2015 Q2 10-Q
As filed with the Securities and Exchange Commission on August 10, 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
Commission File Number 001-14951 
 ____________________________________________________________

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States
 
52-1578738
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer identification number)
 
 
 
1999 K Street, N.W., 4th Floor,
Washington, D.C.
 
20006
(Address of principal executive offices)
 
(Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes        x                               No           o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes        x                                No          o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes        o                                No           x
As of August 3, 2015, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock and 9,508,091 shares of Class C non-voting common stock.


Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I

Item 1. Financial Statements



3
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
1,683,156

 
$
1,363,387

Investment securities:
 

 
 

Available-for-sale, at fair value
1,851,899

 
1,938,499

Trading, at fair value
606

 
689

Total investment securities
1,852,505

 
1,939,188

Farmer Mac Guaranteed Securities:
 

 
 

Available-for-sale, at fair value
4,051,208

 
3,659,281

Held-to-maturity, at amortized cost
1,822,027

 
1,794,620

Total Farmer Mac Guaranteed Securities
5,873,235

 
5,453,901

USDA Securities:
 

 
 

Available-for-sale, at fair value
1,825,406

 
1,731,222

Trading, at fair value
33,770

 
40,310

Total USDA Securities
1,859,176

 
1,771,532

Loans:
 

 
 

Loans held for investment, at amortized cost
3,153,012

 
2,833,461

Loans held for investment in consolidated trusts, at amortized cost
512,559

 
692,478

Allowance for loan losses
(5,939
)
 
(5,864
)
Total loans, net of allowance
3,659,632

 
3,520,075

Real estate owned, at lower of cost or fair value
750

 
421

Financial derivatives, at fair value
7,455

 
4,177

Interest receivable (includes $6,338 and $9,509, respectively, related to consolidated trusts)
101,127

 
106,874

Guarantee and commitment fees receivable
37,847

 
39,462

Deferred tax asset, net
23,130

 
33,391

Prepaid expenses and other assets
46,584

 
55,413

Total Assets
$
15,144,597

 
$
14,287,821

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Notes payable:
 

 
 

Due within one year
$
7,632,668

 
$
7,353,953

Due after one year
6,013,237

 
5,471,186

Total notes payable
13,645,905

 
12,825,139

Debt securities of consolidated trusts held by third parties
516,004

 
424,214

Financial derivatives, at fair value
69,373

 
84,844

Accrued interest payable (includes $5,302 and $5,145, respectively, related to consolidated trusts)
50,183

 
48,355

Guarantee and commitment obligation
36,417

 
37,925

Accounts payable and accrued expenses
245,785

 
81,252

Reserve for losses
4,637

 
4,263

Total Liabilities
14,568,304

 
13,505,992

Commitments and Contingencies (Note 6)


 


Equity:
 

 
 

Preferred stock:
 

 
 

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

 
58,333

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

 
73,044

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

 
73,382

Common stock:
 

 
 

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

 
1,031

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

 
500

Class C Non-Voting, $1 par value, no maximum authorization, 9,508,000 shares and 9,406,267 shares outstanding, respectively
9,508

 
9,406

Additional paid-in capital
116,098

 
113,559

Accumulated other comprehensive income, net of tax
22,733

 
15,533

Retained earnings
221,477

 
201,013

Total Stockholders' Equity
576,106

 
545,801

Non-controlling interest
187

 
236,028

Total Equity
576,293

 
781,829

Total Liabilities and Equity
$
15,144,597

 
$
14,287,821

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




4
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Investments and cash equivalents
$
3,094

 
$
5,101

 
$
5,959

 
$
10,338

Farmer Mac Guaranteed Securities and USDA Securities
34,484

 
32,957

 
67,606

 
65,803

Loans
28,814

 
26,417

 
56,778

 
40,786

Total interest income
66,392

 
64,475

 
130,343

 
116,927

Total interest expense
34,528

 
42,502

 
67,690

 
77,228

Net interest income
31,864

 
21,973

 
62,653

 
39,699

(Provision for)/release of allowance for loan losses
(110
)
 
1,583

 
(186
)
 
1,010

Net interest income after (provision for)/release of allowance for loan losses
31,754

 
23,556

 
62,467

 
40,709

Non-interest income:
 
 
 
 
 
 
 
Guarantee and commitment fees
3,388

 
3,703

 
6,765

 
7,487

Gains/(losses) on financial derivatives and hedging activities
14,389

 
(5,698
)
 
10,507

 
(13,276
)
Gains on trading securities
170

 
7,748

 
532

 
8,403

Gains on sale of available-for-sale investment securities
—

 
143

 
6

 
158

Gains/(losses) on sale of real estate owned
—

 
168

 
(1
)
 
165

Other income
260

 
200

 
873

 
292

Non-interest income
18,207

 
6,264

 
18,682

 
3,229

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
5,733

 
4,889

 
11,426

 
9,345

General and administrative
3,374

 
3,288

 
6,197

 
6,082

Regulatory fees
600

 
594

 
1,200

 
1,188

Real estate owned operating costs, net
—

 
59

 
(1
)
 
61

Provision for/(release of) reserve for losses
1,146

 
(974
)
 
374

 
(873
)
Non-interest expense
10,853

 
7,856

 
19,196

 
15,803

Income before income taxes
39,108

 
21,964

 
61,953

 
28,135

Income tax expense/(benefit)
13,769

 
(6,368
)
 
18,000

 
(7,509
)
Net income
25,339

 
28,332

 
43,953

 
35,644

Less: Net loss/(income) attributable to non-controlling interest
119

 
(5,819
)
 
(5,235
)
 
(11,366
)
Net income attributable to Farmer Mac
25,458

 
22,513

 
38,718

 
24,278

Preferred stock dividends
(3,296
)
 
(2,308
)
 
(6,591
)
 
(3,260
)
Loss on retirement of preferred stock
—

 
—

 
(8,147
)
 
—

Net income attributable to common stockholders
$
22,162

 
$
20,205

 
$
23,980

 
$
21,018

 
 
 
 
 
 
 
 
Earnings per common share and dividends:
 
 
 
 
 
 
 
Basic earnings per common share
$
2.01

 
$
1.85

 
$
2.19

 
$
1.93

Diluted earnings per common share
$
1.94

 
$
1.78

 
$
2.11

 
$
1.85

Common stock dividends per common share
$
0.16

 
$
0.14

 
$
0.32

 
$
0.28

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


5
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Net income
$
25,339

 
$
28,332

 
$
43,953

 
$
35,644

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding (losses)/gains on available-for-sale securities(1)
(26,114
)
 
10,301

 
13,056

 
44,542

Unrealized gains/(losses) on cash flow hedges(2)
930

 
(61
)
 
769

 
(129
)
Less reclassification adjustments included in:
 
 
 
 
 
 
 
Gains/(losses) on financial derivatives and hedging activities(3)
(3,219
)
 
(3,106
)
 
(6,379
)
 
(6,207
)
Gains on sale of available-for-sale investment securities(4)
—

 
(93
)
 
(4
)
 
(103
)
Other income(5)
(47
)
 
(72
)
 
(242
)
 
22

Other comprehensive (loss)/income
(28,450
)
 
6,969

 
7,200

 
38,125

Comprehensive (loss)/income
(3,111
)
 
35,301

 
51,153

 
73,769

Less: Comprehensive loss/(income) attributable to non-controlling interest
119

 
(5,819
)
 
(5,235
)
 
(11,366
)
Comprehensive (loss)/income attributable to Farmer Mac
$
(2,992
)
 
$
29,482

 
$
45,918

 
$
62,403

(1) 
Presented net of income tax benefit of $14.1 million and expense of $5.5 million, for the three months ended June 30, 2015 and 2014, respectively, and income tax expense of $7.0 million and $24.0 million for the six months ended June 30, 2015 and 2014, respectively.
(2) 
Presented net of income tax expense of $0.5 million and benefit of $33,000 for the three months ended June 30, 2015 and 2014, respectively, and income tax expense of $0.4 million and benefit of $69,000 for the six months ended June 30, 2015 and 2014, respectively.
(3) 
Relates to the amortization of the unrealized gains on the hedged items prior to application of hedge accounting. Presented net of income tax benefit of $1.7 million for both the three months ended June 30, 2015 and 2014, respectively, and tax benefit of $3.4 million and $3.3 million for the six months ended June 30, 2015 and 2014, respectively.
(4) 
Represents realized gains on sales of available-for-sale investment securities. There were no sales of available-for-sale investment securities for the three months ended June 30, 2015. Presented net of income tax benefit of $50,000 for the three months ended June 30, 2014, and income tax benefit of $2,000 and $55,000 for the six months ended June 30, 2015 and 2014, respectively.
(5) 
Represents amortization of deferred gains related to certain available-for-sale USDA Securities and Farmer Mac Guaranteed USDA Securities. Presented net of income tax benefit of $25,000 and $39,000 for the three months ended June 30, 2015 and 2014, respectively, and income tax benefit of $0.1 million and expense of $12,000 for the six months ended June 30, 2015 and 2014, respectively.

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


6
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
  
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
Shares
 
Amount
 
Shares
 
Amount
 
(in thousands)
Preferred stock:
 
 
 
 
 
 
 
Balance, beginning of period
8,400

 
$
204,759

 
2,400

 
$
58,333

Issuance of Series B preferred stock
—

 
—

 
3,000

 
73,061

Issuance of Series C preferred stock
—

 
—

 
3,000

 
$
73,380

Balance, end of period
8,400

 
$
204,759

 
8,400

 
$
204,774

Common stock:
 

 
 

 
 

 
 

Balance, beginning of period
10,937

 
$
10,937

 
10,886

 
$
10,886

Issuance of Class C common stock
102

 
102

 
38

 
38

Balance, end of period
11,039

 
$
11,039

 
10,924

 
$
10,924

Additional paid-in capital:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
113,559

 
 

 
$
110,722

Stock-based compensation expense
 

 
1,644

 
 

 
1,426

Issuance of Class C common stock
 

 
7

 
 

 
12

Tax effect of stock-based awards
 

 
888

 
 

 
(202
)
Balance, end of period
  

 
$
116,098

 
  

 
$
111,958

Retained earnings:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
201,013

 
 

 
$
168,877

Net income attributable to Farmer Mac
 

 
38,718

 
 

 
24,278

Cash dividends:
 

 


 
 
 


Preferred stock, Series A ($0.7344 per share in 2015 and 2014)
 
 
(1,763
)
 
 
 
(1,762
)
Preferred stock, Series B ($0.8594 per share in 2015 and $0.5347 per share in 2014)
 
 
(2,578
)
 
 
 
(1,360
)
Preferred stock, Series C ($0.7500 per share in 2015 and $0.0458 per share in 2014)
 
 
(2,250
)
 
 
 
(138
)
Common stock ($0.32 per share in 2015 and $0.28 per share in 2014)
 

 
(3,516
)
 
 

 
(3,053
)
Loss on retirement of preferred stock, Farmer Mac II LLC
 
 
(8,147
)
 
 

 
—

Balance, end of period
 

 
$
221,477

 
 

 
$
186,842

Accumulated other comprehensive income:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
15,533

 
 

 
$
(16,202
)
Other comprehensive income, net of tax
 

 
7,200

 
 

 
38,125

Balance, end of period
 

 
$
22,733

 
 

 
$
21,923

Total Stockholders' Equity
 

 
$
576,106

 
 

 
$
536,421

Non-controlling interest:
 

 
 

 
 

 
 

Balance, beginning of period
 

 
$
236,028

 
 

 
$
241,853

Redemption of Farmer Mac II LLC preferred stock
 
 
(235,853
)
 
 
 
(6,000
)
Investment in Contour - non-controlling interest
 
 
131

 
 
 
—

Net loss attributable to non-controlling interest
 
 
(119
)
 
 
 
—

Balance, end of period
 

 
$
187

 
 

 
$
235,853

Total Equity
 
 
$
576,293

 
 

 
$
772,274

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


7
Table of Contents

FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
43,953

 
$
35,644

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

Net amortization of deferred gains, premiums, and discounts on loans, investments, Farmer Mac Guaranteed Securities, and USDA Securities
1,604

