  % 3.7  % 0.7  % 0.1  % —  % 13.0  %
Northeast 160,221  59,717  67,891  66,463  3,518  —  357,810 
2.0  % 0.7  % 0.8  % 0.8  % —  % —  % 4.3  %
Southeast 236,109  182,696  131,722  72,844  18,615  324  642,310 
2.9  % 2.2  % 1.6  % 0.9  % 0.2  % —  % 7.8  %
Total $ 4,200,252  $ 1,922,741  $ 1,513,137  $ 485,778  $ 109,369  $ 18,072  $ 8,249,349 
51.0  % 23.3  % 18.3  % 5.9  % 1.3  % 0.2  % 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).


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Table 30
As of September 30, 2020
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:
2010 and prior $ 3,427  $ 9,762  $ 3,836  $ 1,066  $ 12,012  $ 30,103 
2011 —  —  —  —  3,661  3,661 
2012 —  —  —  —  —  — 
2013 —  —  —  —  —  — 
2014 —  —  —  —  —  — 
2015 (540) —  —  24  —  (516)
2016 —  —  —  —  —  — 
2017 —  —  —  —  —  — 
2018 —  —  —  —  —  — 
2019 —  —  —  —  —  — 
2020 —  —  —  —  —  — 
Total $ 2,887  $ 9,762  $ 3,836  $ 1,090  $ 15,673  $ 33,248 

Rural Utilities

Farmer Mac's direct credit exposure to Rural Utilities loans held and loans underlying LTSPCs as of September 30, 2020 was $2.7 billion across 45 states. For more information about Farmer Mac's underwriting and collateral valuation standards for Rural Utilities loans, 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, 2019 filed with the SEC on February 25, 2020. As of September 30, 2020, there were no delinquencies in Farmer Mac's portfolio of Rural Utilities loans.

Farmer Mac has indirect credit exposure to Rural Utilities loans that secure AgVantage securities included in the Institutional Credit line of business. As of September 30, 2020, Farmer Mac had not experienced any credit losses on any AgVantage securities. 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.

Farmer Mac has never experienced a credit loss in its Rural Utilities line of business. Upon the adoption of the current expected credit loss accounting standard ("CECL") on January 1, 2020, we are now required to forecast and disclose our expected credit losses for the expected life of our Rural Utilities portfolio assets. To do this, Farmer Mac relies upon industry data purchased from ratings agencies as well as publicly available information as disclosed in the securities filings of other major lenders who serve this industry. 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."

Farmer Mac evaluates credit risk for these assets by reviewing a variety of borrower credit risk characteristics. These characteristics can include (but is not limited to) financial metrics, internal risk ratings, ratings assigned by ratings agencies, types of customers served, sources of power supply, and the regulatory environment.


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The following table presents Farmer Mac’s portfolio of generation and transmission ("G&T") and distribution cooperative borrowers, as well as renewable energy loans, disaggregated by internally assigned risk ratings.

Table 31
Rural Utilities portfolio by internally assigned risk rating as of September 30, 2020
Acceptable Special Mention Substandard Total
(in thousands)
Distribution Cooperative $ 2,088,027  $ —  $ 4,474  $ 2,092,501 
G&T Cooperative 573,401  —  —  573,401 
Renewable Energy 19,407  —  —  19,407 
Rural Utilities Total $ 2,680,835  $ —  $ 4,474  $ 2,685,309 

For more information about the credit quality of Farmer Mac's Rural Utilities portfolio and the associated allowance for losses please refer to Notes 5 and 6 of the consolidated financial statements.

Other Considerations Regarding Credit Risk Related to Loans and Guarantees

The credit exposure on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is guaranteed by the full faith and credit of the United States.  Therefore, Farmer Mac believes that we have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee.  As of September 30, 2020, Farmer Mac had not experienced any credit losses on any securities under the USDA Guarantees line of business and does not expect to incur any such losses in the future. Because we do not expect credit losses on this portfolio, Farmer Mac does not provide an allowance for losses on its portfolio of USDA Guaranteed Securities. As of September 30, 2020, Farmer Mac had executed COVID-19 payment deferments on loans with unpaid principal balances of $83.8 million underlying USDA Securities.

Farmer Mac requires most approved lenders to make representations and warranties about 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 who make these representations and warranties are responsible to Farmer Mac for breaches of those representations and warranties. 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, 2020, there have been no breaches of representations and warranties by sellers that resulted in Farmer Mac requiring a seller to cure, replace, or repurchase a loan. In addition to relying on the representations and warranties of sellers, Farmer Mac also underwrites the agricultural real estate mortgage loans (other than rural housing and part-time farm mortgage loans) and Rural Utilities loans on which it has direct credit exposure. 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 and underwriting standards, see "Business—Farmer Mac's Lines of Business—Farm & Ranch—Loan Eligibility," "Business—Farmer Mac's Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards," "Business—Farmer Mac's Lines of Business—Rural Utilities—Loan Eligibility," and "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, 2019, as filed with the SEC on February 25, 2020.

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Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved servicers service loans in accordance with Farmer Mac's requirements. Servicers are responsible to Farmer Mac for serious errors in the servicing of those loans. If a 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, the servicer is responsible for any corresponding damages to Farmer Mac and, in most cases, Farmer Mac has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by the servicer. Farmer Mac also can proceed against the servicer in arbitration or exercise any remedies available to it under law. During the previous three years ended September 30, 2020, Farmer Mac had not exercised any remedies or taken any formal action against any 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, 2019 filed with the SEC on February 25, 2020.

Credit Risk – Institutional.  Farmer Mac is exposed to credit risk arising from its business relationships with other institutions, which include:
 
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 particular counterparty type and transaction.  The required collateralization level is established when the AgVantage facility is entered into with the counterparty and does not change during the life of the AgVantage securities issued under the facility without Farmer Mac's consent. In AgVantage transactions, the corporate obligor is typically 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.  Since the onset of the COVID-19 pandemic, Farmer Mac has approved and expects to continue to approve payment deferments on loans collateralizing AgVantage securities, allowing the AgVantage counterparty to keep these loans in its collateral pool without replacing them. The criteria currently in place for approving payment deferments for these loans is similar to the criteria Farmer Mac has established for loans in its Farm & Ranch portfolio that are affected by the COVID-19 pandemic.

In the event of a default on an AgVantage security, 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 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" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020.

The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans eligible for the Farm & Ranch line of business totaled $5.4 billion as of September 30, 2020 and $5.5 billion as of December 31, 2019. The unpaid principal balance of on-balance sheet AgVantage securities

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secured by loans eligible for the Rural Utilities line of business totaled $2.9 billion as of September 30, 2020 and $2.9 billion as of December 31, 2019. The unpaid principal balance of outstanding off-balance sheet AgVantage securities totaled $6.1 million as of September 30, 2020 and $7.6 million as of December 31, 2019. A $0.3 billion off-balance sheet AgVantage revolving line of credit facility was terminated during fourth quarter 2019.

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, 2020 and December 31, 2019:

Table 32
  As of September 30, 2020 As of December 31, 2019
Counterparty Balance Credit Rating Required Collateralization Balance Credit Rating Required Collateralization
  (dollars in thousands)
AgVantage:
CFC $ 2,919,816  A 100% $ 2,949,500  A 100%
MetLife 2,375,000  AA- 103% 2,550,000  AA- 103%
Rabo AgriFinance 2,250,000  None 110% 2,225,000  None 110%
Other(1)
528,929  None 106% to 125% 436,041  None 106% to 125%
Farm Equity AgVantage(2)
245,757  None 110% 279,705  None 110%
Total outstanding $ 8,319,502      $ 8,440,246     
(1)Consists of AgVantage securities issued by 6 and 5 different issuers as of September 30, 2020 and December 31, 2019, respectively.
(2)Consists of AgVantage securities issued by 4 and 5 different issuers as of September 30, 2020 and December 31, 2019, respectively.

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 Business—Rural Utilities—Approved Lenders" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on February 25, 2020.

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 swap portfolio with each counterparty. Farmer Mac and its interest rate swap counterparties are required to fully collateralize their derivatives positions without any minimum threshold for cleared swap transactions, as well as for non-cleared swap transactions entered into after March 1, 2017. Farmer Mac transacts interest rate swaps with multiple counterparties to reduce counterparty credit exposure concentration. Farmer Mac's usage of cleared derivatives has increased over time as has its exposure to clearinghouses. The usage of cleared swap transactions reduces Farmer Mac's exposure to individual counterparties with the central clearinghouse acting to settle the change in value of contracts on a daily basis. 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, 2020, Farmer Mac had $0.9 billion of cash and cash equivalents and $3.6 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 the liquidity and investment regulations for Farmer Mac, which were issued by FCA and which establish criteria for investments that

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are eligible for Farmer Mac's investment portfolio, including limitations on asset class, dollar amount, issuer concentration, and credit quality. 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.

Farmer Mac's liquidity and investment regulations and internal policies 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) if 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.

Farmer Mac's liquidity and investment regulations and internal policies also establish concentration limits, which are intended to limit exposure to any single entity, issuer, or obligor. Farmer Mac's liquidity and investment regulations limit Farmer Mac's total credit exposure to any single entity, issuer, or obligor of securities to 10% of Farmer Mac's regulatory capital ($100.4 million as of September 30, 2020). However, Farmer Mac's current policy limits this total credit exposure to 5% of its regulatory capital ($50.2 million as of September 30, 2020). 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% of regulatory capital in the senior non-convertible debt securities of any one GSE.

Although the Liquidity and Investments Regulations do not establish limits on the maximum amount, expressed as a percentage of Farmer Mac's investment portfolio, that can be invested in each eligible asset class, 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 financial assets retained on its balance sheet because of timing differences in the cash flows of the assets and debt together with financial derivatives.  This risk is primarily related to loans, loan participation interests, Farmer Mac Guaranteed Securities, and USDA Securities due to the contract right of borrowers to prepay their loans before the scheduled maturities.  Cash flow mismatches due to changing interest rates can reduce the earnings of Farmer Mac if assets prepay 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. Alternatively, Farmer Mac could see a drop in income if assets repay more slowly than expected in a rising interest rate environment and the associated debt must be replaced by higher-cost debt.

Interest Rate Risk Management

The goal of interest rate risk management at Farmer Mac is to manage the balance sheet in a manner 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 regularly assesses this exposure and, if necessary, adjusts its portfolio of assets, debt, and financial derivatives.


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Farmer Mac's objective is to maintain its exposure to interest rate risk within appropriate limits, as approved by Farmer Mac's board of directors. Farmer Mac's management-level Asset and Liability Committee ("ALCO") provides oversight and approves strategies to maintain interest rate risk within the board-established limits.