 
15,029

Amortization of debt premiums, discounts and issuance costs
5,870

 
5,144

Net change in fair value of trading securities, hedged assets, and financial derivatives
(15,619
)
 
7,636

Gains on sale of available-for-sale investment securities
(6
)
 
(158
)
Losses/(gains) on sale of real estate owned
1

 
(165
)
Total provision for/(release of) losses
560

 
(1,883
)
Deferred income taxes
5,657

 
(17,496
)
Stock-based compensation expense
1,644

 
1,427

Proceeds from repayment of trading investment securities
437

 
414

Proceeds from repayment of loans purchased as held for sale
54,728

 
58,930

Net change in:
 
 
 
Interest receivable
5,747

 
13,125

Guarantee and commitment fees receivable
1,615

 
215

Other assets
9,182

 
(14,473
)
Securities sold, not yet purchased
—

 
1,673,532

Accrued interest payable
1,828

 
(4,185
)
Other liabilities
(3,838
)
 
(3,955
)
Net cash provided by operating activities
113,363

 
1,768,781

Cash flows from investing activities:
 

 
 

Net change in securities purchased under agreements to resell
—

 
(1,640,686
)
Purchases of available-for-sale investment securities
(915,614
)
 
(1,138,711
)
Purchases of Farmer Mac Guaranteed Securities and USDA Securities
(559,162
)
 
(681,044
)
Purchases of loans held for investment
(323,401
)
 
(407,595
)
Purchases of defaulted loans
(1,981
)
 
(440
)
Proceeds from repayment of available-for-sale investment securities
914,988

 
575,393

Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Securities
236,801

 
670,079

Proceeds from repayment of loans purchased as held for investment
143,804

 
199,774

Proceeds from sale of available-for-sale investment securities
74,998

 
730,527

Proceeds from sale of Farmer Mac Guaranteed Securities
99,477

 
126,857

(Payments)/proceeds from sale of real estate owned
(1
)
 
461

Net cash used in investing activities
(330,091
)
 
(1,565,385
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of discount notes
38,965,462

 
27,163,649

Proceeds from issuance of medium-term notes
2,690,604

 
1,759,012

Payments to redeem discount notes
(38,734,464
)
 
(28,161,623
)
Payments to redeem medium-term notes
(2,106,715
)
 
(1,440,000
)
Excess tax benefits related to stock-based awards
154

 
35

Payments to third parties on debt securities of consolidated trusts
(20,641
)
 
(13,615
)
Proceeds from common stock issuance
1,488

 
12

Proceeds from Series B Preferred stock issuance
—

 
73,061

Proceeds from Series C Preferred stock issuance
—

 
73,380

Investment in Contour
131

 
—

Redemption of Farmer Mac II LLC Preferred Stock
(244,000
)
 
(6,000
)
Dividends paid - Non-controlling interest - preferred stock
(5,415
)
 
(11,366
)
Dividends paid on common and preferred stock
(10,107
)
 
(5,131
)
Net cash provided by/(used in) financing activities
536,497

 
(568,586
)
Net increase/(decrease) in cash and cash equivalents
319,769

 
(365,190
)
Cash and cash equivalents at beginning of period
1,363,387

 
749,313

Cash and cash equivalents at end of period
$
1,683,156

 
$
384,123

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


8
Table of Contents

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

1.
ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("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, 2014 consolidated balance sheet presented in this report has been derived from Farmer Mac's audited 2014 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 2014 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, 2014 filed with the SEC on March 16, 2015. That Form 10-K describes Farmer Mac's significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Transfers of Financial Assets and Liabilities; Investment Securities, Farmer Mac Guaranteed Securities, and USDA Securities; Loans; Securitization of Loans; Real Estate Owned; Financial Derivatives; Notes Payable; Allowance for Loan Losses and Reserve for Losses; Earnings Per Common Share; Income Taxes; Stock-Based Compensation; Comprehensive Income; Long-Term Standby Purchase Commitments; Fair Value Measurement; and Consolidation of Variable Interest Entities ("VIEs"). Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Farmer Mac's significant accounting policies that contain updated information for the three and six month periods ended June 30, 2015.

Principles of Consolidation

The consolidated financial statements include the accounts of Farmer Mac and its three subsidiaries: (1) Farmer Mac Mortgage Securities Corporation ("FMMSC"), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities; (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; and (3) Contour Valuation Services, LLC, whose principal activity is to provide appraisal services related to agricultural real estate.  All inter-company balances and transactions have been eliminated in consolidation. The consolidated financial statements also include the accounts of VIEs in which Farmer Mac determined itself to be the primary beneficiary.  



9
Table of Contents

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

Table 1.1
 
Consolidation of Variable Interest Entities
 
As of June 30, 2015
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost
$
512,559

 
$
—

 
$
—

 
$
—

 
$
—

 
$
512,559

Debt securities of consolidated trusts held by third parties(1)
516,004

 
—

 
—

 
—

 
—

 
516,004

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

 
35,008

 
—

 
32,065

 
—

 
67,073

      Maximum exposure to loss(3)
—

 
33,822

 
—

 
30,000

 
—

 
63,822

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value(4)
—

 
—

 
—

 
—

 
455,251

 
455,251

        Maximum exposure to loss(3)(4)
—

 
—

 
—

 
—

 
458,566

 
458,566

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss(3)(5)
575,811

 
10,888

 
—

 
970,000

 
—

 
1,556,699

(1)
Includes borrower remittances of $3.4 million. The borrower remittances have not been passed through to third party investors as of June 30, 2015.
(2)
Includes $1.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $2.1 million.
(3)
Farmer Mac uses unpaid principal balance and outstanding face amount of investment securities to represent maximum exposure to loss.
(4)
Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(5)
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.




10
Table of Contents


 
Consolidation of Variable Interest Entities
 
As of December 31, 2014
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
Corporate
 
Total
 
(in thousands)
On-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment in consolidated trusts, at amortized cost(1)
$
421,355

 
$
—

 
$
271,123

 
$
—

 
$
—

 
$
692,478

Debt securities of consolidated trusts held by third parties(2)
424,214

 
—

 
—

 
—

 
—

 
424,214

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

 
27,620

 
—

 
32,415

 
—

 
60,035

      Maximum exposure to loss(4)
—

 
27,832

 
—

 
30,000

 
—

 
57,832

   Investment securities:
 
 
 
 
 
 
 
 
 
 
 
        Carrying value(5)
—

 
—

 
—

 
—

 
409,657

 
409,657

        Maximum exposure to loss(4)(5)
—

 
—

 
—

 
—

 
412,690

 
412,690

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 Unconsolidated VIEs:
 
 
 
 
 
 
 
 
 
 
 
   Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
 
 
 
      Maximum exposure to loss(4)(6)
636,086

 
13,978

 
—

 
970,000

 
—

 
1,620,064

(1)
Includes unamortized premiums related to the Rural Utilities line of business of $3.7 million.
(2)
Includes borrower remittances of $2.9 million, which have not been passed through to third party investors as of December 31, 2014.
(3)
Includes $0.2 million of unamortized premiums and discounts and fair value adjustments related to the USDA Guarantees line of business. Includes fair value adjustments related to the Institutional Credit line of business of $2.4 million.
(4)
Farmer Mac uses unpaid principal balance and the outstanding face amount of investment securities to represent maximum exposure to loss.
(5)
Includes auction-rate certificates, asset-backed securities, and government-sponsored enterprise ("GSE")-guaranteed mortgage-backed securities.
(6)
The amount under the Farm & Ranch line of business relates to unconsolidated trusts where Farmer Mac determined it was not the primary beneficiary due to shared power with an unrelated party.



(a)
Statements of Cash Flows

The following table sets forth information regarding certain non-cash transactions for the six months ended June 30, 2015 and 2014:

Table 1.2

 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Non-cash activity:
 
 
 
Loans acquired and securitized as Farmer Mac Guaranteed Securities
$
99,477

 
$
126,857

Consolidation of Farm & Ranch Guaranteed Securities from off-balance sheet to loans held for investment in consolidated trusts and to debt securities of consolidated trusts held by third parties
112,440

 
129,305

Purchases of securities - traded, not yet settled
236,600

 
—

Issuance costs on the retirement of Farmer Mac II LLC Preferred Stock
8,147

 
—

Transfers of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity
—

 
1,612,086




11
Table of Contents

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

(b)
Earnings Per Common Share

Basic earnings per common share ("EPS") is based on the weighted-average number of shares of common stock outstanding.  Diluted earnings per common share is based on the weighted-average number of shares of common stock outstanding adjusted to include all potentially dilutive common stock options, stock appreciation rights ("SARs"), and non-vested restricted stock awards.  The following schedule reconciles basic and diluted EPS for the three and six months ended June 30, 2015 and 2014:

Table 1.3

 
For the Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
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
$
22,162

 
11,010

 
$
2.01

 
$
20,205

 
10,924

 
$
1.85

Effect of dilutive securities(1):
 
 
 
 
 
 
 

 
 

 
 
Stock options, SARs and restricted stock
—

 
428

 
(0.07
)
 
—

 
437

 
(0.07
)
Diluted EPS
$
22,162

 
11,438

 
$
1.94

 
$
20,205

 
11,361

 
$
1.78

(1)
For the three months ended June 30, 2015 and 2014, stock options and SARs of 229,693 and 121,468, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the three months ended June 30, 2015 and 2014, contingent shares of non-vested restricted stock of 45,034 and 42,514, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions have not yet been met.



 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
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
$
23,980

 
10,974

 
$
2.19

 
$
21,018

 
10,906

 
$
1.93

Effect of dilutive securities(1):
 
 
 
 
 
 
 

 
 

 
 

Stock options, SARs and restricted stock
—

 
411

 
(0.08
)
 
—

 
448

 
(0.08
)
Diluted EPS
$
23,980

 
11,385

 
$
2.11

 
$
21,018

 
11,354

 
$
1.85

(1)
For the six months ended June 30, 2015 and 2014, stock options and SARs of 215,547 and 77,226, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because they were anti-dilutive. For the six months ended June 30, 2015 and 2014, contingent shares of non-vested restricted stock of 37,774 and 37,054, respectively, were outstanding but not included in the computation of diluted earnings per share of common stock because performance conditions have not yet been met.




12
Table of Contents

(c) New Accounting Standards

In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis." This update modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. It also affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015. The adoption of the new guidance will not have a material effect on Farmer Mac's financial position, results of operations, or cash flows.

(d)
Reclassifications

Beginning January 1, 2015, Farmer Mac classified all of the income from Farmer Mac Guaranteed Securities that it holds in its portfolio as interest income. Prior to January 1, 2015, Farmer Mac classified a portion of the income from those securities, $2.7 million and $5.4 million for the three and six months ended June 30, 2014, respectively, as guarantee and commitment fees. This change in classification does not affect the timing or amount of income recognized from these securities. The corresponding guarantee and commitment fee receivable balance as of December 31, 2014 also was reclassified to accrued interest receivable. Certain reclassifications of prior period information, including the aforementioned change, were made to conform to the current period presentation.




13
Table of Contents


2.
INVESTMENT SECURITIES

The following tables set forth information about Farmer Mac's investment securities as of June 30, 2015 and December 31, 2014:
 
Table 2.1

 
As of June 30, 2015
 
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
$
46,600

 
$
—

 
$
46,600

 
$
—

 
$
(6,418
)
 
$
40,182

Floating rate asset-backed securities
91,382

 
(317
)
 
91,065

 
182

 
(69
)
 
91,178

Floating rate corporate debt securities
10,000

 
—

 
10,000

 
62

 
(2
)
 
10,060

Fixed rate corporate debt securities
15,000

 
(3
)
 
14,997

 
4

 
(16
)
 
14,985

Floating rate Government/GSE guaranteed mortgage-backed securities
703,990

 
3,265

 
707,255

 
4,111

 
(306
)
 
711,060

Fixed rate GSE guaranteed mortgage-backed securities(1)
765

 
3,330

 
4,095

 
3,952

 
—

 
8,047

Floating rate GSE subordinated debt
70,000

 
—

 
70,000

 
—

 
(4,028
)
 
65,972

Fixed rate senior agency debt
297,806

 
(29
)
 
297,777

 
68

 
—

 
297,845

Fixed rate U.S. Treasuries
612,194

 
260

 
612,454

 
127

 
(11
)
 
612,570

Total available-for-sale
1,847,737

 
6,506

 
1,854,243

 
8,506

 
(10,850
)
 
1,851,899

Trading:
 
 
 
 
 

 
 

 
 

 
 

Floating rate asset-backed securities
2,431

 
—

 
2,431

 
—

 
(1,825
)
 
606

Total investment securities
$
1,850,168

 
$
6,506

 
$
1,856,674

 
$
8,506

 
$
(12,675
)
 
$
1,852,505

(1)
Fair value includes $7.2 million of an interest-only security with a notional amount of $152.4 million.







14
Table of Contents

 
As of December 31, 2014
 
Amount Outstanding
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
46,600

 
$
—

 
$
46,600

 
$
—

 
$
(6,024
)
 
$
40,576

Floating rate asset-backed securities
100,730

 
(74
)
 
100,656

 
283

 
(37
)
 
100,902

Floating rate corporate debt securities
10,000

 
—

 
10,000

 
91

 
—

 
10,091

Fixed rate corporate debt securities
30,000

 
(10
)
 
29,990

 
35

 
—

 
30,025

Floating rate Government/GSE guaranteed mortgage-backed securities
605,053

 
3,431

 
608,484

 
4,712

 
(443
)
 
612,753

Fixed rate GSE guaranteed mortgage-backed securities(1)
853

 
3,542

 
4,395

 
3,807

 
—

 
8,202

Floating rate GSE subordinated debt
70,000

 
—

 
70,000

 
—

 
(3,680
)
 
66,320

Fixed rate senior agency debt
18,806

 
130

 
18,936

 
3

 
—

 
18,939

Floating rate U.S. Treasuries
75,000

 
(10
)
 
74,990

 
—

 
(11
)
 
74,979

Fixed rate U.S. Treasuries
975,194

 
462

 
975,656

 
72

 
(16
)
 
975,712

Total available-for-sale
1,932,236

 
7,471

 
1,939,707

 
9,003

 
(10,211
)
 
1,938,499

Trading:
 
 
 
 
 

 
 

 
 

 
 

Floating rate asset-backed securities
2,868

 
—

 
2,868

 
—

 
(2,179
)
 
689

Total investment securities
$
1,935,104

 
$
7,471

 
$
1,942,575

 
$
9,003

 
$
(12,390
)
 
$
1,939,188

(1)
Fair value includes $7.3 million of an interest-only security with a notional amount of $152.4 million.

During the three months ended June 30, 2015, Farmer Mac did not sell any securities from its available-for-sale investment portfolio, compared to proceeds of $720.5 million for the same period in 2014, resulting in gross realized gains of $0.1 million. During the six months ended June 30, 2015, Farmer Mac received proceeds of $75.0 million from the sale of securities from its available-for-sale investment portfolio, resulting in realized gains of $6,000, compared to proceeds of $730.5 million for the six months ended June 30, 2014, resulting in gross realized gains of $0.2 million.



15
Table of Contents

As of June 30, 2015 and December 31, 2014, unrealized losses on available-for-sale investment securities were as follows:

Table 2.2

 
As of June 30, 2015
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
—

 
$
—

 
$
40,182

 
$
(6,418
)
Floating rate asset-backed securities
14,940

 
(69
)
 
—

 
—

Floating rate corporate debt securities
4,998

 
(2
)
 
—

 
—

Fixed rate corporate debt securities
9,981

 
(16
)
 
—

 
—

Floating rate Government/GSE guaranteed mortgage-backed securities
59,590

 
(162
)
 
88,205

 
(144
)
Floating rate GSE subordinated debt
—

 
—

 
65,972

 
(4,028
)
Fixed rate U.S. Treasuries
85,038

 
(11
)
 
—

 
—

Total
$
174,547

 
$
(260
)
 
$
194,359

 
$
(10,590
)

 
As of December 31, 2014
 
Available-for-Sale Securities
 
Unrealized loss position for
less than 12 months
 
Unrealized loss position for
more than 12 months
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
(in thousands)
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
—

 
$
—

 
$
40,576

 
$
(6,024
)
Floating rate asset-backed securities
19,388

 
(37
)
 
—

 
—

Floating rate Government/GSE guaranteed mortgage-backed securities
76,100

 
(164
)
 
76,867

 
(279
)
Floating rate GSE subordinated debt
—

 
—

 
66,320

 
(3,680
)
Floating rate U.S. Treasuries
74,980

 
(11
)
 
—

 
—

Fixed rate U.S. Treasuries
325,033

 
(16
)
 
—

 
—

Total
$
495,501

 
$
(228
)
 
$
183,763

 
$
(9,983
)

The unrealized losses presented above are principally due to a general widening of credit spreads from the dates of acquisition to June 30, 2015 and December 31, 2014, as applicable. The resulting decrease in fair values reflects an increase in the perceived risk by the financial markets related to those securities. As of June 30, 2015, all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+," except three that were rated "A-." As of December 31, 2014 , all of the investment securities in an unrealized loss position either were backed by the full faith and credit of the U.S. government or had credit ratings of at least "AA+," except one that was rated "A-." The unrealized losses were on 29 and 35 individual investment securities as of June 30, 2015 and December 31, 2014, respectively.

As of June 30, 2015, 12 of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $10.6 million. As of December 31, 2014, 15 of the securities


16
Table of Contents

in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $10.0 million.  Securities in unrealized loss positions for 12 months or longer have a fair value as of June 30, 2015 that is, on average, approximately 95 percent of their amortized cost basis. Farmer Mac believes that all of these unrealized losses are recoverable within a reasonable period of time by way of maturity or changes in credit spreads. Accordingly, Farmer Mac has concluded that none of the unrealized losses on these available-for-sale investment securities represents other-than-temporary impairment as of June 30, 2015 and December 31, 2014.

Farmer Mac did not own any held-to-maturity investment securities as of June 30, 2015 and December 31, 2014. As of June 30, 2015, Farmer Mac owned trading investment securities with an amortized cost of $2.4 million, a fair value of $0.6 million, and a weighted average yield of 4.27 percent. As of December 31, 2014, Farmer Mac owned trading investment securities with an amortized cost of $2.9 million, a fair value of $0.7 million, and a weighted average yield of 4.24 percent.

The amortized cost, fair value, and weighted average yield of available-for-sale investment securities by remaining contractual maturity as of June 30, 2015 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets.

Table 2.3

 
As of June 30, 2015
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
925,228

 
$
925,400

 
0.31%
Due after one year through five years
103,309

 
103,939

 
1.19%
Due after five years through ten years
239,193

 
239,790

 
0.88%
Due after ten years
586,513

 
582,770

 
0.90%
Total
$
1,854,243

 
$
1,851,899

 
0.62%




17
Table of Contents

3.
FARMER MAC GUARANTEED SECURITIES AND USDA SECURITIES

The following tables set forth information about on-balance sheet Farmer Mac Guaranteed Securities and USDA Securities as of June 30, 2015 and December 31, 2014:

Table 3.1

 
As of June 30, 2015
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,819,159

 
$
2,868

 
$
1,822,027

 
$
14,269

 
$
—

 
$
1,836,296

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
4,022,251

 
$
—

 
$
4,022,251

 
$
36,810

 
$
(42,861
)
 
$
4,016,200

Farmer Mac Guaranteed USDA Securities
33,822

 
(339
)
 
33,483

 
1,525

 
—

 
35,008

Total Farmer Mac Guaranteed Securities
4,056,073

 
(339
)
 
4,055,734

 
38,335

 
(42,861
)
 
4,051,208

USDA Securities
1,785,662

 
2,536

 
1,788,198

 
37,243

 
(35
)
 
1,825,406

Total available-for-sale
$
5,841,735

 
$
2,197

 
$
5,843,932

 
$
75,578

 
$
(42,896
)
 
$
5,876,614

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
32,058

 
$
2,384

 
$
34,442

 
$
100

 
$
(772
)
 
$
33,770


 
As of December 31, 2014
 
Unpaid Principal Balance
 
Unamortized Premium/(Discount)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
1,785,340

 
$
9,280

 
$
1,794,620

 
$
6,211

 
$
(255
)
 
$
1,800,576

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
AgVantage
$
3,625,073

 
$
—

 
$
3,625,073

 
$
36,442

 
$
(29,853
)
 
$
3,631,662

Farmer Mac Guaranteed USDA Securities
27,831

 
(442
)
 
27,389

 
237

 
(7
)
 
27,619

Total Farmer Mac Guaranteed Securities
3,652,904

 
(442
)
 
3,652,462

 
36,679

 
(29,860
)
 
3,659,281

USDA Securities
1,717,813

 
3,162

 
1,720,975

 
11,850

 
(1,603
)
 
1,731,222

Total available-for-sale
$
5,370,717

 
$
2,720

 
$
5,373,437

 
$
48,529

 
$
(31,463
)
 
$
5,390,503

Trading:
 
 
 
 
 

 
 

 
 

 
 

USDA Securities
$
38,412

 
$
2,748

 
$
41,160

 
$
114

 
$
(964
)
 
$
40,310




18
Table of Contents

As of June 30, 2015 and December 31, 2014, 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 June 30, 2015
 
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)
Available-for-sale:
 
 
 
 
 
 
 
AgVantage
$
1,185,341

 
$
(33,229
)
 
$
859,874

 
$
(9,632
)
USDA Securities
—

 
—

 
97,848

 
(35
)
Total available-for-sale
$
1,185,341

 
$
(33,229
)

$
957,722


$
(9,667
)

 
As of December 31, 2014
 
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
$
547

 
$
(1
)
 
$
49,745

 
$
(254
)
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
AgVantage
$
685,131

 
$
(13,115
)
 
$
1,460,089

 
$
(16,738
)
Farmer Mac Guaranteed USDA Securities
3,720

 
(7
)
 
—

 
—

USDA Securities
264,375

 
(1,549
)
 
97,817

 
(54
)
Total available-for-sale
$
953,226

 
$
(14,671
)
 
$
1,557,906

 
$
(16,792
)

The unrealized losses presented above are principally due to higher interest rates from the date of acquisition to June 30, 2015 and December 31, 2014, as applicable. The credit exposure related to Farmer Mac's USDA Guarantees line of business is covered by the full faith and credit guarantee of the United States. The unrealized losses from AgVantage securities were on 16 available-for-sale securities as of June 30, 2015. There were no unrealized losses from held-to-maturity AgVantage securities as of June 30, 2015. The unrealized losses from AgVantage securities were on 2 held-to-maturity securities and 23 available-for-sale securities as of As of December 31, 2014. As of June 30, 2015, 6 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $9.6 million. As of December 31, 2014, 15 available-for-sale AgVantage securities had been in a loss position for more than 12 months with a total unrealized loss of $16.7 million. AgVantage® is a registered trademark of Farmer Mac used to designate Farmer Mac Guaranteed Securities that are general obligations of lenders secured by pools of eligible loans. These Farmer Mac Guaranteed Securities are referred to as AgVantage securities. Each AgVantage security backed by agricultural mortgages requires some level of overcollateralization, or, in the case of rural utilities loans, 100 percent collateralization, and is secured by eligible loans of the issuing institution with a requirement that delinquent loans be removed


19
Table of Contents

from the collateral pool and then replaced with current eligible loans. Farmer Mac has concluded that none of the unrealized losses on its held-to-maturity Farmer Mac Guaranteed Securities and available-for-sale Farmer Mac Guaranteed Securities and USDA Securities are other-than-temporary impairment as of either June 30, 2015 or As of December 31, 2014.  Farmer Mac does not intend to sell these securities, and it is not more likely than not that Farmer Mac will be required to sell the securities before recovery of the amortized cost basis.

During the three and six months ended June 30, 2015 and 2014, Farmer Mac realized no gains or losses from the sale of Farmer Mac Guaranteed Securities and USDA Securities.