Farmer Mac's primary strategy for managing interest rate risk is to fund asset purchases with debt that together with financial derivatives have similar duration and convexity characteristics so that they will perform in a similar fashion as interest rates change. As part of the debt issuance strategy, Farmer Mac seeks to issue a blend of liabilities across a variety of maturities to approximately align the liability cashflows with the forecasted asset cashflows.

Farmer Mac issues discount notes and both callable and non-callable medium-term notes across a spectrum of maturities to execute its liability issuance strategy. Callable debt is issued to mitigate prepayment risk associated with assets held on balance sheet. The interest rate sensitivities of the debt together with financial derivatives 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 enters into financial derivatives, primarily interest rate swaps, as another tool to better match the durations of Farmer Mac's assets and liabilities, thereby reducing overall sensitivity to changing interest rates.

Taking into consideration the prepayment provisions and the default probabilities associated with its portfolio of retained assets, Farmer Mac incorporates prepayment behavioral models when projecting and valuing cash flows associated with these assets.  Because borrowers' behaviors in various interest rate environments may change over time, Farmer Mac periodically evaluates the effectiveness of these models compared to actual prepayment experience and adjusts and refines the models as necessary to improve the precision of future prepayment forecasts.

Changes in interest rates may affect loan prepayment rates which may, in turn, impact 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 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 other financial derivatives.  Farmer Mac enters into U.S. Treasury futures contracts as a hedge against the level of interest rates.

Farmer Mac's $0.9 billion of cash and cash equivalents mature within three months and are generally funded with debt having similar maturities. As of September 30, 2020, $3.5 billion of the $3.6 billion of investment securities (97%) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. The floating rate securities are funded with effectively floating rate debt that closely matches the rate adjustment dates of the associated investments. The fixed rate investment securities are generally funded in a manner consistent with Farmer Mac's overall funding strategy that approximates a duration and convexity match.


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Interest Rate Risk Metrics

Farmer Mac regularly stress tests its portfolio for interest rate risk and examines 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 effect 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 over the next twelve months from interest-earning assets and interest expense produced by the related funding, including associated derivatives. Farmer Mac's NES may be impacted 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 sensitivity to interest rates.

Duration is a measure of a financial instrument's fair value sensitivity to small changes in interest rates. Duration gap is the net estimated durations of Farmer Mac's assets, debt, and financial derivatives. Because duration is a measure of fair value sensitivity, duration gap summarizes the extent to which estimated fair 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 debt and derivatives. A positive duration gap indicates that the changes to the fair value of Farmer Mac's assets is more sensitive to small interest rate movements than are the changes to fair value of its debt and derivatives. Conversely, a negative duration gap indicates that changes to fair value of Farmer Mac's assets are less sensitive to small interest rate movements than are the changes to fair value of its debt and derivatives. A duration gap of zero indicates that with small changes in interest rate movements the fair value change of Farmer Mac's assets is effectively offset the fair value change of its debt and derivatives.

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 asset 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.


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The following schedule summarizes the results of Farmer Mac's MVE and NES sensitivity analysis as of September 30, 2020 and December 31, 2019 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:

Table 33
  Percentage Change in MVE from Base Case
Interest Rate Scenario(1)
As of September 30, 2020 As of December 31, 2019
+100 basis points 6.1  % 2.7  %
-100 basis points (0.5) % (8.4) %

  Percentage Change in NES from Base Case
Interest Rate Scenario(1)
As of September 30, 2020 As of December 31, 2019
+100 basis points 3.1  % 0.8  %
-100 basis points (0.2) % 0.1  %
(1)The down 100 basis points shock scenario was replaced with a proportional shock relative to 50% of the 3-month Treasury bill rate, with the approval of the Financial Risk Committee of the Board of Directors.

As of September 30, 2020, Farmer Mac's effective duration gap was negative 4.4 months, compared to negative 2.5 months as of December 31, 2019. Interest rates decreased significantly during the first nine months of 2020. This rate movement contributed to reducing the duration of Farmer Mac's assets relative to its liabilities, thereby widening Farmer Mac's duration gap. Furthermore, as of September 30, 2020, Farmer Mac implemented a replacement behavioral prepayment model that also contributed to a widening duration gap.

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, 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, 2020, Farmer Mac had $15.1 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to thirty years, of which $6.2 billion were pay-fixed interest rate swaps, $5.6 billion were receive-fixed interest rate swaps, and $3.3 billion were basis swaps.

Farmer Mac enters into interest rate swap contracts to more closely match the cash flow and duration characteristics of its assets with those of its liabilities. Interest rate swaps paired with the issuance of short-term debt effectively can create fixed rate funding that approximately matches duration with the corresponding assets being funded.  Farmer Mac evaluates the overall cost of using the swap market in conjunction with debt issuance as a funding alternative to duration-matched debt and enters into interest rate swaps to manage interest rate risks across the balance sheet.


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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 and SOFR). Also, certain financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.

As discussed in Note 4 to the consolidated financial statements, all financial derivatives are recorded on the balance sheet at fair value as derivative assets or as derivative liabilities. Changes in the fair values of financial derivatives are reported in "(Losses)/gains on financial derivatives" in the consolidated statements of operations. For financial derivatives designated in fair value hedge accounting relationships, changes in the fair values of the hedged items 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 accounting relationships are also recorded in "Net interest income" in the consolidated statements of operations. For financial derivatives designated in cash flow hedge accounting 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. 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, 2020 and December 31, 2019, Farmer Mac had no uncollateralized net exposures.

Re-funding and repricing 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 and SOFR) on many of the floating rate assets it holds. This exposure is referred to as "re-funding and repricing risk." Re-funding and repricing risk arises from potential changes in funding costs when Farmer Mac funds floating rate, or synthetic floating rate, assets with floating rate liabilities with shorter maturities. Changes in Farmer Mac's funding costs relative to the benchmark rate to which the assets are indexed can cause changes to net interest income from funding those assets.

Farmer Mac is subject to re-funding and repricing risk on any floating rate assets that are not funded to contractual maturity. In addition, many of Farmer Mac's floating rate assets may prepay before the contractual maturity date. Farmer Mac is also subject to re-funding and repricing risk on a portion of its fixed rate assets as a result of its use of pay-fixed receive-floating interest rate swaps that effectively convert the required funding needed from fixed rate to floating rate. These fixed rate assets are then effectively synthetically floating rate assets that require floating rate funding.

Farmer Mac can meet floating rate funding needs 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 and reset frequencies that match the assets being funded;
issuing non-maturity matched, floating rate medium-term notes with reset frequencies that match the assets being funded; or
issuing non-maturity matched, 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.


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To meet floating rate funding needs, Farmer Mac frequently issues shorter-term floating-rate medium-term notes or fixed rate medium-term notes paired with an interest rate swap because these options generally provide a lower cost of funding while generating an effective interest rate match. 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 in the context of Farmer Mac's overall liability issuance and liquidity management strategies.

However, if the funding cost of Farmer Mac’s discount notes or medium-term notes were to deteriorate relative to LIBOR (or a different market index to which the assets are being funded) during the time between when these floating rate assets were first funded and when Farmer Mac refinanced the associated debt, Farmer Mac would be exposed to a commensurate reduction in its net effective spread on the associated assets. Conversely, if the funding cost on Farmer Mac’s discount notes or medium-term notes were to improve relative to LIBOR (or a different market index) during that time, Farmer Mac would benefit from a commensurate increase in its net effective spread on those assets.

Farmer Mac's liability issuance strategy targets balancing liquidity risk and re-funding and repricing risk while maintaining an appropriate liability management profile that is consistent with Farmer Mac's risk tolerance. ALCO regularly reviews Farmer Mac's liability issuance strategy to appropriately manage re-funding and repricing risk.

As of September 30, 2020, Farmer Mac held $7.0 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 $6.2 billion of interest rate swaps outstanding where Farmer Mac pays a fixed rate of interest and receives a floating rate of interest.

Throughout the first nine months of 2020, Farmer Mac's funding relative to LIBOR remained stable with spreads comparable to historical averages. Farmer Mac regularly adjusts its funding strategies to mitigate the effects of spread variability from time to time and seeks to maintain an effective funding cost in the context of its overall liability management and liquidity management strategies.

Discontinuation of LIBOR

As described in "Risk Factors—Market Risk" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 25, 2020, Farmer Mac faces risks associated with the reform, replacement, or discontinuation of the LIBOR benchmark interest rate and the transition to an alternative benchmark interest rate. We are currently evaluating the potential effect on our business of the replacement of the LIBOR benchmark interest rate, including the possibility of replacement benchmark interest rates.

As of September 30, 2020, Farmer Mac held $5.7 billion of floating rate assets in its lines of business and its investment portfolio, had issued $5.2 billion of floating rate debt, and had entered into $14.9 billion notional amount of interest rate swaps, each of which reset based on LIBOR. In addition, our Non-Cumulative Series C Preferred Stock currently pays a fixed rate of interest until July 17, 2024. It becomes redeemable at our option on July 18, 2024 and thereafter pays interest at a floating rate equal to three-month LIBOR plus 3.260%.

The market transition away from LIBOR and towards an alternative benchmark interest rate that may be developed is expected to be complicated and may require the development of term and credit adjustments

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to accommodate for differences between the benchmark interest rates. The transition may also result in different financial performance for previously booked transactions, require different hedging strategies, or require renegotiation of previously booked transactions. As of September 30, 2020, we had $1.1 billion outstanding in medium-term notes based on the Secured Overnight Financing Rate (SOFR), a potential alternative benchmark interest rate.

Liquidity and Capital Resources

Farmer Mac's primary sources of funds to meet its liquidity and funding needs are the proceeds of its debt issuances, guarantee and commitment fees, net effective spread, loan repayments, and maturities of AgVantage securities. Farmer Mac regularly accesses the capital markets for funding, and Farmer Mac has maintained access to the capital markets at favorable rates through third quarter 2020. Farmer Mac funds its purchases of eligible loan assets, USDA Securities, Farmer Mac Guaranteed Securities, and investment assets and finances its operations primarily by issuing debt obligations of various maturities in the public capital markets. As of September 30, 2020, Farmer Mac had outstanding discount notes of $2.4 billion, medium-term notes that mature within one year of $8.6 billion, and medium-term notes that mature after one year of $10.7 billion.

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 contingency funding 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 must maintain a minimum of 90 days of liquidity under its liquidity and investment regulations. Under the methodology for calculating available days of liquidity prescribed by those regulations, Farmer Mac maintained an average of 202 days of liquidity during third quarter 2020 and had 182 days of liquidity as of September 30, 2020. ALCO regularly reviews Farmer Mac's liquidity position and ensures the required minimums are maintained.
 
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.  Farmer Mac's current policies authorize liquidity investments in:
 
obligations of or fully guaranteed by the United States or a U.S. government agency;
obligations of or fully guaranteed by GSEs;
municipal securities;
international and multilateral development bank obligations;
money market instruments;
diversified investment funds;
asset-backed securities;
corporate debt securities; and
mortgage-backed securities.