The amortized cost, fair value, and weighted average yield of available-for-sale and held-to-maturity Farmer Mac Guaranteed Securities and USDA Securities by remaining contractual maturity as of June 30, 2015 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 June 30, 2015
 
Available-for-Sale Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
571,035

 
$
577,094

 
2.77
%
Due after one year through five years
1,233,236

 
1,248,863

 
1.35
%
Due after five years through ten years
1,479,773

 
1,492,590

 
1.78
%
Due after ten years
2,559,888

 
2,558,067

 
2.37
%
Total
$
5,843,932

 
$
5,876,614

 
2.04
%
 
As of June 30, 2015
 
Held-to-Maturity Securities
 
Amortized
Cost
 
Fair Value
 
Weighted-
Average
Yield
 
(dollars in thousands)
Due within one year
$
679,891

 
$
680,697

 
2.66
%
Due after one year through five years
1,135,536

 
1,148,735

 
2.35
%
Due after five years through ten years
6,600

 
6,864

 
3.35
%
Total
$
1,822,027

 
$
1,836,296

 
2.46
%

As of June 30, 2015, Farmer Mac owned trading USDA Securities with an amortized cost of $34.4 million, a fair value of $33.8 million, and a weighted average yield of 5.50 percent. As of December 31, 2014, Farmer Mac owned trading USDA Securities with an amortized cost of $41.2 million, a fair value of $40.3 million, and a weighted average yield of 5.60 percent.  

4.
FINANCIAL DERIVATIVES

Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets, future cash flows, or debt issuance, and not for trading or speculative purposes.  Certain financial derivatives are designated as fair


20
Table of Contents

value hedges of fixed rate assets classified as available-for-sale to protect against fair value changes in the assets related to a benchmark interest rate (i.e., LIBOR). Other financial derivatives are designated as cash flow hedges to mitigate the volatility of future interest rate payments on floating rate debt.

The following tables summarize information related to Farmer Mac's financial derivatives on a gross basis without giving consideration to master netting arrangements as of June 30, 2015 and December 31, 2014 and the effects of financial derivatives on the consolidated statements of operations for the three and six months ended June 30, 2015 and 2014:

Table 4.1

  
As of June 30, 2015
  
 
 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
1,026,075

 
$
963

 
$
(24,366
)
 
2.46%
 
0.28%
 
 
 
3.65
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
92,000

 
866

 
(335
)
 
2.16%
 
0.48%
 
 
 
6.93
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
519,408

 
1,425

 
(43,645
)
 
4.06%
 
0.28%
 
 
 
8.80
Receive fixed non-callable
4,062,734

 
4,093

 
(313
)
 
0.16%
 
0.35%
 
 
 
0.58
Receive fixed callable
487,565

 
54

 
(437
)
 
0.13%
 
0.82%
 
 
 
2.51
Basis swaps
1,295,000

 
74

 
(258
)
 
0.12%
 
0.29%
 
 
 
2.68
Agency forwards
45,608

 
—

 
(208
)
 
 
 
 
 
99.05

 
 
Treasury futures
13,700

 
—

 
(58
)
 
 
 
 
 
125.75

 
 
Credit valuation adjustment
 
 
(20
)
 
247

 
 
 
 
 
 
 
 
Total financial derivatives
$
7,542,090

 
$
7,455

 
$
(69,373
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 
—

 
35,335

 
 
 
 
 
 
 
 
Net amount
 
 
$
7,455

 
$
(34,038
)
 
 
 
 
 
 
 
 


21
Table of Contents

  
As of December 31, 2014
  

 
Fair Value
 
Weighted-
Average
Pay Rate
 
Weighted-
Average Receive Rate
 
Weighted-
Average
Forward
Price
 
Weighted-
Average
Remaining
Life (in years)
  
Notional Amount
 
Asset
 
(Liability)
 
 
 
 
  
(dollars in thousands)
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
$
1,000,000

 
$
—

 
$
(31,718
)
 
2.47%
 
0.23%
 
 
 
3.98
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
15,000

 
—

 
(289
)
 
2.43%
 
0.51%
 
 
 
6.23
No hedge designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed non-callable
490,183

 
537

 
(51,224
)
 
4.23%
 
0.23%
 
 
 
7.05
Receive fixed non-callable
3,829,355

 
3,414

 
(461
)
 
0.14%
 
0.27%
 
 
 
0.55
Receive fixed callable
383,565

 
1

 
(877
)
 
0.12%
 
1.34%
 
 
 
3.47
Basis swaps
1,105,000

 
247

 
(406
)
 
0.11%
 
0.31%
 
 
 
2.42
Agency forwards
12,768

 
—

 
(53
)
 
 
 
 
 
101.00

 
 
Treasury futures
1,700

 
—

 
(3
)
 
 
 
 
 
126.60

 
 
Credit valuation adjustment
 
 
(22
)
 
187

 
 
 
 
 
 
 
 
Total financial derivatives
$
6,837,571

 
$
4,177

 
$
(84,844
)
 
  
 
  
 
 
 
  
Collateral pledged
 
 
—

 
46,627

 
 
 
 
 
 
 
 
Net amount
 
 
$
4,177

 
$
(38,217
)
 
 
 
 
 
 
 
 

Table 4.2

 
Gains/(losses) on financial derivatives and hedging activities
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Interest rate swaps(1)
$
14,075

 
$
(799
)
 
$
8,316

 
$
(599
)
Hedged items
(11,354
)
 
3,818

 
(2,478
)
 
6,568

Gains on hedging activities
2,721

 
3,019

 
5,838

 
5,969

No hedge designation:
 
 
 
 
 
 
 
Interest rate swaps
11,798

 
(8,126
)
 
5,841

 
(17,674
)
Agency forwards
(356
)
 
(235
)
 
(1,142
)
 
(1,087
)
Treasury futures
226

 
(356
)
 
(30
)
 
(484
)
Gains/(losses) on financial derivatives not designated in hedging relationships
11,668

 
(8,717
)
 
4,669

 
(19,245
)
Gains/(losses) on financial derivatives and hedging activities
$
14,389

 
$
(5,698
)
 
$
10,507

 
$
(13,276
)
(1)
Included in the assessment of hedge effectiveness as of June 30, 2015, but excluded from the amounts in the table, were losses of $2.9 million and $5.8 million for the three and six months ended June 30, 2015, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the three and six months ended June 30, 2015 were losses of $0.2 million and gains of $0.1 million. The comparable amounts as of June 30, 2014 were losses of $2.9 million and $5.9 million for the three and six months ended June 30, 2014, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.1 million for the three and six months ended June 30, 2014, attributable to hedge ineffectiveness.




22
Table of Contents


As of June 30, 2015 and December 31, 2014, Farmer Mac's credit exposure to interest rate swap counterparties, excluding netting arrangements and any adjustment for nonperformance risk, but including accrued interest, was $10.8 million and $6.1 million, respectively; however, including netting arrangements and accrued interest, Farmer Mac's credit exposure was $0.7 million as of June 30, 2015 and $0.4 million as of December 31, 2014. Farmer Mac held no cash as collateral for its derivatives in net asset positions, resulting in uncollateralized net asset positions of $0.7 million as of June 30, 2015 and $0.4 million as of December 31, 2014.

As of June 30, 2015 and December 31, 2014, the fair value of Farmer Mac's derivatives in a net liability position including accrued interest but excluding netting arrangements and any adjustment for nonperformance risk, was $83.2 million and $99.4 million, respectively. Including netting arrangements and accrued interest, the fair value of Farmer Mac's derivatives in a net liability position at the counterparty level, was $74.0 million and $93.4 million as of June 30, 2015 and December 31, 2014, respectively.  Farmer Mac posted cash of $35.3 million and no investment securities as of June 30, 2015 and posted cash of $46.6 million and no investment securities as of December 31, 2014.  Farmer Mac records posted cash as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of prepaid expenses and other assets. The investment securities posted as collateral are included in the investment securities balances on the consolidated balance sheets.  If Farmer Mac had breached certain provisions of the derivative contracts as of June 30, 2015 and December 31, 2014, it could have been required to settle its obligations under the agreements or post additional collateral of $38.7 million and $46.8 million, respectively. As of June 30, 2015 and December 31, 2014, 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 $7.5 billion notional amount of interest rate swaps outstanding as of June 30, 2015, $4.4 billion were cleared through swap clearinghouses. Of Farmer Mac's $6.8 billion notional amount of interest rate swaps outstanding as of December 31, 2014, $4.0 billion were cleared through swap clearinghouses.





23
Table of Contents


5.
LOANS AND ALLOWANCE FOR LOSSES

Loans

Farmer Mac classifies loans as either held for investment or held for sale. Loans held for investment are recorded at the unpaid principal balance, net of unamortized premium or discount and other cost adjustments. Loans held for sale are reported at the lower of cost or fair value determined on a pooled basis. As of June 30, 2015 and December 31, 2014, Farmer Mac had no loans held for sale. The following table displays the composition of the loan balances as of June 30, 2015 and December 31, 2014:

Table 5.1

 
As of June 30, 2015
 
As of December 31, 2014
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
Unsecuritized
 
In Consolidated Trusts
 
Total
 
(in thousands)
Farm & Ranch
$
2,197,934

 
$
512,559

 
$
2,710,493

 
$
2,118,867

 
$
421,355

 
$
2,540,222

Rural Utilities
954,188

 
—

 
954,188

 
718,213

 
267,396

 
985,609

Total unpaid principal balance(1)
3,152,122

 
512,559

 
3,664,681

 
2,837,080

 
688,751

 
3,525,831

Unamortized premiums, discounts and other cost basis adjustments
890

 
—

 
890

 
(3,619
)
 
3,727

 
108

Total loans
3,153,012

 
512,559

 
3,665,571

 
2,833,461

 
692,478

 
3,525,939

Allowance for loan losses
(5,395
)
 
(544
)
 
(5,939
)
 
(5,324
)
 
(540
)
 
(5,864
)
Total loans, net of allowance
$
3,147,617

 
$
512,015

 
$
3,659,632

 
$
2,828,137

 
$
691,938

 
$
3,520,075

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

Allowance for Losses

Farmer Mac maintains an allowance for losses presented in two components on its consolidated balance sheets: (1) an allowance for loan losses to account for estimated probable losses on loans held, and (2) a reserve for losses to account for estimated probable losses on loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities.  As of June 30, 2015 and December 31, 2014, Farmer Mac reported allowances for losses of $10.6 million and $10.1 million, respectively. See Note 6 for more information about off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs.  



24
Table of Contents

The following is a summary of the changes in the total allowance for losses for the three and six months ended June 30, 2015 and 2014:

Table 5.2

 
As of June 30, 2015
 
As of June 30, 2014
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
5,940

 
$
3,491

 
$
9,431

 
$
7,410

 
$
6,569

 
$
13,979

Provision for/(release of) losses
110

 
1,146

 
1,256

 
(1,583
)
 
(974
)
 
(2,557
)
Charge-offs
(111
)
 
—

 
(111
)
 
(57
)
 
—

 
(57
)
Ending Balance
$
5,939

 
$
4,637

 
$
10,576

 
$
5,770

 
$
5,595

 
$
11,365

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
5,864

 
$
4,263

 
$
10,127

 
$
6,866

 
$
6,468

 
$
13,334

Provision for/(release of) losses
186

 
374

 
560

 
(1,010
)
 
(873
)
 
(1,883
)
Charge-offs
(111
)
 
—

 
(111
)
 
(86
)
 
—

 
(86
)
Ending Balance
$
5,939

 
$
4,637

 
$
10,576

 
$
5,770

 
$
5,595

 
$
11,365


During second quarter 2015, Farmer Mac recorded provisions to its allowance for loan losses of $0.1 million and provisions to its reserve for losses of $1.1 million, primarily related to a specific allowance for an impaired loan to a canola facility underlying an LTSPC. The establishment of a specific allowance for this loan was due to a downgrade in risk rating resulting from collateral shortfalls relative to the unpaid principal balance for such loan. Farmer Mac recorded $0.1 million of charge-offs to its allowance for loan losses during second quarter 2015.