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The following table presents these assets as of September 30, 2020 and December 31, 2019:

Table 34
  As of September 30, 2020 As of December 31, 2019
  (in thousands)
Cash and cash equivalents $ 910,592  $ 604,381 
Investment securities:    
Guaranteed by U.S. Government and its agencies 1,696,538  1,842,640 
Guaranteed by GSEs 1,861,611  1,143,323 
Asset-backed securities 19,109  18,912 
Total $ 4,487,850  $ 3,609,256 

The increase in the investment portfolio since December 31, 2019 was to provide a greater level of liquidity in response to the COVID-19 pandemic, to prepare for the possibility of future volatility in the debt capital markets, and to support program asset growth as the overall funding needs for the balance sheet increased.

Capital Requirements. Farmer Mac is subject to the following statutory capital requirements – minimum, critical, and risk-based. Farmer Mac must comply with the higher of the minimum capital requirement and the risk-based capital requirement. As of September 30, 2020, Farmer Mac was in compliance with its statutory capital requirements and was classified as within "level I" (the highest compliance level).

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 restricts Tier 1-eligible dividends and any discretionary bonus payments if Tier 1 capital falls below specified thresholds. As of September 30, 2020 and December 31, 2019, Farmer Mac's Tier 1 capital ratio was 14.3% and 12.9%, respectively. The increase in our Tier 1 capital ratio was due to the fact that capital growth, which reflects the issuance of the Series E and Series F Preferred Stock, partially offset by the redemption of the Series A Preferred Stock, outpaced the growth in risk-weighted assets during the first nine months of 2020. As of September 30, 2020, Farmer Mac was in compliance with its capital adequacy policy. Farmer Mac does not expect its compliance on an ongoing basis with FCA's rule on capital planning, including Farmer Mac's policy on Tier 1 capital, to materially affect Farmer Mac's operations or financial condition.

For more information about the capital requirements applicable to Farmer Mac, its capital adequacy policy, and FCA's rule on capital planning, 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, 2019 filed with the SEC on February 25, 2020. See Note 8 to the consolidated financial statements for more information about Farmer Mac's capital position.

Regulatory Matters

In response to the economic effects of the COVID-19 pandemic, FCA has issued regulatory guidance to encourage Farmer Mac to work with its lending and servicing partners in approving servicing actions for borrowers impacted by COVID-19, including working with other Farm Credit System institutions on approvals for loans to which statutory borrower rights are attached (primarily in LTSPCs). FCA also provided guidance about under what circumstances loans with approved servicing actions due exclusively

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to the economic effects of the COVID-19 pandemic should not be classified as nonaccrual or troubled debt restructurings.

Also in response to the COVID-19 pandemic and the related economic effects, Congress passed a series of stimulus measures, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which contained a $9.5 billion emergency fund for the USDA aimed toward providing help to livestock, dairy, and produce providers who sell locally. It also included a $14 billion replenishment of the CCC, a line of credit at the U.S. Treasury Department that USDA can use to help crop and livestock producers. On April 17, 2020, USDA announced that it would provide $19 billion of assistance through the Coronavirus Food Assistance Program ("CFAP"). CFAP used the funding and authorities provided in the CARES Act, the Families First Coronavirus Response Act, and other USDA existing authorities to provide $16 billion in direct support to farmers and ranchers based on actual losses from disruptions to prices and market supply chains and for projected impacts to marketing costs resulting from lost demand and short-term oversupply for the 2020 marketing year caused by the coronavirus. As part of CFAP, USDA also announced that it would purchase $3 billion in fresh produce, dairy, and meat. These purchases are aimed at propping up commodity prices while providing commodities to food banks, community and faith based organizations, and other non-profits serving Americans in need. As of October 25, 2020, the USDA had distributed $10.3 billion in CFAP payments. Additionally, on September 17, 2020, the USDA announced the second round of CFAP funding through the authorities of the CCC for up to $14 billion in direct support for eligible commodities ("CFAP 2"). As of October 25, 2020, the USDA had distributed more than $7.6 billion in payments through CFAP 2. Through the end of October, more than $26 billion in economic support has been delivered to farm businesses under the CARES Act through a combination of direct payments and loans. In addition to legislation and stimulus in response to COVID-19, Farmer Mac continues to monitor the establishment and evolution of legislation and regulations that could affect farmers, ranchers, rural lenders, and rural America in general.

Other Matters

The expected effects of recently issued accounting pronouncements on the consolidated financial statements are presented in Note 1(d) to the consolidated financial statements.


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Supplemental Information

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

Table 35
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, 2020 $ 740,823  $ 94,495  $ 225,494  $ 62,300  $ —  $ 211,908  $ 1,335,020 
June 30, 2020 609,284  85,390  224,016  339,366  19,500  430,024  1,707,580 
March 31, 2020 401,853  73,674  147,906  152,668  —  560,395  1,336,496 
December 31, 2019 602,750  65,614  143,565  102,900  —  371,075  1,285,904 
September 30, 2019 309,805  125,022  113,664  117,279  —  402,611  1,068,381 
June 30, 2019 248,152  57,321  118,335  105,000  —  659,447  1,188,255 
March 31, 2019 203,156  91,215  57,223  546,198  —  825,417  1,723,209 
December 31, 2018 285,008  80,840  90,297  3,000  —  585,814  1,044,959 
September 30, 2018 192,628  64,100  116,339  —  —  1,085,953  1,459,020 
For the year ended:
December 31, 2019 $ 1,363,863  $ 339,172  $ 432,787  $ 871,377  $ —  $ 2,258,550  $ 5,265,749 
December 31, 2018 960,848  430,071  460,121  11,645  —  3,310,307  5,172,992 



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Table 36
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 $ 174,986  $ 2,524  $ 32,276  $ 29,654  $ 54,513  $ 14,100  $ 547,236  $ 855,289 
Unscheduled 326,025  1,934  66,074  138,518  —  —  —  532,551 
September 30, 2020 $ 501,011  $ 4,458  $ 98,350  $ 168,172  $ 54,513  $ 14,100  $ 547,236  $ 1,387,840 
Scheduled $ 101,264  $ 3,043  $ 39,010  $ 37,879  $ 23,589  $ 25,132  $ 471,295  $ 701,212 
Unscheduled 248,890  4,034  92,177  154,536  3,935  —  —  503,572 
June 30, 2020 $ 350,154  $ 7,077  $ 131,187  $ 192,415  $ 27,524  $ 25,132  $ 471,295  $ 1,204,784 
Scheduled $ 128,768  $ 6,132  $ 50,393  $ 43,069  $ 34,235  $ 13,593  $ 304,540  $ 580,730 
Unscheduled 191,260  3,888  60,442  78,806  —  —  —  334,396 
March 31, 2020 $ 320,028  $ 10,020  $ 110,835  $ 121,875  $ 34,235  $ 13,593  $ 304,540  $ 915,126 
Scheduled $ 57,488  $ 4,737  $ 39,878  $ 25,142  $ 10,317  $ 10,551  $ 656,095  $ 804,208 
Unscheduled 105,671  3,247  74,121  66,011  34,063  —  13,000  296,113 
December 31, 2019 $ 163,159  $ 7,984  $ 113,999  $ 91,153  $ 44,380  $ 10,551  $ 669,095  $ 1,100,321 
Scheduled $ 97,421  $ 3,095  $ 22,713  $ 27,853  $ 31,656  $ 8,692  $ 441,575  $ 633,005 
Unscheduled 129,676  2,663  76,883  39,442  —  —  1,088  249,752 
September 30, 2019 $ 227,097  $ 5,758  $ 99,596  $ 67,295  $ 31,656  $ 8,692  $ 442,663  $ 882,757 
Scheduled $ 39,879  $ 3,758  $ 58,779  $ 38,676  $ 6,951  $ 17,092  $ 612,964  $ 778,099 
Unscheduled 64,912  3,399  58,979  43,044  —  —  —  170,334 
June 30, 2019 $ 104,791  $ 7,157  $ 117,758  $ 81,720  $ 6,951  $ 17,092  $ 612,964  $ 948,433 
Scheduled $ 112,973  $ 5,843  $ 74,054  $ 41,266  $ 31,492  $ 7,660  $ 470,812  $ 744,100 
Unscheduled 67,608  1,798  50,482  46,798  24,448  —  5,587  196,721 
March 31, 2019 $ 180,581  $ 7,641  $ 124,536  $ 88,064  $ 55,940  $ 7,660  $ 476,399  $ 940,821 
Scheduled $ 36,006  $ 8,331  $ 35,682  $ 24,793  $ 6,321  $ 16,062  $ 568,277  $ 695,472 
Unscheduled 56,299  9,257  33,319  21,135  20,538  —  —  140,548 
December 31, 2018 $ 92,305  $ 17,588  $ 69,001  $ 45,928  $ 26,859  $ 16,062  $ 568,277  $ 836,020 
Scheduled $ 73,476  $ 5,677  $ 21,742  $ 28,135  $ 25,640  $ 8,286  $ 1,102,798  $ 1,265,754 
Unscheduled 77,492  4,562  47,159  35,068  3,476  —  9,760  177,517 
September 30, 2018 $ 150,968  $ 10,239  $ 68,901  $ 63,203  $ 29,116  $ 8,286  $ 1,112,558  $ 1,443,271 
For the year ended:
Scheduled $ 307,761  $ 17,433  $ 195,424  $ 132,937  $ 80,416  $ 43,995  $ 2,181,446  $ 2,959,412 
Unscheduled 367,867  11,107  260,465  195,295  58,511  —  19,675  912,920 
December 31, 2019 $ 675,628  $ 28,540  $ 455,889  $ 328,232  $ 138,927  $ 43,995  $ 2,201,121  $ 3,872,332 
Scheduled $ 253,290  $ 36,484  $ 158,548  $ 130,722  $ 58,821  $ 33,047  $ 2,822,608  $ 3,493,520 
Unscheduled 293,719  27,021  231,221  165,993  90,272  120,022  9,760  938,008 
December 31, 2018 $ 547,009  $ 63,505  $ 389,769  $ 296,715  $ 149,093  $ 153,069  $ 2,832,368  $ 4,431,528 



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Table 37
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, 2020 $ 5,857,324  $ 85,767  $ 2,306,258  $ 2,735,129  $ 2,109,355  $ 575,953  $ 8,319,502  $ 21,989,288 
June 30, 2020 5,617,512  90,225  2,310,113  2,677,807  2,101,568  590,053  8,654,830  22,042,108 
March 31, 2020 5,358,382  97,302  2,355,910  2,646,206  1,789,726  595,685  8,696,101  21,539,312 
December 31, 2019 5,276,557  107,322  2,393,071  2,620,175  1,671,293  609,278  8,440,246  21,117,942 
September 30, 2019 4,836,966  115,306  2,441,456  2,567,763  1,612,773  619,829  8,738,266  20,932,359 
June 30, 2019 4,754,258  121,064  2,416,030  2,521,394  1,527,150  628,521  8,778,318  20,746,735 
March 31, 2019 4,610,897  128,221  2,476,467  2,484,779  1,429,101  645,613  8,731,835  20,506,913 
December 31, 2018 4,588,322  135,862  2,509,787  2,515,620  938,843  653,273  8,382,817  19,724,524 
September 30, 2018 4,420,619  287,594  2,363,805  2,471,251  962,702  669,335  8,365,280  19,540,586 


Table 38
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, 2020 $ 10,879,372  $ 2,811,547  $ 5,013,640  $ 18,704,559 
June 30, 2020 10,793,629  2,845,266  5,076,445  18,715,340 
March 31, 2020 10,296,598  2,818,869  4,996,478  18,111,945 
December 31, 2019 10,045,712  2,863,199  4,702,577  17,611,488 
September 30, 2019 9,642,802  2,850,000  4,549,689  17,042,491 
June 30, 2019 9,446,117  2,825,151  4,601,917  16,873,185 
March 31, 2019 9,206,082  2,720,639  4,643,506  16,570,227 
December 31, 2018 8,325,347  2,717,505  4,705,169  15,748,021 
September 30, 2018 7,945,007  2,629,612  4,986,987  15,561,606 



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

Table 39
Net Effective Spread by Line of Business
Farm & Ranch USDA Guarantees Rural Utilities Institutional Credit Corporate Net Effective Spread
Dollars Yield Dollars Yield Dollars Yield Dollars Yield Dollars Yield Dollars Yield
(dollars in thousands)
For the quarter ended:
September 30, 2020(1)
$ 18,025  1.67  % $ 5,865  0.97  % $ 6,939  1.32  % $ 18,601  0.87  % $ 2,372  0.23  % $ 51,802  0.96  %
June 30, 2020 16,733  1.71  % 4,689  0.81  % 5,516  1.15  % 18,782  0.86  % 749  0.08  % 46,469  0.89  %
March 31, 2020 14,938  1.64  % 4,625  0.81  % 4,920  1.14  % 17,702  0.84  % 1,978  0.21  % 44,163  0.89  %
December 31, 2019 16,374  1.90  % 4,363  0.78  % 4,871  1.17  % 18,008  0.85  % 2,375  0.27  % 45,991  0.95  %
September 30, 2019(1)
13,181  1.66  % 4,314  0.79  % 4,502  1.16  % 17,807  0.84  % 2,657  0.30  % 42,461  0.90  %
June 30, 2019
13,335  1.72  % 4,097  0.76  % 3,996  1.10  % 17,371  0.82  % 2,556  0.34  % 41,355  0.91  %
March 31, 2019 12,737  1.70  % 3,964  0.74  % 3,233  1.12  % 16,373  0.79  % 2,494  0.35  % 38,801  0.89  %
December 31, 2018 13,288  1.79  % 4,630  0.85  % 2,833  1.19  % 15,751  0.80  % 2,353  0.36  % 38,855  0.93  %
September 30, 2018 13,887  1.91  % 4,627  0.86  % 2,877  1.18  % 15,642  0.78  % 2,044  0.30  % 39,077  0.93  %
(1)See Note 10 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, 2020 and 2019.





























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

Table 40
Core Earnings by Quarter End
September 2020 June 2020 March 2020 December 2019 September 2019 June 2019 March 2019 December 2018 September 2018
(in thousands)
Revenues:
Net effective spread $ 51,802  $ 46,469  $ 44,163  $ 45,991  $ 42,461  $ 41,355  $ 38,801  $ 38,855  $ 39,077 
Guarantee and commitment fees 4,659  4,943  4,896  5,432  5,208  5,276  5,419  5,309  5,170 
Other 453  1,048  674  100  389  777  509  (129) 110 
Total revenues 56,914  52,460  49,733  51,523  48,058  47,408  44,729  44,035  44,357 
Credit related expense/(income):
Provision for/(release of) losses 1,200  51  3,831  2,851  623  420  (393) 166  (3)
REO operating expenses —  —  —  —  —  64  —  —  — 
(Gains)/losses on sale of REO —  —  (485) —  —  —  —  —  41 
Total credit related expense/(income) 1,200  51  3,346  2,851  623  484  (393) 166  38 
Operating expenses:
Compensation and employee benefits 8,791  8,087  10,127  6,732  7,654  6,770  7,606  7,167  6,777 
General and administrative 5,044  5,295  5,363  5,773  5,253  4,689  4,596  5,829  4,350 
Regulatory fees 725  725  725  725  688  687  688  687  625 
Total operating expenses 14,560  14,107  16,215  13,230  13,595  12,146  12,890  13,683  11,752 
Net earnings 41,154  38,302  30,172  35,442  33,840  34,778  32,232  30,186  32,567 
Income tax expense 8,297  8,016  6,598  7,526  7,018  7,351  6,715  6,431  6,891 
Preferred stock dividends 5,166  3,939  3,431  3,432  3,427  3,785  3,296  3,296  3,295 
Core earnings $ 27,691  $ 26,347  $ 20,143  $ 24,484  $ 23,395  $ 23,642  $ 22,221  $ 20,459  $ 22,381 
Reconciling items:
(Losses)/gains on undesignated financial derivatives due to fair value changes (4,149) 8,700  (6,484) 4,469  (7,117) 10,485  2,240  (96) 3,625 
(Losses)/gains on hedging activities due to fair value changes (5,245) (2,676) (5,925) (220) (4,535) (1,438) (2,817) (853) 1,051 
Unrealized (losses)/gains on trading assets (258) (20) 106  172  49  61  44  57  (3)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value 97  35  40  (7) (139) (16) 67  (38)
Net effects of terminations or net settlements on financial derivatives 233  720  (1,300) 1,339  232  (592) 110  (312) 546 
Issuance costs on the retirement of preferred stock (1,667) —  —  —  —  (1,956) —  —  — 
Income tax effect related to reconciling items 1,957  (1,419) 2,856  (1,218) 2,389  (1,759) 92  238  (1,088)
Net income attributable to common stockholders $ 18,659  $ 31,687  $ 9,399  $ 29,066  $ 14,406  $ 28,304  $ 21,874  $ 19,560  $ 26,474 


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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 about 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 (“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 about 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, 2020.
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, 2020.

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, 2020 that have materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial reporting.


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PART II

Item 1.Legal Proceedings

None.

Item 1A.Risk Factors

For a discussion of our risk factors see Part I, Item 1A "Risk Factors" of Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 ("2019 Form 10-K"), as filed with the SEC on February 25, 2020, and as updated by Farmer Mac's Current Report on Form 8-K filed with the SEC on April 6, 2020, Farmer Mac's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2020, and Farmer Mac's Quarterly Report on Form 10-Q filed with the SEC on August 10, 2020 ("2020 Second Quarter Form 10-Q"). The information included in the "Risk Factors" section of the 2020 Second Quarter Form 10-Q is incorporated by reference herein. The risk factors in this section update and supplement the risk factors described in "Risk Factors" in the 2019 Form 10-K and the 2020 Second Quarter Form 10-Q. The primary risks to our business and how we seek to manage those risks are also described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management," in the 2019 Form 10-K and in this report. The risks we face could materially affect our business, operations, operating results, financial condition, liquidity, capital levels, or future results and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make.

Farmer Mac’s efforts to manage and mitigate these risk factors may be unsuccessful, and the effectiveness of these efforts and the extent to which the COVID-19 pandemic affects Farmer Mac’s business, results of operations, and financial condition will depend on factors beyond its control, including: the duration, severity, and spread of the pandemic; third-party and government actions taken to contain COVID-19 or treat its impact and mitigate public health and economic effects; the nature and extent of the deferments approved for borrowers negatively affected by COVID-19; the conduct of agricultural producer borrowers in response to the COVID-19 pandemic and how quickly and to what extent affected borrowers can recover from the negative economic impact of the pandemic; and how quickly and to what extent normal economic and operating conditions can resume, including whether any future COVID-19 outbreaks interrupt economic recovery. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment and stimulus measures, continued outbreaks and increasing rates of infection, and the related impacts to economic and operating conditions. Even after the COVID-19 pandemic is over, Farmer Mac may continue to experience material adverse effects to its business as a result of the disruption in the global economy, the domestic agricultural economy, and any resulting recession. Because there have been no comparable recent global pandemics that resulted in similar global macroeconomic impact, Farmer Mac does not yet know the full extent of the effects on its business, operations, or the global economy as a whole, but they could materially and adversely affect Farmer Mac’s business, operations, operating results, financial condition, liquidity, or capital levels as discussed in more detail below.






123







The trading price for Farmer Mac's Class C non-voting common stock may be volatile due to market influences, trading volume, the effects of equity awards for Farmer Mac's officers, directors, and employees, or sales of significant amounts of the stock by large holders.

The trading price of Farmer Mac's Class C non-voting common stock ("Class C stock") has at times experienced substantial price volatility and may continue to be volatile. For example, from January 2020 to October 2020, the closing price of the Class C stock ranged from $43.02 per share to $83.55 per share. The trading price may fluctuate in response to various factors, including short sales, hedging, the presence or absence of a share repurchase program, stock market influences in general that are unrelated to Farmer Mac's operating performance (including COVID-19), or sales of significant amounts of the stock by large holders. Farmer Mac typically grants equity awards each year that are based on the Class C stock, including grants that vest over time or upon the achievement of specified performance goals. Sales of stock acquired upon vesting or the exercise of equity awards by Farmer Mac's officers, directors, or employees, whether under an established trading plan or otherwise, could adversely affect the trading price of the Class C stock.

As to the potential effect of sales of significant amounts of the Class C stock by large holders, Farmer Mac is aware of a regulatory action that could result in significant sales by Zions Bancorporation, National Association (“Zions”), which held 600,000 shares of Class C stock (approximately 6.5% of the outstanding shares) as of November 6, 2020. In a letter granting conditional approval of a proposed merger involving Zions, the applicable federal regulator found that, although Zions had requested to maintain its ownership in Farmer Mac’s Class C stock after the merger, the continued ownership of Class C stock (held by Zions' holding company before the merger) would not be a permissible investment for the surviving national bank entity of the merger based on then-current precedent. Under the terms of the conditional approval letter, Zions was to divest its ownership of the Class C stock by September 30, 2020, however Zions has indicated in its Quarterly Report filed on Form 10-Q on May 6, 2020, that the regulator has granted approval for Zions to extend the original sale deadline from September 30, 2020 to a date which will enable an orderly sale of its Farmer Mac Class C stock. Even though the regulator has made the determination to allow Zions to sell the Class C stock over an extended period, Zions is still required to sell all or a significant amount of its remaining Class C stock, and those sales could adversely affect the trading price of the Class C stock. The merger condition related to Zions’ ownership of Class C stock does not apply to Zions’ ownership of 322,100 shares of Farmer Mac’s Class A voting common stock (approximately 31.25% of the outstanding shares of that stock as of September 30, 2020). Farmer Mac believes that Zions' sales of the Class C stock, and the expectation that its sales will continue until all shares are sold, have in the past and can be expected in the future to negatively impact the potential for increases in the price of the Class C stock.