During second quarter 2014, Farmer Mac recorded releases from its allowance for loan losses of $1.6 million and releases from its reserve for losses of $1.0 million. The releases recorded during second quarter 2014 primarily related to a significant decline in the balance of Farmer Mac's ethanol-related Agricultural Storage and Processing portfolio. Farmer Mac also recorded $0.1 million of charge-offs to its allowance for loan losses during second quarter 2014.



25
Table of Contents

The following tables present the changes in the total allowance for losses for the three and six months ended June 30, 2015 and 2014 by commodity type:

Table 5.3

 
June 30, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,640

 
$
2,284

 
$
1,343

 
$
459

 
$
2,698

 
$
7

 
$
9,431

Provision for/(release of) losses
13

 
(63
)
 
417

 
85

 
804

 
—

 
1,256

Charge-offs
—

 
—

 
—

 
(111
)
 
—

 
—

 
(111
)
Ending Balance
$
2,653

 
$
2,221

 
$
1,760

 
$
433

 
$
3,502

 
$
7

 
$
10,576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,519

 
$
2,159

 
$
1,423

 
$
467

 
$
3,552

 
$
7

 
$
10,127

Provision for/(release of) losses
134

 
62

 
337

 
77

 
(50
)
 
—

 
560

Charge-offs
—

 
—

 
—

 
(111
)
 
—

 
—

 
(111
)
Ending Balance
$
2,653


$
2,221


$
1,760


$
433


$
3,502


$
7


$
10,576


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

 
$
2,131

 
$
1,387

 
$
464

 
$
7,715

 
$
4

 
$
13,979

Provision for/(release of) losses
112

 
86

 
(19
)
 
(20
)
 
(2,716
)
 
—

 
(2,557
)
Charge-offs
—

 
—

 
(57
)
 
—

 
—

 
—

 
(57
)
Ending Balance
$
2,390

 
$
2,217

 
$
1,311

 
$
444

 
$
4,999

 
$
4

 
$
11,365

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

 
$
2,186

 
$
1,271

 
$
454

 
$
7,292

 
$
7

 
$
13,334

Provision for/(release of) losses
266

 
31

 
97

 
19

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

 
—

 
(57
)
 
(29
)
 
—

 
—

 
(86
)
Ending Balance
$
2,390

 
$
2,217

 
$
1,311

 
$
444

 
$
4,999

 
$
4

 
$
11,365



26
Table of Contents


The following tables present the unpaid principal balances of loans held and loans underlying LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities and the related total allowance for losses by impairment method and commodity type as of June 30, 2015 and December 31, 2014:

Table 5.4

  
As of June 30, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,748,310

 
$
377,534

 
$
417,004

 
$
67,853

 
$
25,071

 
$
80

 
$
2,635,852

Off-balance sheet
1,262,318

 
528,186

 
785,805

 
103,521

 
58,433

 
6,009

 
2,744,272

Total
$
3,010,628

 
$
905,720

 
$
1,202,809

 
$
171,374

 
$
83,504

 
$
6,089

 
$
5,380,124

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
20,372

 
$
38,672

 
$
6,118

 
$
9,479

 
$
—

 
$
—

 
$
74,641

Off-balance sheet
5,565

 
3,736

 
7,302

 
702

 
13,500

 
—

 
30,805

Total
$
25,937

 
$
42,408

 
$
13,420

 
$
10,181

 
$
13,500

 
$
—

 
$
105,446

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,768,682

 
$
416,206

 
$
423,122

 
$
77,332

 
$
25,071

 
$
80

 
$
2,710,493

Off-balance sheet
1,267,883

 
531,922

 
793,107

 
104,223

 
71,933

 
6,009

 
2,775,077

Total
$
3,036,565

 
$
948,128

 
$
1,216,229

 
$
181,555

 
$
97,004

 
$
6,089

 
$
5,485,570

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,806

 
$
459

 
$
651

 
$
76

 
$
367

 
$
—

 
$
3,359

Off-balance sheet
311

 
139

 
310

 
59

 
881

 
7

 
1,707

Total
$
2,117

 
$
598

 
$
961

 
$
135

 
$
1,248

 
$
7

 
$
5,066

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
391

 
$
1,469

 
$
446

 
$
274

 
$
—

 
$
—

 
$
2,580

Off-balance sheet
145

 
154

 
353

 
24

 
2,254

 
—

 
2,930

Total
$
536

 
$
1,623

 
$
799

 
$
298

 
$
2,254

 
$
—

 
$
5,510

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,197

 
$
1,928

 
$
1,097

 
$
350

 
$
367

 
$
—

 
$
5,939

Off-balance sheet
456

 
293

 
663

 
83

 
3,135

 
7

 
4,637

Total
$
2,653

 
$
2,221

 
$
1,760

 
$
433

 
$
3,502

 
$
7

 
$
10,576




27
Table of Contents

  
As of December 31, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,621,360

 
$
359,517

 
$
406,049

 
$
57,851

 
$
29,003

 
$
—

 
$
2,473,780

Off-balance sheet
1,305,141

 
521,535

 
839,286

 
102,857

 
85,357

 
6,781

 
2,860,957

Total
$
2,926,501

 
$
881,052

 
$
1,245,335

 
$
160,708

 
$
114,360

 
$
6,781

 
$
5,334,737

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
12,307

 
$
35,904

 
$
6,571

 
$
11,660

 
$
—

 
$
—

 
$
66,442

Off-balance sheet
2,458

 
3,239

 
8,712

 
1,586

 
—

 
—

 
15,995

Total
$
14,765

 
$
39,143

 
$
15,283

 
$
13,246

 
$
—

 
$
—

 
$
82,437

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,633,667

 
$
395,421

 
$
412,620

 
$
69,511

 
$
29,003

 
$
—

 
$
2,540,222

Off-balance sheet
1,307,599

 
524,774

 
847,998

 
104,443

 
85,357

 
6,781

 
2,876,952

Total
$
2,941,266

 
$
920,195

 
$
1,260,618

 
$
173,954

 
$
114,360

 
$
6,781

 
$
5,417,174

Allowance for Losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
1,824

 
$
495

 
$
658

 
$
51

 
$
503

 
$
—

 
$
3,531

Off-balance sheet
298

 
149

 
404

 
52

 
3,049

 
7

 
3,959

Total
$
2,122

 
$
644

 
$
1,062

 
$
103

 
$
3,552

 
$
7

 
$
7,490

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
283

 
$
1,410

 
$
328

 
$
312

 
$
—

 
$
—

 
$
2,333

Off-balance sheet
114

 
105

 
33

 
52

 
—

 
—

 
304

Total
$
397

 
$
1,515

 
$
361

 
$
364

 
$
—

 
$
—

 
$
2,637

Total Farm & Ranch loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet
$
2,107

 
$
1,905

 
$
986

 
$
363

 
$
503

 
$
—

 
$
5,864

Off-balance sheet
412

 
254

 
437

 
104

 
3,049

 
7

 
4,263

Total
$
2,519

 
$
2,159

 
$
1,423

 
$
467

 
$
3,552

 
$
7

 
$
10,127




28
Table of Contents

The following tables present by commodity type the unpaid principal balances, recorded investment, and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of June 30, 2015 and December 31, 2014:

Table 5.5

  
As of June 30, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
4,272

 
$
6,352

 
$
4,085

 
$
1,486

 
$
—

 
$
—

 
$
16,195

Unpaid principal balance
4,231

 
6,354

 
4,085

 
1,486

 
—

 
—

 
16,156

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment(1)
21,706

 
36,342

 
9,341

 
8,699

 
13,500

 
—

 
89,588

Unpaid principal balance
21,706

 
36,054

 
9,335

 
8,695

 
13,500

 
—

 
89,290

Associated allowance
536

 
1,623

 
799

 
298

 
2,254

 
—

 
5,510

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
25,978

 
42,694

 
13,426

 
10,185

 
13,500

 
—

 
105,783

Unpaid principal balance
25,937

 
42,408

 
13,420

 
10,181

 
13,500

 
—

 
105,446

Associated allowance
536

 
1,623

 
799

 
298

 
2,254

 
—

 
5,510

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status(2)
$
3,608

 
$
24,835

 
$
4,230

 
$
5,944

 
$
—

 
$
—

 
$
38,617

(1)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $77.7 million (73 percent) of impaired loans as of June 30, 2015, which resulted in a specific reserve of $3.8 million.
(2)
Includes $12.5 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.
  
As of December 31, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment
$
4,877

 
$
5,837

 
$
9,576

 
$
2,001

 
$
—

 
$
—

 
$
22,291

Unpaid principal balance
4,723

 
5,750

 
9,386

 
1,981

 
—

 
—

 
21,840

With a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment(1)
10,753

 
33,690

 
5,979

 
11,350

 
—

 
—

 
61,772

Unpaid principal balance
10,042

 
33,393

 
5,897

 
11,265

 
—

 
—

 
60,597

Associated allowance
397

 
1,515

 
361

 
364

 
—

 
—

 
2,637

Total:
 

 
 

 
 

 
 

 
 

 
 

 
 

Recorded investment
15,630

 
39,527

 
15,555

 
13,351

 
—

 
—

 
84,063

Unpaid principal balance
14,765

 
39,143

 
15,283

 
13,246

 
—

 
—

 
82,437

Associated allowance
397

 
1,515

 
361

 
364

 
—

 
—

 
2,637

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment of loans on nonaccrual status(2)
$
5,168

 
$
14,413

 
$
4,438

 
$
6,133

 
$
—

 
$
—

 
$
30,152

(1)
Impairment analysis was performed in the aggregate in consideration of similar risk characteristics of the assets and historical statistics on $54.4 million (65 percent) of impaired loans as of December 31, 2014, which resulted in a specific reserve of $1.2 million.


29
Table of Contents

(2)
Includes $11.7 million of loans that are less than 90 days delinquent but which have not met Farmer Mac's performance criteria for returning to accrual status.


The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2015 and 2014:

Table 5.6

 
June 30, 2015
 
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
$
24,392

 
$
42,347

 
$
14,247

 
$
10,924

 
$
6,750

 
$
—

 
$
98,660

Income recognized on impaired loans
58

 
142

 
49

 
92

 
—

 
—

 
341

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Average recorded investment in impaired loans
$
21,471

 
$
41,407

 
$
14,683

 
$
11,733

 
$
4,500

 
$
—

 
$
93,794

Income recognized on impaired loans
340

 
225

 
197

 
150

 
—

 
—

 
912


 
June 30, 2014
 
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
$
22,969

 
$
43,329

 
$
12,798

 
$
12,116

 
$
—

 
$
—

 
$
91,212

Income recognized on impaired loans
105

 
76

 
59

 
79

 
—

 
—

 
319

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

 
$
44,228

 
$
13,289

 
$
12,410

 
$
—

 
$
40

 
$
93,164

Income recognized on impaired loans
275

 
270

 
135

 
201

 
—

 
—

 
881


For the three and six months ended June 30, 2015, the recorded investment of loans determined to be troubled debt restructurings ("TDRs") was $1.1 million both before and after restructuring. For the three and six months ended June 30, 2014, the recorded investment of loans determined to be TDRs was $0.3 million and $0.8 million both before and after restructuring. As of June 30, 2015, there were no TDRs identified during the previous 12 months that were in default under the modified terms. The impact of TDRs on Farmer Mac's allowance for loan losses was immaterial for the three and six months ended June 30, 2015 and 2014.

When particular criteria are met, such as the default of the borrower, Farmer Mac becomes entitled to purchase the defaulted loans underlying Farmer Mac Guaranteed Securities (commonly referred to as "removal-of-account" provisions).  Farmer Mac records all such defaulted loans at their unpaid principal balance during the period in which Farmer Mac becomes entitled to purchase the loans and therefore regains effective control over the transferred loans. In accordance with the terms of all LTSPCs, Farmer Mac acquires loans that are either 90 days or 120 days delinquent (depending on the provisions of the applicable agreement) upon the request of the counterparty. Subsequent to the purchase, these defaulted


30
Table of Contents

loans are treated as nonaccrual loans and, therefore, interest is accounted for on the cash basis.  Any decreases in expected cash flows are recognized as impairment.