All of these factors may be exacerbated during periods of low trading volume for Farmer Mac's Class C stock, which has averaged approximately 50,000 shares daily during 2020, and may have a prolonged negative effect on its trading price or increase price volatility.

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 2020, the following transactions occurred related to Farmer Mac's equity securities that were not

124





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 131 shares of its Class C non-voting common stock in July 2020 to the four 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 $64.01 per share, which was the closing price of the Class C non-voting common stock on June 30, 2020 (the last trading day of the previous 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.

Item 5.Other Information

(a) None.

(b) None.


125





Item 6.Exhibits

* 3.1
* 3.2

* 4.1
* 4.2
* 4.3
* 4.4
* 4.4.1
* 4.5
* 4.5.1
* 4.6

* 4.6.1
* 4.7
* 4.7.1
** 4.8
* 4.8.1
** 4.9
* 21
** 31.1
** 31.2
** 32
** 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
** 101.SCH Inline XBRL Taxonomy Extension Schema
** 101.CAL Inline XBRL Taxonomy Extension Calculation
** 101.DEF Inline XBRL Taxonomy Extension Definition
** 101.LAB Inline XBRL Taxonomy Extension Label
** 101.PRE Inline XBRL Taxonomy Extension Presentation
** 104 Cover Page Inline Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document included as Exhibit 101


126





* 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.

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 9, 2020
By:
Bradford T. Nordholm
  Date
  President and Chief Executive Officer    
  (Principal Executive Officer)    
          /s/ Aparna Ramesh   November 9, 2020
By:
Aparna Ramesh
  Date
  Executive Vice President - Chief Financial Officer and Treasurer    
  (Principal Financial Officer)    



127
        Exhibit 4.8
Established under the Laws of the United States Pursuant to an Act of Congress

FEDERAL AGRICULTURAL
MORTGAGE CORPORATION
Series F
Certificate No.
No. of Series F Shares
4,800,000
1

CUSIP No.: 313148843

5.250% Non-Cumulative Preferred Stock, Series F

        THIS CERTIFIES THAT Cede & Co. is the registered holder of 4,800,000 fully paid and non-assessable shares, par value $25.00 per share, of 5.250% Non-Cumulative Preferred Stock, Series F of the Federal Agricultural Mortgage Corporation (hereinafter and on the reverse hereof referred to as the “Corporation”) transferable on the books and records of the Continental Stock Transfer & Trust Company (the “Transfer Agent”) in accordance with the applicable procedures of the Transfer Agent and the Depository Trust Company, a New York corporation (“DTC”).

        IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officers this 20th day of August, 2020.

____SPECIMEN___________________
___SPECIMEN____________________
President and Chief Executive Officer Executive Vice President – General Counsel and Secretary

    THE PREFERRED STOCK IS NOT A DEBT OR OBLIGATION OF, AND IS NOT GUARANTEED BY, THE UNITED STATES, THE FARM CREDIT ADMINISTRATION, THE FARM CREDIT SYSTEM OR ANY FEDERAL AGENCY OR INSTRUMENTALITY OR ANY INDIVIDUAL INSTITUTION OF THE FARM CREDIT SYSTEM OTHER THAN THE FEDERAL AGRICULTURAL MORTGAGE CORPORATION.
THE INFORMATION CONTAINED IN THIS CERTIFICATE IS A SUMMARY OF CERTAIN PROVISIONS OF TITLE VIII OF THE FARM CREDIT ACT OF 1971, AS AMENDED (THE “ACT”), WHICH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE THERETO.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND ARE BEING ISSUED PURSUANT TO THE EXEMPTION AFFORDED BY SECTION 3(a)(2) OF THE SECURITIES ACT. THEREFORE, THE SECURITIES ARE NOT RESTRICTED SECURITIES AND ARE FREELY TRANSFERABLE.
THE HOLDER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS ENTITLED TO CERTAIN RIGHTS AND SUBJECT TO CERTAIN OBLIGATIONS,


        Exhibit 4.8
INCLUDING PROVISIONS RELATING TO REDEMPTION, LIQUIDATION PREFERENCES AND DIVIDEND RATE, AS SET FORTH IN THE CERTIFICATE OF DESIGNATION OF TERMS AND CONDITIONS OF 5.250% NON-CUMULATIVE PREFERRED STOCK, SERIES F. THE SECURITIES EVIDENCED BY THIS CERTIFICATE SHALL NOT HAVE ANY PREEMPTIVE RIGHTS TO PURCHASE UNISSUED OR TREASURY SHARES OF THE CORPORATION.
THIS CERTIFICATE AND SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL BE SUBJECT TO THE PROVISIONS OF THE ACT, AND THE BYLAWS, RULES AND REGULATIONS OF THE CORPORATION, AND ALL AMENDMENTS THERETO, TO ALL OF WHICH THE HOLDER HEREOF BY ACCEPTANCE OF THIS CERTIFICATE ASSENTS.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK, INCLUDING ADDITIONAL PREFERRED STOCK DESIGNATED AS 5.250% NON-CUMULATIVE PREFERRED STOCK, SERIES F. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES, AND RELATIVE, PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
        UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, TO THE CORPORATION OR THE TRANSFER AGENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.




        Exhibit 4.8
REVERSE OF SECURITY
1. Designation, Par Value, Number of Shares, and Seniority
The class of preferred stock of Farmer Mac created hereby (the “Preferred Stock”) shall be designated “5.250% Non-Cumulative Preferred Stock, Series F,” shall have a par value of $25.00 per share and a liquidation preference of $25.00 per share and shall consist of 4,800,000 shares. The Board of Directors, or a duly authorized committee thereof, shall be permitted to increase the authorized number of such shares at any time and from time to time. The Preferred Stock shall rank senior to the Class A Voting Common Stock, Class B Voting Common Stock, and Class C Non-Voting Common Stock of Farmer Mac (collectively, the “Common Stock”), and on parity with the outstanding 5.875% Non-Cumulative Preferred Stock, Series A, the outstanding 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C, the outstanding 5.700% Non-Cumulative Preferred Stock, Series D and the outstanding 5.750% Non-Cumulative Preferred Stock, Series E of Farmer Mac (collectively, the “Outstanding Parity Preferred Stock”), in each case to the extent provided in this Certificate.
2. Dividends
(a) Subject to paragraphs (2) and (3) of Section 8.4(c) of the Farm Credit Act of 1971, as amended (12 U.S.C. §§ 2279aa-4(c)), holders of outstanding shares of the Preferred Stock shall be entitled to receive, ratably, when, as, and if declared by the Board of Directors, in its sole discretion, out of funds legally available for dividend payments, on a non-cumulative basis, quarterly cash dividends at the annual rate of 5.250% of the liquidation preference of the Preferred Stock, or $1.3125 per share per year of Preferred Stock. Dividends on the Preferred Stock shall be payable when, as, and if declared by the Board of Directors, on January 17, April 17, July 17 and October 17 of each year (each, a “Dividend Payment Date”), beginning on October 17, 2020. If a Dividend Payment Date is not a “Business Day,” the related dividend (if declared) shall be paid on the next Business Day with the same force and effect as though paid on the Dividend Payment Date, without any increase to account for the period from such Dividend Payment Date through the date of actual payment. For these purposes, “Business Day” means a day other than (i) a Saturday or Sunday, (ii) a day on which New York City banks are closed, or (iii) a day on which the offices of Farmer Mac are closed. The “Dividend Period” relating to a Dividend Payment Date shall be the period from, but not including, the preceding Dividend Payment Date (or from, but not including, August 20, 2020 in the case of the first Dividend Payment Date) (regardless of whether or not a dividend was declared and paid for such previous Dividend Period) through and including the related Dividend Payment Date. If declared, the dividend payable in respect of a Dividend Period shall be $0.328125 per share, or such lesser amount as the Board of Directors may determine; provided, however, that the dividend, when, as, and if declared by the Board of Directors, for the first Dividend Period shall be $0.2078125 per share, or such lesser amount as the Board of Directors may determine. The amount of dividends payable for any period shorter than a full quarterly Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends shall be paid to holders of record of outstanding shares of the Preferred Stock as they appear in the books and records of Farmer Mac on the record date fixed by the Board of Directors, not to be earlier


        Exhibit 4.8
than 45 days nor later than 10 days preceding the applicable Dividend Payment Date. Notwithstanding any other provision hereof to the contrary, dividends on the Preferred Stock shall not be declared, paid, or set aside for payment to the extent such act would cause Farmer Mac to fail to comply with laws or regulations applicable thereto, including any applicable capital adequacy requirements.
(b) No dividends shall be declared or paid or set apart for payment on the Common Stock or any other class or series of stock ranking junior to the Preferred Stock unless full dividends have been declared and paid for the then-current Dividend Period or set apart or ordered by our Board of Directors to be set apart for payment on the outstanding Preferred Stock in respect of the then-current Dividend Period. The foregoing dividend preference shall not in any way create any claim or right in favor of the holders of the Preferred Stock in the event that Farmer Mac shall not have declared or paid or set apart or the Board of Directors shall not have ordered to be set apart dividends on the Preferred Stock in respect of any prior Dividend Period. In the event that Farmer Mac shall not declare any one or more dividends or any part thereof on the Preferred Stock, the holders of the Preferred Stock shall not have any claim in respect of such non-payment.
(c) Full dividends will not be declared or paid or set apart for payment on any outstanding class or series of stock issued by Farmer Mac of equal priority as to dividends as the Preferred Stock, including the Outstanding Parity Preferred Stock, unless dividends on the Preferred Stock for the then-current Dividend Period are declared and paid or set apart for payment in full. The Board of Directors may, in its discretion, choose to declare and pay less than a full dividend on the Preferred Stock. In the event that the Board of Directors declares less than a full dividend on the Preferred Stock and/or any other outstanding class or series of stock of equal priority as to dividends, including the Outstanding Parity Preferred Stock, the Board of Directors shall declare dividends on the Preferred Stock and such other outstanding stock, as applicable, on a proportional basis such that the amount of such dividends declared per share shall bear to each other the same ratio that full dividends per share for the then-current Dividend Period on the Preferred Stock and full dividends per share on any such other outstanding stock of equal priority as to dividends, bear to each other; provided, that, solely for purposes of calculating the ratio set forth in the foregoing sentence, the amount of full dividends per share for the then-current Dividend Period on the Preferred Stock and/or the full dividends per share on any such other outstanding stock of equal priority, as applicable, shall be increased by the amount per share of dividends that have been declared but not paid in respect of such stock, if any.
(d) Notwithstanding any other provision of this Certificate, the Board of Directors, in its sole discretion, may choose to pay dividends on the Preferred Stock without the payment of any dividends on the Common Stock or any other outstanding class or series of stock ranking junior to the Preferred Stock with respect to the payment of dividends.
(e) No dividend shall be declared or paid or set apart for payment on any shares of the Preferred Stock if at the same time any arrears or default exists in the payment of dividends on the Preferred Stock or on any outstanding class or series of stock of Farmer Mac ranking senior to or (except as provided herein) on parity with the Preferred Stock with respect to the payment


        Exhibit 4.8
of dividends, including the Outstanding Parity Preferred Stock. If and whenever dividends, having been declared, shall not have been paid in full, as aforesaid, on shares of the Preferred Stock and on the shares of any other class or series of stock of Farmer Mac ranking on parity with the Preferred Stock with respect to the payment of dividends, all such dividends that have been declared on shares of the Preferred Stock and on the shares of any such other class or series shall be paid pro rata, so that the respective amounts of dividends paid per share on the Preferred Stock and on such other class or series shall in all cases bear to each other the same ratio that the respective amounts of dividends declared but unpaid per share on the shares of the Preferred Stock and on the shares of such other class or series bear to each other.
(f) Holders of shares of the Preferred Stock shall not be entitled to any dividends, whether payable in cash or in property, other than as herein provided and shall not be entitled to interest, or any sum in lieu of interest, on or in respect of any dividend payment.
(g) If Farmer Mac defaults on the payment of the equivalent of six quarters of declared dividends (regardless of whether such quarters are consecutive quarters), then the holders of the Preferred Stock will have the right to elect two observers to the Board of Directors.
3. Optional Redemption
(a) The Preferred Stock shall not be redeemable before October 17, 2025. On that date and on any Dividend Payment Date thereafter, subject to the notice provisions set forth in Section 3(b) below and to any further limitations that may be imposed by law, Farmer Mac may redeem the Preferred Stock, in whole or in part, out of funds legally available therefor, at the redemption price of $25.00 per share plus an amount, determined in accordance with Section 2 above, equal to the amount of any declared and unpaid dividends through and including the date of redemption. If less than all of the outstanding shares of the Preferred Stock are to be redeemed, Farmer Mac shall select shares to be redeemed from the outstanding shares not previously called for redemption by lot or pro rata (as nearly as possible).
(b) In the event Farmer Mac shall redeem any or all of the Preferred Stock, Farmer Mac shall give notice of such redemption by first class mail, postage prepaid, mailed neither less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares of the Preferred Stock being redeemed, at such holder’s address as the same appears in the books and records of Farmer Mac; provided, that, if the Preferred Stock is held in book-entry form through DTC, Farmer Mac may give such notice in any manner permitted by DTC. Each such notice shall state the number of shares to be redeemed, the redemption price, the redemption date, and the procedures a holder must follow to submit its shares of Preferred Stock for redemption. Failure to duly give notice, or any defect in the notice, to any holder of the Preferred Stock shall not affect the validity of the proceedings for the redemption of shares of any other holder of the Preferred Stock being redeemed.
(c) If any redemption date is not a Business Day, payment of the redemption price may be made on the next Business Day with the same force and effect as if made on the redemption date, and no interest, additional dividends or other sums will accrue on the amount payable from the redemption date to the next Business Day.


        Exhibit 4.8
(d) Notice having been mailed as aforesaid, from and after the redemption date specified therein and upon payment of the consideration set forth in Section 3(a) above, said shares of the Preferred Stock shall no longer be deemed to be outstanding, and all rights of the holders thereof as holders of the Preferred Stock shall cease, with respect to shares so redeemed.
(e) Any shares of the Preferred Stock so redeemed shall, after such redemption, no longer have the status of issued or outstanding shares.
(f) The Preferred Stock shall not be subject to any mandatory redemption, sinking fund, or other similar provisions. In addition, holders of the Preferred Stock shall have no right to require redemption of any shares of the Preferred Stock.
4. No Voting Rights
Except as set forth in Section 9, the shares of the Preferred Stock shall not have any voting powers, either general or special, or have any consent rights.
5. No Conversion or Exchange Rights
The holders of shares of the Preferred Stock shall not have any right to convert such shares into or exchange such shares for any other class or series of stock or obligations of Farmer Mac.
6. No Preemptive Rights
No holder of the Preferred Stock shall, as such holder, be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any new or additional issue of other shares, rights, options, or other securities of any class of Farmer Mac whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.
7. Liquidation Rights and Preference
(a) Except as otherwise set forth herein, upon the voluntary or involuntary dissolution, liquidation, or winding up of Farmer Mac, after payment of or provision for the liabilities of Farmer Mac and the expenses of such dissolution, liquidation, or winding up, the holders of the outstanding shares of the Preferred Stock shall be entitled to receive out of the assets of Farmer Mac available for distribution to stockholders, before any payment or distribution shall be made on the Common Stock or any other class or series of stock of Farmer Mac ranking junior to the Preferred Stock upon liquidation, the amount of $25.00 per share plus an amount, determined in accordance with Section 2 above, equal to the amount of any declared and unpaid dividends through and including the date of payment in respect of such dissolution, liquidation, or winding up. The holders of the outstanding shares of any class or series of stock of Farmer Mac ranking on parity with the Preferred Stock upon liquidation, including the Outstanding Parity Preferred Stock, shall be entitled to receive out of the assets of Farmer Mac available for distribution to stockholders, before any such payment or distribution shall be made on the Common Stock or


        Exhibit 4.8
any other class or series of stock of Farmer Mac ranking junior to the Preferred Stock and to such parity stock upon dissolution, liquidation, or winding up, any corresponding preferential amount to which the holders of such parity stock may, by the terms thereof, be entitled; provided, however, that if the assets of Farmer Mac available for distribution to stockholders shall be insufficient for the payment in full of the aggregate amount to which the holders of the outstanding shares of the Preferred Stock and the holders of the outstanding shares of such parity stock shall be entitled to receive upon such dissolution, liquidation, or winding up of Farmer Mac as aforesaid, then, subject to paragraph (b) of this Section 7, all of the assets of Farmer Mac available for distribution to stockholders shall be distributed to the holders of outstanding shares of the Preferred Stock and to the holders of outstanding shares of such parity stock pro rata, so that the amounts so distributed to holders of the Preferred Stock and to holders of such classes or series of such parity stock, respectively, shall bear to each other the same ratio that the respective distributive amounts to which they are so entitled bear to each other. After the payment of the aforesaid amounts to which they are entitled, the holders of outstanding shares of the Preferred Stock and the holders of outstanding shares of any such parity stock shall not be entitled to any further participation in any distribution of assets of Farmer Mac. Solely for purposes of Section 8.4(e)(3) of the Farm Credit Act of 1971, as amended, the Preferred Stock shall be deemed to have a par value of $25.00 per share.
(b) Notwithstanding the foregoing, upon the dissolution, liquidation, or winding up of Farmer Mac, the holders of shares of the Preferred Stock then outstanding shall not be entitled to be paid any amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7 unless and until the holders of any classes or series of stock of Farmer Mac ranking senior to the Preferred Stock upon liquidation shall have been paid all amounts to which such classes or series are entitled pursuant to their respective terms.
(c) Neither the sale, lease, or exchange of all or substantially all of the property or business of Farmer Mac, nor the merger, consolidation, or combination of Farmer Mac into or with any other corporation or entity, shall be deemed to be a dissolution, liquidation, or winding up for the purpose of this Section 7.
8. Additional Preferred Stock and Additional Classes or Series of Stock
The Board of Directors shall have the right at any time in the future to authorize, create, and issue, by resolution or resolutions, additional Preferred Stock or one or more additional classes or series of stock of Farmer Mac, and to determine and fix the distinguishing characteristics and the relative rights, preferences, privileges and other terms of the shares thereof. Any such class or series of stock may rank senior to, on parity with, or junior to the Preferred Stock as to dividends, upon liquidation, or otherwise.
9. Amendments
Farmer Mac, by or under the authority of the Board of Directors, may amend, alter, supplement, or repeal any provision of this Certificate pursuant to the following terms and conditions:


        Exhibit 4.8
(a) Without the consent of the holders of the Preferred Stock, Farmer Mac may amend, alter, supplement, or repeal any provision of this Certificate to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Certificate, provided that such action shall not materially and adversely affect the powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms, or conditions of the Preferred Stock.
(b) The consent of the holders of at least two-thirds of all of the shares of the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Preferred Stock shall vote together as a class, shall be necessary for authorizing, effecting, or validating the amendment, alteration, supplementation, or repeal of the provisions of this Certificate if such amendment, alteration, supplementation, or repeal would materially and adversely affect the powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms, or conditions of the Preferred Stock. Notwithstanding the foregoing sentence, the 5.250% annual dividend rate, the redemption price, or the liquidation preference of the Preferred Stock shall not be reduced without the unanimous consent of the holders of all shares of the Preferred Stock. Any increase in the amount of authorized or issued Preferred Stock, or the creation and issuance of any other class or series of stock of Farmer Mac, or the issuance of additional shares of any existing class or series of stock of Farmer Mac, whether ranking senior to, on parity with, or junior to the Preferred Stock as to dividends, liquidation rights, or otherwise, shall be deemed not to constitute such an amendment, alteration, supplementation, or repeal.
(c) Holders of the Preferred Stock shall be entitled to one vote per share on matters on which their consent is required pursuant to subparagraph (b) of this Section 9. Consents shall be effective when duly executed and delivered to Farmer Mac in accordance with the applicable procedures of DTC. In connection with any meeting of such holders, the Board of Directors shall fix a record date, neither earlier than 60 days nor later than 10 days prior to the date of such meeting, and holders of record of shares of the Preferred Stock on such record date shall be entitled to notice of and to vote at any such meeting and any adjournment. The Board of Directors, or such person or persons as it may designate, may establish reasonable rules and procedures as to the solicitation of the consent of holders of the Preferred Stock at any such meeting or otherwise, which rules and procedures shall conform to the requirements of any national securities exchange on which the Preferred Stock may be listed at such time.
10. Priority
Any stock of any class or series of Farmer Mac shall be deemed to rank:
(a) senior to the shares of the Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of Farmer Mac, as the case may be, in preference or priority to the holders of shares of the Preferred Stock;