During the three months ended June 30, 2015, Farmer Mac purchased one defaulted loan having an unpaid principal balance of $1.3 million from a pool underlying a Farm & Ranch Guaranteed Security. During the six months ended June 30, 2015, Farmer Mac purchased two defaulted loans having an unpaid principal balance of $2.0 million from pools underlying Farm & Ranch Guaranteed Securities. During the three and six months ended June 30, 2014, Farmer Mac purchased no defaulted loans and one defaulted loan having an unpaid principal balance of $0.4 million, respectively, from a pool underlying an LTSPC.
  
The following tables present information related to Farmer Mac's acquisition of defaulted loans for the three and six months ended June 30, 2015 and 2014 and the outstanding balances and carrying amounts of all such loans as of June 30, 2015 and December 31, 2014:

Table 5.7

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Unpaid principal balance at acquisition date:
 
 
 
 
 
 
 
  Loans underlying LTSPCs
$
—

 
$
—

 
$
—

 
$
440

  Loans underlying off-balance sheet Farmer Mac Guaranteed Securities
1,324

 
—

 
1,981

 
—

    Total unpaid principal balance at acquisition date
1,324

 
—

 
1,981

 
440

Contractually required payments receivable
—

 
—

 
—

 
440

Impairment recognized subsequent to acquisition
57

 
17

 
109

 
69

Recovery/release of allowance for defaulted loans
—

 
5

 
121

 
7


 
As of
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Outstanding balance
$
25,484

 
$
24,921

Carrying amount
22,546

 
22,149






31
Table of Contents

Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs are presented in the table below.  As of June 30, 2015, there were no delinquencies and no probable losses inherent in Farmer Mac's Rural Utilities loan portfolio and Farmer Mac had not experienced credit losses on any Rural Utilities loans.

Table 5.8

 
90-Day Delinquencies(1)
 
Net Credit Losses
 
As of
 
For the Six Months Ended
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
On-balance sheet assets:
 
 
 
 
 
 
 
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
26,140

 
$
18,427

 
$
112

 
$
(21
)
Total on-balance sheet
$
26,140

 
$
18,427

 
$
112

 
$
(21
)
Off-balance sheet assets:
 

 
 
 
 

 
 

Farm & Ranch:
 

 
 
 
 

 
 

LTSPCs
$
5,712

 
$
490

 
$
—

 
$
—

Total off-balance sheet
$
5,712

 
$
490

 
$
—

 
$
—

Total
$
31,852

 
$
18,917

 
$
112

 
$
(21
)
(1)
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, or in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

Of the $26.1 million and $18.4 million of on-balance sheet loans reported as 90-day delinquencies as of June 30, 2015 and December 31, 2014, respectively, $1.8 million were loans subject to "removal-of-account" provisions.



32
Table of Contents

Credit Quality Indicators

The following tables present credit quality indicators related to Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2015 and December 31, 2014:  

Table 5.9

  
As of June 30, 2015
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,735,454

 
$
377,534

 
$
382,150

 
$
65,353

 
$
25,071

 
$
80

 
$
2,585,642

Special mention(2)
12,856

 
—

 
34,854

 
2,500

 
—

 
—

 
50,210

Substandard(3)
20,372

 
38,672

 
6,118

 
9,479

 
—

 
—

 
74,641

Total on-balance sheet
$
1,768,682

 
$
416,206

 
$
423,122

 
$
77,332

 
$
25,071

 
$
80

 
$
2,710,493

Off-Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,221,082

 
$
514,384

 
$
757,470

 
$
97,822

 
$
52,299

 
$
5,365

 
$
2,648,422

Special mention(2)
35,174

 
10,185

 
18,364

 
1,143

 
—

 
8

 
64,874

Substandard(3)
11,627

 
7,353

 
17,273

 
5,258

 
19,634

 
636

 
61,781

Total off-balance sheet
$
1,267,883

 
$
531,922

 
$
793,107

 
$
104,223

 
$
71,933

 
$
6,009

 
$
2,775,077

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
2,956,536

 
$
891,918

 
$
1,139,620

 
$
163,175

 
$
77,370

 
$
5,445

 
$
5,234,064

Special mention(2)
48,030

 
10,185

 
53,218

 
3,643

 
—

 
8

 
115,084

Substandard(3)
31,999

 
46,025

 
23,391

 
14,737

 
19,634

 
636

 
136,422

Total
$
3,036,565

 
$
948,128

 
$
1,216,229

 
$
181,555

 
$
97,004

 
$
6,089

 
$
5,485,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans(1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
1,296

 
$
20,606

 
$
1,802

 
$
2,436

 
$
—

 
$
—

 
$
26,140

Off-balance sheet
2,889

 
608

 
2,114

 
101

 
—

 
—

 
5,712

90-days or more past due
$
4,185

 
$
21,214

 
$
3,916

 
$
2,537

 
$
—

 
$
—

 
$
31,852

(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.



33
Table of Contents

  
As of December 31, 2014
 
Crops
 
Permanent
Plantings
 
Livestock
 
Part-time
Farm
 
Ag. Storage and
Processing
 
Other
 
Total
  
(in thousands)
Credit risk profile by internally assigned grade(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,604,546

 
$
353,487

 
$
375,010

 
$
57,239

 
$
29,003

 
$
—

 
$
2,419,285

Special mention(2)
16,814

 
6,030

 
31,039

 
612

 
—

 
—

 
54,495

Substandard(3)
12,307

 
35,904

 
6,571

 
11,660

 
—

 
—

 
66,442

Total on-balance sheet
$
1,633,667

 
$
395,421

 
$
412,620

 
$
69,511

 
$
29,003

 
$
—

 
$
2,540,222

Off-Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
1,282,773

 
$
503,414

 
$
799,047

 
$
97,692

 
$
64,363

 
$
6,117

 
$
2,753,406

Special mention(2)
13,603

 
12,150

 
30,281

 
1,351

 
—

 
8

 
57,393

Substandard(3)
11,223

 
9,210

 
18,670

 
5,400

 
20,994

 
656

 
66,153

Total off-balance sheet
$
1,307,599

 
$
524,774

 
$
847,998

 
$
104,443

 
$
85,357

 
$
6,781

 
$
2,876,952

Total Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acceptable
$
2,887,319

 
$
856,901

 
$
1,174,057

 
$
154,931

 
$
93,366

 
$
6,117

 
$
5,172,691

Special mention(2)
30,417

 
18,180

 
61,320

 
1,963

 
—

 
8

 
111,888

Substandard(3)
23,530

 
45,114

 
25,241

 
17,060

 
20,994

 
656

 
132,595

Total
$
2,941,266

 
$
920,195

 
$
1,260,618

 
$
173,954

 
$
114,360

 
$
6,781

 
$
5,417,174

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity analysis of past due loans(1)
 

 
 

 
 

 
 

 
 

 
 

 
 

On-balance sheet
$
4,175

 
$
6,869

 
$
4,555

 
$
2,828

 
$
—

 
$
—

 
$
18,427

Off-balance sheet
—

 
—

 
490

 
—

 
—

 
—

 
490

90-days or more past due
$
4,175

 
$
6,869

 
$
5,045

 
$
2,828

 
$
—

 
$
—

 
$
18,917

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



34
Table of Contents

Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs as of June 30, 2015 and December 31, 2014:

Table 5.10

 
As of
  
June 30, 2015
 
December 31, 2014
  
(in thousands)
By commodity/collateral type:
 
 
 
Crops
$
3,036,565

 
$
2,941,266

Permanent plantings
948,128

 
920,195

Livestock
1,216,229

 
1,260,618

Part-time farm
181,555

 
173,954

Ag. Storage and Processing
97,004

 
114,360

Other
6,089

 
6,781

Total
$
5,485,570

 
$
5,417,174

By geographic region(1):
 

 
 

Northwest
$
591,539

 
$
573,135

Southwest
1,720,074

 
1,753,606

Mid-North
1,907,771

 
1,873,041

Mid-South
670,976

 
627,615

Northeast
209,909

 
214,402

Southeast
385,301

 
375,375

Total
$
5,485,570

 
$
5,417,174

By original loan-to-value ratio:
 

 
 

0.00% to 40.00%
$
1,520,752

 
$
1,503,076

40.01% to 50.00%
1,199,107

 
1,191,804

50.01% to 60.00%
1,522,736

 
1,491,502

60.01% to 70.00%
1,102,486

 
1,091,759

70.01% to 80.00%
119,173

 
115,645

80.01% to 90.00%
21,316

 
23,388

Total
$
5,485,570

 
$
5,417,174

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


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




35
Table of Contents

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

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

The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under all off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2015 and December 31, 2014, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans:

Table 6.1
Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities
  
As of June 30, 2015
 
As of December 31, 2014
  
(in thousands)
Farm & Ranch:
 
 
 
Guaranteed Securities
$
575,811

 
$
636,086

USDA Guarantees:
 

 
 

Farmer Mac Guaranteed USDA Securities
10,888

 
13,978

Institutional Credit:
 

 
 

AgVantage Securities
986,529

 
986,528

Total off-balance sheet Farmer Mac Guaranteed Securities
$
1,573,228

 
$
1,636,592


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

Table 6.2
 
For the Six Months Ended
  
June 30, 2015
 
June 30, 2014
  
(in thousands)
Proceeds from new securitizations
$
99,477

 
$
126,857

Guarantee fees received
2,082

 
2,416

Purchases of assets from the trusts
1,981

 
—


Farmer Mac has recorded a liability for its obligation to stand ready under the guarantee in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $9.8 million as of June 30, 2015 and $11.1 million as of December 31, 2014. As of June 30, 2015 and December 31, 2014, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage securities, was 11.6 years and 12.0 years, respectively.  As of June 30, 2015 and December 31, 2014, the weighted-average remaining maturity of the off-balance sheet AgVantage securities was 1.9 years and 2.4 years, respectively.



36
Table of Contents

Long-Term Standby Purchase Commitments

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

The maximum principal amount of potential undiscounted future payments that Farmer Mac could be requested to make under all LTSPCs, not including offsets provided by any recourse provisions, recoveries from third parties, or collateral for the underlying loans, was $2.2 billion as of both June 30, 2015 and December 31, 2014.

As of both June 30, 2015 and December 31, 2014, the weighted-average remaining maturity of all loans underlying LTSPCs was 14.3 years.  For those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has recorded a liability for its obligation to stand ready under the commitment in the guarantee and commitment obligation on the consolidated balance sheets.  This liability approximated $26.6 million as of June 30, 2015 and $26.8 million as of December 31, 2014.


7.
EQUITY

Non-Controlling Interest in Farmer Mac II LLC

On January 25, 2010, Farmer Mac completed a private offering of $250.0 million of securities issued by a newly formed Delaware statutory trust.  The trust securities, called Farm Asset-Linked Capital Securities or "FALConS," represented undivided beneficial ownership interests in 250,000 shares of non-cumulative perpetual preferred stock (the "Farmer Mac II LLC Preferred Stock") of Farmer Mac's subsidiary, Farmer Mac II LLC, a Delaware limited liability company.  The Farmer Mac II LLC Preferred Stock had a liquidation preference of $1,000 per share. On May 14, 2014, Farmer Mac purchased $6.0 million of FALConS from certain holders. On March 30, 2015, Farmer Mac II LLC redeemed all of the outstanding shares of Farmer Mac II LLC Preferred Stock which, in turn, triggered the redemption of all of the outstanding FALConS on that same day. Farmer Mac recognized an expense of $8.1 million in deferred issuance costs upon the retirement of the Farmer Mac II LLC Preferred Stock.
  
Capital Requirements

Farmer Mac is subject to the following capital requirements:
 
•
Statutory minimum capital requirement – Farmer Mac's statutory minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income ) equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically including:   
◦
the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;
◦
instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and


37
Table of Contents

◦
other off-balance sheet obligations of Farmer Mac.
•
Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core capital equal to 50 percent of the total minimum capital requirement at that time.
•
Risk-based capital requirement – Farmer Mac's charter directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.

Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement. As of June 30, 2015 and December 31, 2014, the minimum capital requirement was greater than the risk-based capital requirement. Farmer Mac's ability to declare and pay dividends on its preferred stock could be restricted if it fails to comply with applicable capital requirements.

As of June 30, 2015, Farmer Mac's minimum capital requirement was $443.8 million and its actual core capital level was $553.4 million, which was $109.6 million above the minimum capital requirement as of that date.  As of December 31, 2014, Farmer Mac's minimum capital requirement was $421.3 million and its actual core capital level was $766.3 million, which was $345.0 million above the minimum capital requirement as of that date.

In accordance with FCA's rule on Farmer Mac's capital planning, and as part of Farmer Mac's capital plan, Farmer Mac has adopted a policy for maintaining a sufficient level of Tier 1 capital (consisting of retained earnings, paid-in-capital, common stock, qualifying preferred stock, and accumulated other comprehensive income allocable to investments not included in one of the four operating lines of business) and imposing restrictions on common stock dividends and any discretionary bonus payments in the event that this capital falls below specified thresholds.

8.
FAIR VALUE DISCLOSURES

As of June 30, 2015, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $6.0 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3).  These financial instruments measured as level 3 represented 39 percent of total assets and 76 percent of financial instruments measured at fair value as of June 30, 2015. As of December 31, 2014, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.5 billion whose fair values were estimated by management in the absence of readily determinable fair values.  These financial instruments measured as level 3 represented 38 percent of total assets and 73 percent of financial instruments measured at fair value as of December 31, 2014.

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period.  There were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities, Farmer Mac Guaranteed Securities, USDA Securities, and financial derivatives during the first six months of 2015 and 2014. See Note 1(a) for information about the transfer of available-for-sale Farmer Mac Guaranteed Securities to held-to-maturity as of January 1, 2014.



38
Table of Contents

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2015 and December 31, 2014, respectively, and indicate the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:

Table 8.1
Assets and Liabilities Measured at Fair Value as of June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
—

 
$
—

 
$
40,182

 
$
40,182

Floating rate asset-backed securities
—

 
91,178

 
—

 
91,178

Floating rate corporate debt securities
—

 
10,060

 
—

 
10,060

Fixed rate corporate debt securities
—

 
14,985

 
—

 
14,985

Floating rate Government/GSE guaranteed mortgage-backed securities
—

 
711,060

 
—

 
711,060

Fixed rate GSE guaranteed mortgage-backed securities
—

 
8,047

 
—

 
8,047

Floating rate GSE subordinated debt
—

 
65,972

 
—

 
65,972

Fixed rate senior agency debt
—

 
297,845

 
—

 
297,845

Fixed rate U.S. Treasuries
612,570

 
—

 
—

 
612,570

Total available-for-sale
612,570

 
1,199,147

 
40,182

 
1,851,899

Trading:
 

 
 

 
 

 
 

Floating rate asset-backed securities
—

 
—

 
606

 
606

Total trading
—

 
—

 
606

 
606

Total Investment Securities
612,570

 
1,199,147

 
40,788

 
1,852,505

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage
—

 
—

 
4,016,200

 
4,016,200

Farmer Mac Guaranteed USDA Securities
—

 
—

 
35,008

 
35,008

Total Farmer Mac Guaranteed Securities
—

 
—

 
4,051,208

 
4,051,208

USDA Securities:
 

 
 

 
 

 
 

Available-for-sale
—

 
—

 
1,825,406

 
1,825,406

Trading
—

 
—

 
33,770

 
33,770

Total USDA Securities
—

 
—

 
1,859,176

 
1,859,176

Financial derivatives
—

 
7,455

 
—

 
7,455

Total Assets at fair value
$
612,570

 
$
1,206,602

 
$
5,951,172

 
$
7,770,344

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
58

 
$
69,315

 
$
—

 
$
69,373

Total Liabilities at fair value
$
58

 
$
69,315

 
$
—

 
$
69,373

Nonrecurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$
—

 
$
—

 
$
10,125

 
$
10,125

Total Nonrecurring Assets at fair value
$
—

 
$
—

 
$
10,125

 
$
10,125




39
Table of Contents

Assets and Liabilities Measured at Fair Value as of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
Assets:
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
—

 
$
—

 
$
40,576

 
$
40,576

Floating rate asset-backed securities
—

 
100,902

 
—

 
100,902

Floating rate corporate debt securities
—

 
10,091

 
—

 
10,091

Fixed rate corporate debt
—

 
30,025

 
—

 
30,025

Floating rate Government/GSE guaranteed mortgage-backed securities
—

 
612,753

 
—

 
612,753

Fixed rate GSE guaranteed mortgage-backed securities
—

 
8,202

 
—

 
8,202

Floating rate GSE subordinated debt
—

 
66,320

 
—

 
66,320

Fixed rate senior agency debt
—

 
18,939

 
—

 
18,939

Floating rate U.S. Treasuries
74,979

 
—

 
—

 
74,979

Fixed rate U.S. Treasuries
975,712

 
—

 
—

 
975,712

Total available-for-sale
1,050,691

 
847,232

 
40,576

 
1,938,499

Trading:
 

 
 

 
 

 
 

Floating rate asset-backed securities
—

 
—

 
689

 
689

Total trading
—

 
—

 
689

 
689

Total Investment Securities
1,050,691

 
847,232

 
41,265

 
1,939,188

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale:
 

 
 

 
 

 
 

AgVantage
—

 
—

 
3,631,662

 
3,631,662

Farmer Mac Guaranteed USDA Securities
—

 
—

 
27,619

 
27,619

Total Farmer Mac Guaranteed Securities
—

 
—

 
3,659,281

 
3,659,281

USDA Guaranteed Securities:
 

 
 

 
 

 
 

Available-for-sale
—

 
—

 
1,731,222

 
1,731,222

Trading
—

 
—

 
40,310

 
40,310

Total USDA Guaranteed Securities
—

 
—

 
1,771,532

 
1,771,532

Financial derivatives
—

 
4,177

 
—

 
4,177

Total Assets at fair value
$
1,050,691

 
$
851,409

 
$
5,472,078

 
$
7,374,178

Liabilities:
 

 
 

 
 

 
 

Financial derivatives
$
3

 
$
84,841

 
$
—

 
$
84,844

Total Liabilities at fair value
$
3

 
$
84,841

 
$
—

 
$
84,844

Nonrecurring:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for investment
$
—

 
$
—

 
$
5,973

 
$
5,973

Total Nonrecurring Assets at fair value
$
—

 
$
—

 
$
5,973

 
$
5,973






40
Table of Contents

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 months ended June 30, 2015.

Table 8.2
 
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended June 30, 2015
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
40,379

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(197
)
 
$
40,182

Total available-for-sale
40,379

 
—

 
—

 
—

 
—

 
(197
)
 
40,182

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities (1)
638

 
—

 
—

 
(190
)
 
158

 
—

 
606

Total trading
638

 
—

 
—

 
(190
)
 
158

 
—

 
606

Total Investment Securities
41,017

 
—

 
—

 
(190
)
 
158

 
(197
)
 
40,788

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
3,818,704

 
249,260

 
—

 
(9,245
)
 
(11,354
)
 
(31,165
)
 
4,016,200

Farmer Mac Guaranteed USDA Securities
23,505

 
12,512

 
—

 
(1,766
)
 
—

 
757

 
35,008

Total Farmer Mac Guaranteed Securities
3,842,209

 
261,772

 
—

 
(11,011
)
 
(11,354
)
 
(30,408
)
 
4,051,208

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,794,844

 
111,421

 
—

 
(69,192
)
 
—

 
(11,667
)
 
1,825,406

Trading (2)
37,593

 
—

 
—

 
(3,834
)
 
11

 
—

 
33,770

Total USDA Securities
1,832,437

 
111,421

 
—

 
(73,026
)
 
11

 
(11,667
)
 
1,859,176

Total Assets at fair value
$
5,715,663

 
$
373,193

 
$
—

 
$
(84,227
)
 
$
(11,185
)
 
$
(42,272
)
 
$
5,951,172

(1)
Unrealized gains are attributable to assets still held as of June 30, 2015 and are recorded in "Gains on trading securities."
(2)
Includes unrealized gains of $0.1 million attributable to assets still held as of June 30, 2015 that are recorded in "Gains on trading securities."




41
Table of Contents

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

 
$
—

 
$
(12,125
)
 
$
—

 
$
(375
)
 
$
2,513

 
$
54,976

Floating rate Government/GSE guaranteed mortgage-backed securities
203

 
—

 
—

 
(7
)
 
—

 
(1
)
 
195

Total available-for-sale
65,166

 
—

 
(12,125
)
 
(7
)
 
(375
)
 
2,512

 
55,171

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
923

 
—

 
—

 
(131
)
 
88

 
—

 
880

Total trading
923

 
—

 
—

 
(131
)
 
88

 
—

 
880

Total Investment Securities
66,089

 
—

 
(12,125
)
 
(138
)
 
(287
)
 
2,512

 
56,051

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
3,467,655

 
295,775

 
—

 
(356,319
)
 
3,818

 
5,583

 
3,416,512

Farmer Mac Guaranteed USDA Securities
21,608

 
—

 
—

 
(191
)
 
—

 
(373
)
 
21,044

Total Farmer Mac Guaranteed Securities
3,489,263

 
295,775

 
—

 
(356,510
)
 
3,818

 
5,210

 
3,437,556

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,600,659

 
90,785

 
—

 
(59,640
)
 
—

 
5,126

 
1,636,930

Trading(2)
51,102

 
—

 
—

 
(4,843
)
 
(160
)
 
—

 
46,099

Total USDA Securities
1,651,761

 
90,785

 
—

 
(64,483
)
 
(160
)
 
5,126

 
1,683,029

Total Assets at fair value
$
5,207,113

 
$
386,560

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

 
$
12,848

 
$
5,176,636

Liabilities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Financial derivatives
$
(161
)
 
$
—

 
$
—

 
$
—

 
$
161

 
$
—

 
$
—

Total Liabilities at fair value
$
(161
)
 
$
—

 
$
—

 
$
—

 
$
161

 
$
—

 
$
—

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



42
Table of Contents

Level 3 Assets and Liabilities Measured at Fair Value for the the Six Months Ended June 30, 2015
  
Beginning
Balance
 
Purchases
 
Sales
 
Settlements
 
Realized and
Unrealized Gains/(Losses) included
in Income
 
Unrealized
Gains/(Losses)
included in Other
Comprehen-sive
Income
 
Ending
Balance
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
$
40,576

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(394
)
 
$
40,182

Total available-for-sale
40,576

 
—

 
—

 
—

 
—

 
(394
)
 
40,182

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 

Floating rate asset-backed securities(1)
689

 
—

 
—

 
(437
)
 
354

 
—

 
606

Total trading
689

 
—

 
—

 
(437
)
 
354

 
—

 
606

Total Investment Securities
41,265

 
—

 
—

 
(437
)
 
354

 
(394
)
 
40,788

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 

AgVantage
3,631,662

 
464,175

 
—

 
(66,997
)
 
(2,478
)
 
(10,162
)
 
4,016,200

Farmer Mac Guaranteed USDA Securities
27,619

 
12,512

 
—

 
(6,418
)
 
—

 
1,295

 
35,008

Total Farmer Mac Guaranteed Securities
3,659,281

 
476,687

 
—

 
(73,415
)
 
(2,478
)
 
(8,867
)
 
4,051,208

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 

Available-for-sale
1,731,222

 
200,607

 
—

 
(133,383
)
 
—

 
26,960

 
1,825,406

Trading(2)
40,310

 
—

 
—

 
(6,717
)
 
177

 
—

 
33,770

Total USDA Securities
1,771,532

 
200,607

 
—

 
(140,100
)
 
177

 
26,960

 
1,859,176

Total Assets at fair value
$
5,472,078

 
$
677,294

 
$
—

 
$
(213,952
)
 
$
(1,947
)
 
$
17,699

 
$
5,951,172

(1)
Unrealized gains are attributable to assets still held as of June 30, 2015 and are recorded in "Gains on trading securities."
(2)
Includes unrealized gains of $0.2 million attributable to assets still held as of June 30, 2015 that are recorded in "Gains on trading securities."