        Exhibit 4.8
(b) on parity with shares of the Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates or amounts, dividend payment dates, or redemption or liquidation prices per share, if any, be different from those of the Preferred Stock, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of Farmer Mac, as the case may be, in proportion to their respective dividend rates or amounts or liquidation prices, without preference or priority, one over the other, as between the holders of such class or series and the holders of shares of the Preferred Stock; and
(c) junior to shares of the Preferred Stock, either as to dividends or upon liquidation, if such class or series shall be Common Stock, or if the holders of shares of the Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of Farmer Mac, as the case may be, in preference or priority to the holders of shares of such class or series.
11. Notices
Any notice, demand, or other communication that by any provision of this Certificate is required or permitted to be given or served to or upon Farmer Mac shall be given or served in writing addressed (unless and until another address shall be published by Farmer Mac) to the Federal Agricultural Mortgage Corporation, 1999 K Street, N.W., 4th Floor, Washington, D.C. 20006, Attention: Executive Vice President—General Counsel and Secretary. Such notice, demand, or other communication to or upon Farmer Mac shall be deemed to have been sufficiently given or made only upon actual receipt of a writing by Farmer Mac. Any notice, demand, or other communication that by any provision of this Certificate is required or permitted to be given or served by Farmer Mac hereunder may be given or served by being deposited first class, postage prepaid, in the United States mail addressed (1) to the holder as such holder’s name and address may appear at such time in the books and records of Farmer Mac or (2) if to a person or entity other than a holder of record of the Preferred Stock, to such person or entity at such address as appears to Farmer Mac to be appropriate at such time; provided that if the Preferred Stock is held in book-entry form through DTC, Farmer Mac may give such notice in any manner permitted by DTC. Such notice, demand, or other communication shall be deemed to have been sufficiently given or made, for all purposes, upon mailing.
12. Miscellaneous
(a) Farmer Mac and any agent of Farmer Mac may deem and treat the holder of a share or shares of Preferred Stock, as shown in Farmer Mac’s books and records, as the absolute owner of such share or shares of Preferred Stock for the purpose of receiving payment of dividends in respect of such share or shares of Preferred Stock and for all other purposes whatsoever, and neither Farmer Mac nor any agent of Farmer Mac shall be affected by any notice to the contrary. All payments made to or upon the order of any such person shall be valid and, to the extent of the sum or sums so paid, effectual to satisfy and discharge liabilities for moneys payable by Farmer Mac on or with respect to any such share or shares of Preferred Stock.


        Exhibit 4.8
(b) The shares of the Preferred Stock, when duly issued, shall be fully paid and non-assessable.
(c) Farmer Mac may at its option issue shares of Preferred Stock without certificates.
(d) For purposes of this Certificate, the term “Farmer Mac” means the Federal Agricultural Mortgage Corporation and any successor thereto by operation of law or by reason of a merger, consolidation, or combination.
(e) This Certificate and the respective rights and obligations of Farmer Mac and the holders of the Preferred Stock with respect to such Preferred Stock shall be construed in accordance with and governed by the laws of the United States, provided that the law of the District of Columbia shall serve as the federal rule of decision in all instances except where such law is inconsistent with Farmer Mac’s enabling legislation, its public purposes or any provision of this Certificate.
(f) RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE PREFERRED STOCK BY OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE HOLDER (AND ALL OTHERS HAVING BENEFICIAL OWNERSHIP OF SUCH SHARE OR SHARES) OF ALL OF THE TERMS AND PROVISIONS OF THIS CERTIFICATE. NO SIGNATURE OR OTHER FURTHER MANIFESTATION OF ASSENT TO THE TERMS AND PROVISIONS OF THIS CERTIFICATE SHALL BE NECESSARY FOR ITS OPERATION OR EFFECT AS BETWEEN FARMER MAC AND THE HOLDER (AND ALL SUCH OTHERS).


        Exhibit 4.8
ASSIGNMENT FORM

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

, and does hereby irrevocably constitute and irrevocably appoints:
        
        
        

agent to transfer the said Shares on the books of the Transfer Agent, with full power of substitution in the premises.

Dated: __________________
Signature: _______________________
Signature Guarantee*: _________________________

*    Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Transfer Agent).



Exhibit 4.9
Description of Registrant’s Securities

Class A voting common stock
Farmer Mac’s Class A voting common stock has a par value of $1.

Farmer Mac’s statutory charter restricts ownership of Farmer Mac's Class A voting common stock to banks, insurance companies, and other financial institutions or similar entities that are not institutions of the Farm Credit System. Shares of Class A voting common stock may only be transferred to other banks, insurance companies, and other financial institutions or similar entities that are not institutions of the Farm Credit System.

The charter also provides that five members of Farmer Mac's 15-member board of directors (the “Board”) are elected by a plurality of the votes of the Class A stockholders each year. Each share of Class A voting common stock shall be entitled to one vote for each of the five seats eligible to be elected by holders of Class A voting common stock, with rights of cumulative voting at all elections of directors.

The charter limits the amount of Class A voting common stock that any one holder may own to no more than 33% of the outstanding shares of Class A voting common stock.

Except for voting rights with respect to Farmer Mac’s Board and transfer rights (in each case, as described above), there are no other provisions in Farmer Mac’s charter or bylaws permitting a change of control of Farmer Mac absent action on the part of Congress (or the Farm Credit Administration, in the event of a conservatorship).

Dividends as may be declared by the Board, in the discretion of the Board, shall be paid by Farmer Mac to holders of the Class A voting common stock pro rata based on at minimum the total number of shares of both the Class A voting common stock and the Class B voting common stock outstanding. Declaration and payment of dividends are subject to:

the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter;
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter; and
all dividends due on preferred stock have been paid.

The Class A voting common stock does not contain any conversion terms, sinking fund provisions, redemption provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

1


Exhibit 4.9
In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares (including Class A voting common stock) receive any payment. Shares of Class A voting common stock have equal liquidation preference to all other classes of Farmer Mac’s common stock and would receive pro rata distribution of any funds remaining after full liquidation of outstanding preferred stock.

The rights of holders may be modified otherwise than by a vote of a majority or more of the shares outstanding, voting as a class, under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Class A voting common stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Class A voting common stock.

The rights of holders of Class A voting common stock are materially limited or qualified by the rights of holders of Farmer Mac’s outstanding series of preferred stock in dividend payment and liquidation preference (in each case as described above). The rights of holders of Class A voting common stock are otherwise not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.

Class B voting common stock
Farmer Mac’s Class B voting common stock has a par value of $1.

Farmer Mac’s statutory charter restricts ownership of Farmer Mac's Class B voting common stock to institutions of the Farm Credit System. Shares of Class B voting common stock may only be transferred to other institutions of the Farm Credit System.

The charter also provides that five members of Farmer Mac's 15-member board of directors (the “Board”) are elected by a plurality of the votes of the Class B stockholders each year. Each share of Class B voting common stock shall be entitled to one vote for each of the five seats eligible to be elected by holders of Class B voting common stock, with rights of cumulative voting at all elections of directors.
The charter does not prescribe a limit for the amount of Class B voting common stock that any one holder may own.

Except for voting rights with respect to Farmer Mac’s Board and transfer rights (in each case, as described above), there are no other provisions in Farmer Mac’s charter or bylaws permitting a change of control of Farmer Mac absent action on the part of Congress (or the Farm Credit Administration, in the event of a conservatorship).

2


Exhibit 4.9
Dividends as may be declared by the Board, in the discretion of the Board, shall be paid by Farmer Mac to holders of the Class B voting common stock pro rata based on at minimum the total number of shares of both the Class A voting common stock and the Class B voting common stock outstanding. Declaration and payment of dividends are subject to:

the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter;
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter; and
all dividends due on preferred stock have been paid.

The Class B voting common stock does not contain any conversion terms, sinking fund provisions, redemption provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares (including Class B voting common stock) receive any payment. Shares of Class B voting common stock have equal liquidation preference to all other classes of Farmer Mac’s common stock and would receive pro rata distribution of any funds remaining after full liquidation of outstanding preferred stock.

The rights of holders may be modified otherwise than by a vote of a majority or more of the shares outstanding, voting as a class, under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Class B voting common stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Class B voting common stock.

The rights of holders of Class B voting common stock are materially limited or qualified by the rights of holders of Farmer Mac’s outstanding series of preferred stock in dividend payment and liquidation preference (in each case as described above). The rights of holders of Class B voting common stock are otherwise not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.

Class C non-voting common stock
Farmer Mac’s Class C non-voting common stock has a par value of $1.

3


Exhibit 4.9
The charter does not impose any ownership restrictions on Farmer Mac's Class C non-voting common stock, and shares of this class are freely transferable.  Holders of the Class C non-voting common stock do not vote on the election of directors or any other matter, including any right to a change of control of Farmer Mac.  

Dividends as may be declared by the Board, in the discretion of the Board, shall be paid by Farmer Mac to holders of the Class C non-voting common stock, subject to:

the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter;
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter; and
all dividends due on preferred stock have been paid.

The Class C non-voting common stock does not contain any conversion terms, sinking fund provisions, redemption provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares (including Class C non-voting common stock) receive any payment. Shares of Class C non-voting common stock have equal liquidation preference to all other classes of Farmer Mac’s common stock and would receive pro rata distribution of any funds remaining after full liquidation of outstanding preferred stock.

The rights of holders may be modified under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Class C non-voting common stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Class C non-voting common stock.

The rights of holders of Class C non-voting common stock are materially limited or qualified by the rights of holders of Farmer Mac’s outstanding series of preferred stock in dividend payment and liquidation preference (in each case as described above). The rights of holders of Class C non-voting common stock are otherwise not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.

4


Exhibit 4.9
6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C
Farmer Mac’s 6.000% Fixed-to-Floating Non-Cumulative Preferred Stock, Series C (the “Series C Preferred Stock”) has a par value of $25, an initial liquidation preference of $25 per share, and an annualized (non-cumulative) dividend rate of 5.875% from the date of issuance to and including the quarterly payment date on July 17, 2024 and thereafter a floating rate equal to three-month LIBOR plus 3.260%. Each series of outstanding preferred stock (including the Series C Preferred Stock) ranks senior to Farmer Mac’s outstanding classes of common stock.

The charter does not impose any ownership restrictions on Farmer Mac's Series C Preferred Stock, and shares of this stock are freely transferable.  Holders of the Series C Preferred Stock do not vote on the election of directors or any other matter, including any right to a change of control of Farmer Mac.  

Dividends as may be declared by the Board, in the discretion of the Board, are paid quarterly to holders of the Series C Preferred Stock. Dividends on the Series C Preferred Stock are non-cumulative, so if the Board has not declared a dividend before the dividend payment date for any dividend period, the dividend will not be paid or accumulate, and Farmer Mac will not be obligated to pay dividends for that dividend period, whether or not dividends on the Series C Preferred Stock are declared for any future dividend period. Farmer Mac may pay dividends on the Series C Preferred Stock without paying dividends on any class or series of stock Farmer Mac may issue in the future that ranks junior to the Series C Preferred Stock. Dividends on the Series C Preferred Stock are also subject to:

the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter; and
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter.

The Series C Preferred Stock does not contain any conversion terms, sinking fund provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series C Preferred Stock on and any time after July 18, 2024, at a price equal to the then-applicable liquidation preference. If Farmer Mac chooses to redeem the Series C Preferred Stock, Farmer Mac will provide notice of the redemption between 30 and 60 days prior to the redemption date, by mail or in any manner permitted by the Depository Trust Company, which holds the shares of Series C Preferred Stock in book-entry form. There are no restrictions on redemption if there is any arrearage in the payment of dividends.

5


Exhibit 4.9
In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares receive any payment. The shares of Series C Preferred Stock have equal liquidation preference to all other classes of Farmer Mac’s preferred stock. If assets available for distribution to Farmer Mac’s stockholders are insufficient to pay in full the aggregate amount of the par value for all shares of all series of Farmer Mac’s preferred stock (including the Series C Preferred Stock), the assets will be distributed to the holders of shares of the Series C Preferred Stock on a pro rata basis with all other shares of Farmer Mac’s outstanding preferred stock.

The rights of holders may be modified under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Series C Preferred Stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Series C Preferred Stock.

The rights of holders of Series C Preferred Stock are not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.
5.700% Non-Cumulative Preferred Stock, Series D
Farmer Mac’s 5.700% Non-Cumulative Preferred Stock, Series D (the “Series D Preferred Stock”) has a par value of $25, an initial liquidation preference of $25 per share, and an annualized (non-cumulative) dividend rate of 5.700%. Each series of outstanding preferred stock (including the Series D Preferred Stock) ranks senior to Farmer Mac’s outstanding classes of common stock.

The charter does not impose any ownership restrictions on Farmer Mac's Series D Preferred Stock, and shares of this stock are freely transferable.  Holders of the Series D Preferred Stock do not vote on the election of directors or any other matter, including any right to a change of control of Farmer Mac.  

Dividends as may be declared by the Board, in the discretion of the Board, are paid quarterly to holders of the Series D Preferred Stock. Dividends on the Series D Preferred Stock are non-cumulative, so if the Board has not declared a dividend before the dividend payment date for any dividend period, the dividend will not be paid or accumulate, and Farmer Mac will not be obligated to pay dividends for that dividend period, whether or not dividends on the Series D Preferred Stock are declared for any future dividend period. Farmer Mac may pay dividends on the Series D Preferred Stock without paying dividends on any class or series of stock Farmer Mac may issue in the future that ranks junior to the Series D Preferred Stock. Dividends on the Series D Preferred Stock are also subject to:

6


Exhibit 4.9
the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter; and
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter.

The Series D Preferred Stock does not contain any conversion terms, sinking fund provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series D Preferred Stock on any scheduled dividend payment date on or after July 17, 2024, at a price equal to the then-applicable liquidation preference. If Farmer Mac chooses to redeem the Series D Preferred Stock, Farmer Mac will provide notice of the redemption between 30 and 60 days prior to the redemption date, by mail or in any manner permitted by the Depository Trust Company, which holds the shares of Series D Preferred Stock in book-entry form. There are no restrictions on redemption if there is any arrearage in the payment of dividends.

In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares receive any payment. The shares of Series D Preferred Stock have equal liquidation preference to all other classes of Farmer Mac’s preferred stock. If assets available for distribution to Farmer Mac’s stockholders are insufficient to pay in full the aggregate amount of the par value for all shares of all series of Farmer Mac’s preferred stock (including the Series D Preferred Stock), the assets will be distributed to the holders of shares of the Series D Preferred Stock on a pro rata basis with all other shares of Farmer Mac’s outstanding preferred stock.

The rights of holders may be modified under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Series D Preferred Stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Series D Preferred Stock.

The rights of holders of Series D Preferred Stock are not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.
5.750% Non-Cumulative Preferred Stock, Series E
Farmer Mac’s 5.750% Non-Cumulative Preferred Stock, Series E (the “Series E Preferred Stock”) has a par value of $25, an initial liquidation preference of $25 per share, and an
7


Exhibit 4.9
annualized (non-cumulative) dividend rate of 5.750%. Each series of outstanding preferred stock (including the Series E Preferred Stock) ranks senior to Farmer Mac’s outstanding classes of common stock.

The charter does not impose any ownership restrictions on Farmer Mac's Series E Preferred Stock, and shares of this stock are freely transferable.  Holders of the Series E Preferred Stock do not vote on the election of directors or any other matter, including any right to a change of control of Farmer Mac.  

Dividends as may be declared by the Board, in the discretion of the Board, are paid quarterly to holders of the Series E Preferred Stock. Dividends on the Series E Preferred Stock are non-cumulative, so if the Board has not declared a dividend before the dividend payment date for any dividend period, the dividend will not be paid or accumulate, and Farmer Mac will not be obligated to pay dividends for that dividend period, whether or not dividends on the Series E Preferred Stock are declared for any future dividend period. Farmer Mac may pay dividends on the Series E Preferred Stock without paying dividends on any class or series of stock Farmer Mac may issue in the future that ranks junior to the Series E Preferred Stock. Dividends on the Series E Preferred Stock are also subject to:

the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter; and
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter.

The Series E Preferred Stock does not contain any conversion terms, sinking fund provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series E Preferred Stock on any scheduled dividend payment date on or after July 17, 2025, at a price equal to the then-applicable liquidation preference. If Farmer Mac chooses to redeem the Series E Preferred Stock, Farmer Mac will provide notice of the redemption between 30 and 60 days prior to the redemption date, by mail or in any manner permitted by the Depository Trust Company, which holds the shares of Series E Preferred Stock in book-entry form. There are no restrictions on redemption if there is any arrearage in the payment of dividends.

In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares receive any payment. The shares of Series E Preferred Stock have equal liquidation preference to all other classes of Farmer Mac’s preferred stock. If assets available for distribution to Farmer Mac’s stockholders are insufficient to pay in full the
8


Exhibit 4.9
aggregate amount of the par value for all shares of all series of Farmer Mac’s preferred stock (including the Series E Preferred Stock), the assets will be distributed to the holders of shares of the Series E Preferred Stock on a pro rata basis with all other shares of Farmer Mac’s outstanding preferred stock.

The rights of holders may be modified under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Series E Preferred Stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Series E Preferred Stock.

The rights of holders of Series E Preferred Stock are not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.
5.250% Non-Cumulative Preferred Stock, Series F
Farmer Mac’s 5.250% Non-Cumulative Preferred Stock, Series F (the “Series F Preferred Stock”) has a par value of $25, an initial liquidation preference of $25 per share, and an annualized (non-cumulative) dividend rate of 5.250%. Each series of outstanding preferred stock (including the Series F Preferred Stock) ranks senior to Farmer Mac’s outstanding classes of common stock.

The charter does not impose any ownership restrictions on Farmer Mac's Series F Preferred Stock, and shares of this stock are freely transferable.  Holders of the Series F Preferred Stock do not vote on the election of directors or any other matter, including any right to a change of control of Farmer Mac.  

Dividends as may be declared by the Board, in the discretion of the Board, are paid quarterly to holders of the Series F Preferred Stock. Dividends on the Series F Preferred Stock are non-cumulative, so if the Board has not declared a dividend before the dividend payment date for any dividend period, the dividend will not be paid or accumulate, and Farmer Mac will not be obligated to pay dividends for that dividend period, whether or not dividends on the Series F Preferred Stock are declared for any future dividend period. Farmer Mac may pay dividends on the Series F Preferred Stock without paying dividends on any class or series of stock Farmer Mac may issue in the future that ranks junior to the Series F Preferred Stock. Dividends on the Series F Preferred Stock are also subject to:

the Board’s determination that adequate provision has been made for Farmer Mac’s reserve against guarantee losses prescribed by section 8.10(c)(1) of its charter; and
there being no outstanding obligations of Farmer Mac to the U.S. Treasury Department under section 8.13 of Farmer Mac’s charter.

9


Exhibit 4.9
The Series F Preferred Stock does not contain any conversion terms, sinking fund provisions, or preemption rights, and the holders of these shares do not face liability to further calls or assessment by Farmer Mac for any reason. There are no provisions discriminating against any existing or prospective holder as a result of such holder owning a substantial amount of shares or other securities of Farmer Mac.

Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series F Preferred Stock on any scheduled dividend payment date on or after October 17, 2025, at a price equal to the then-applicable liquidation preference. If Farmer Mac chooses to redeem the Series F Preferred Stock, Farmer Mac will provide notice of the redemption between 30 and 60 days prior to the redemption date, by mail or in any manner permitted by the Depository Trust Company, which holds the shares of Series F Preferred Stock in book-entry form. There are no restrictions on redemption if there is any arrearage in the payment of dividends.

In the event of any liquidation, dissolution, or winding up of the business of Farmer Mac, the holders of all series of Farmer Mac’s preferred stock shall be paid in full at the par value of that preferred stock, plus all accrued dividends, before the holders of any class of common shares receive any payment. The shares of Series F Preferred Stock have equal liquidation preference to all other classes of Farmer Mac’s preferred stock. If assets available for distribution to Farmer Mac’s stockholders are insufficient to pay in full the aggregate amount of the par value for all shares of all series of Farmer Mac’s preferred stock (including the Series F Preferred Stock), the assets will be distributed to the holders of shares of the Series F Preferred Stock on a pro rata basis with all other shares of Farmer Mac’s outstanding preferred stock.

The rights of holders may be modified under the following circumstances:

Congress may modify Farmer Mac’s charter at any time and in any manner, which could affect the rights of any of Farmer Mac’s securityholders, including holders of Series F Preferred Stock; and
Farmer Mac’s charter prescribes that the Board may adopt and amend bylaws not inconsistent with Farmer Mac’s charter or other laws or regulations, which may have the effect of modifying the rights of holders of Series F Preferred Stock.

The rights of holders of Series F Preferred Stock are not materially limited or qualified by the rights of any other holders of Farmer Mac’s outstanding securities.
10


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, 2020;
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 9, 2020
 

/s/ Bradford T. Nordholm
Bradford T. Nordholm
Chief Executive Officer




Exhibit 31.2
 
CERTIFICATION
 
I, Aparna Ramesh, 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, 2020;
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 9, 2020
 

/s/ Aparna Ramesh
Aparna Ramesh
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, 2020 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 Aparna Ramesh, 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 their 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/ Aparna Ramesh
Aparna Ramesh
Chief Financial Officer
Date:
November 9, 2020