43
Table of Contents

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

 
$
—

 
$
(12,125
)
 
$
—

 
$
(375
)
 
$
2,191

 
$
—

 
$
54,976

Floating rate Government/GSE guaranteed mortgage-backed securities
205

 
—

 
—

 
(11
)
 
—

 
1

 
—

 
195

Total available-for-sale
65,490

 
—

 
(12,125
)
 
(11
)
 
(375
)
 
2,192

 
—

 
55,171

Trading:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Floating rate asset-backed securities(1)
928

 
—

 
—

 
(414
)
 
366

 
—

 
—

 
880

Total trading
928

 
—

 
—

 
(414
)
 
366

 
—

 
—

 
880

Total Investment Securities
66,418

 
—

 
(12,125
)
 
(425
)
 
(9
)
 
2,192

 
—

 
56,051

Farmer Mac Guaranteed Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Available-for-sale:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

AgVantage
5,070,366

 
465,775

 
—

 
(532,588
)
 
6,568

 
18,477

 
(1,612,086
)
 
3,416,512

Farmer Mac Guaranteed USDA Securities
21,234

 
—

 
—

 
(362
)
 
—

 
172

 
—

 
21,044

Total Farmer Mac Guaranteed Securities
5,091,600

 
465,775

 
—

 
(532,950
)
 
6,568

 
18,649

 
(1,612,086
)
 
3,437,556

USDA Securities:
 

 
 

 
 

 
 
 
 

 
 
 
 
 
 

Available-for-sale
1,553,669

 
158,769

 
—

 
(120,095
)
 
—

 
44,587

 
—

 
1,636,930

Trading(2)
58,344

 
—

 
—

 
(12,462
)
 
217

 
—

 
—

 
46,099

Total USDA Securities
1,612,013

 
158,769

 
—

 
(132,557
)
 
217

 
44,587

 
—

 
1,683,029

Total Assets at fair value
$
6,770,031

 
$
624,544

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

 
$
65,428

 
$
(1,612,086
)
 
$
5,176,636

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial derivatives
$
(235
)
 
$
—

 
$
—

 
$
—

 
$
235

 
$
—

 
$
—

 
$
—

Total Liabilities at fair value
$
(235
)
 
$
—

 
$
—

 
$
—

 
$
235

 
$
—

 
$
—

 
$
—

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


44
Table of Contents

The following tables present additional information about the significant unobservable inputs, such as discount rates and constant prepayment rates ("CPR"), used in the fair value measurements categorized in level 3 of the fair value hierarchy as of June 30, 2015 and December 31, 2014.

Table 8.3
 
 
As of June 30, 2015
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
 
$
40,182

 
Indicative bids
 
Range of broker quotes
 
82.0% - 94.0% (86.2%)
Floating rate asset-backed securities
 
$
606

 
Discounted cash flow
 
Discount rate
 
15.5% - 21.7% (18.9%)
 
 
 
 
 
 
CPR
 
10%
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
4,016,200

 
Discounted cash flow
 
Discount rate
 
0.8% - 3.3% (1.5%)
Farmer Mac Guaranteed USDA Securities
 
$
35,008

 
Discounted cash flow
 
Discount rate
 
1.0% - 3.9% (1.9%)
 
 
 
 
 
 
CPR
 
8% - 20% (11%)
USDA Securities
 
$
1,859,176

 
Discounted cash flow
 
Discount rate
 
1.1% - 5.3% (3.1%)
 
 
 
 
 
 
CPR
 
0% - 18% (7%)

 
 
As of December 31, 2014
Financial Instruments
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average)
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Floating rate auction-rate certificates backed by Government guaranteed student loans
 
$
40,576

 
Indicative bids
 
Range of broker quotes
 
82.0% - 94.0% (87.1%)
Floating rate asset-backed securities
 
$
689

 
Discounted cash flow
 
Discount rate
 
14.3% - 23.9% (19.1%)
 
 
 
 
 
 
CPR
 
10%
Farmer Mac Guaranteed Securities:
 
 
 
 
 
 
 
 
AgVantage
 
$
3,631,662

 
Discounted cash flow
 
Discount rate
 
0.7% - 2.7% (1.3%)
Farmer Mac Guaranteed USDA Securities
 
$
27,619

 
Discounted cash flow
 
Discount rate
 
0.8% - 3.6% (1.9%)
 
 
 
 
 
 
CPR
 
0% - 21% (9%)
USDA Securities
 
$
1,771,532

 
Discounted cash flow
 
Discount rate
 
1.1% - 5.3% (3.2%)
 
 
 
 
 
 
CPR
 
0% - 20% (8%)

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


45
Table of Contents


Disclosures on Fair Value of Financial Instruments

The following table sets forth the estimated fair values and carrying values for financial assets, liabilities, and guarantees and commitments as of June 30, 2015 and December 31, 2014:

Table 8.4

 
As of June 30, 2015
 
As of December 31, 2014
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,683,156

 
$
1,683,156

 
$
1,363,387

 
$
1,363,387

Investment securities
1,852,505

 
1,852,505

 
1,939,188

 
1,939,188

Farmer Mac Guaranteed Securities
5,887,504

 
5,873,235

 
5,459,857

 
5,453,901

USDA Securities
1,859,176

 
1,859,176

 
1,771,532

 
1,771,532

Loans
3,735,725

 
3,659,632

 
3,547,424

 
3,520,075

Financial derivatives
7,455

 
7,455

 
4,177

 
4,177

Guarantee and commitment fees receivable:
 
 
 
 
 
 
 
LTSPCs
29,713

 
27,539

 
29,095

 
27,807

Farmer Mac Guaranteed Securities
10,389

 
10,308

 
11,876

 
11,655

Financial liabilities:
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
Due within one year
7,634,681

 
7,632,668

 
7,357,770

 
7,353,953

Due after one year
6,079,672

 
6,013,237

 
5,556,570

 
5,471,186

Debt securities of consolidated trusts held by third parties
520,755

 
516,004

 
423,085

 
424,214

Financial derivatives
69,373

 
69,373

 
84,844

 
84,844

Guarantee and commitment obligations:
 
 
 
 
 
 
 
LTSPCs
28,807

 
26,633

 
28,130

 
26,843

Farmer Mac Guaranteed Securities
9,865

 
9,784

 
11,303

 
11,082


The carrying value of cash and cash equivalents is a reasonable estimate of their approximate fair value and is classified as level 1 within the fair value hierarchy. Investment securities primarily are valued based on unadjusted quoted prices in active markets and are classified as level 2 within the fair value hierarchy. Farmer Mac internally models the fair value of its loan portfolio, including loans held for sale, 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 within the fair value hierarchy. Financial derivatives primarily are valued using unadjusted counterparty valuations and are classified as level 2 within the fair value hierarchy. 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 within the fair value hierarchy. 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


46
Table of Contents

also classified as level 3 within the fair value hierarchy. 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.

9.
BUSINESS SEGMENT REPORTING

Farmer Mac's operations consist of four reportable operating segments – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. The Institutional Credit segment comprises Farmer Mac's guarantees of AgVantage securities related to general obligations of lenders that are secured by pools of eligible loans.

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

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

The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis.  Accordingly, the core earnings for Farmer Mac's reportable operating segments will differ from the stand-alone financial statements of Farmer Mac's subsidiaries.  These differences will be due to various factors, including the reversal of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the incurrence of indebtedness managed at the corporate level.  The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences.  The assets of Farmer Mac's subsidiary Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.  As of June 30, 2015, Farmer Mac II LLC held assets with a fair value of $1.9 billion, had debt outstanding of $777.0 million, and had $1.0 billion of common stock outstanding held by Farmer Mac.



47
Table of Contents

The following tables present core earnings for Farmer Mac's reportable operating segments and a reconciliation to consolidated net income for the three and six months ended June 30, 2015 and 2014:

Table 9.1


Core Earnings by Business Segment
For the Three Months Ended June 30, 2015
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Interest income(1)
$
22,159

 
$
14,779

 
$
6,521

 
$
20,036

 
$
3,094

 
$
(197
)
 
$
66,392

Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
(697
)
 
—

 
—

 
—

 
—

 
697

 
—

Interest expense(2)
(11,781
)
 
(10,313
)
 
(3,683
)
 
(9,176
)
 
(1,152
)
 
1,577

 
(34,528
)
Net effective spread
9,681

 
4,466

 
2,838

 
10,860

 
1,942

 
2,077

 
31,864

Guarantee and commitment fees
3,693

 
8

 
—

 
384

 
—

 
(697
)
 
3,388

Other income/(expense)(3)
160

 
28

 
—

 
—

 
(212
)
 
14,843

 
14,819

Non-interest income/(loss)
3,853

 
36

 
—

 
384

 
(212
)
 
14,146

 
18,207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(110
)
 
—

 
—

 
—

 
—

 
—

 
(110
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(1,146
)
 
—

 
—

 
—

 
—

 
—

 
(1,146
)
Other non-interest expense
(4,304
)
 
(1,025
)
 
(860
)
 
(532
)
 
(2,986
)
 
—

 
(9,707
)
Non-interest expense(4)
(5,450
)
 
(1,025
)
 
(860
)
 
(532
)
 
(2,986
)
 
—

 
(10,853
)
Core earnings before income taxes
7,974

 
3,477

 
1,978

 
10,712

 
(1,256
)
 
16,223

(5) 
39,108

Income tax (expense)/benefit
(2,791
)
 
(1,216
)
 
(691
)
 
(3,749
)
 
356

 
(5,678
)
 
(13,769
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
5,183

 
2,261

 
1,287

 
6,963

 
(900
)
 
10,545

(5) 
25,339

Preferred stock dividends
—

 
—

 
—

 
—

 
(3,296
)
 
—

 
(3,296
)
Non-controlling interest
—

 
—

 
—

 
—

 
119

 
—

 
119

Segment core earnings/(losses)
$
5,183

 
$
2,261

 
$
1,287

 
$
6,963

 
$
(4,077
)
 
$
10,545

(5) 
$
22,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,780,018

 
$
1,913,390

 
$
962,702

 
$
5,874,088

 
$
3,614,399

 
$
—

 
$
15,144,597

Total on- and off-balance sheet program assets at principal balance
5,485,570

 
1,862,430

 
954,188

 
6,827,939

 


 
—

 
15,130,127

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


48
Table of Contents

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

 
$
13,307

 
$
6,782

 
$
20,073

 
$
5,185

 
$
(470
)
 
$
64,475

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

 
—

 
—

 
—

 
513

 
—

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

 
4,159

 
2,953

 
9,957

 
4,160

 
(7,076
)
 
21,973

Guarantee and commitment fees
3,807

 
23

 
—

 
386

 
—

 
(513
)
 
3,703

Other income/(expense)(3)
242

 
9

 
—

 
—

 
(603
)
 
2,913

 
2,561

Non-interest income/(loss)
4,049

 
32

 
—

 
386

 
(603
)
 
2,400

 
6,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of allowance for loan losses
1,583

 
—

 
—

 
—

 
—

 
—

 
1,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of reserve for losses
974

 
—

 
—

 
—

 
—

 
—

 
974

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

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

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

 
3,427

 
2,123

 
9,851

 
727

 
(4,676
)
(5) 
21,964

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

 
1,634

 
6,368

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

 
2,227

 
1,380

 
6,404

 
14,530

 
(3,042
)
(5) 
28,332

Preferred stock dividends
—

 
—

 
—

 
—

 
(2,308
)
 
—

 
(2,308
)
Non-controlling interest
—

 
—

 
—

 
—

 
(5,819
)
 
—

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

 
$
2,227

 
$
1,380

 
$
6,404

 
$
6,403

 
$
(3,042
)
(5) 
$
20,205

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,387,899

 
$
1,721,003

 
$
1,022,421

 
$
5,115,147

 
$
4,423,632

 
$
—

 
$
14,670,102

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

 
1,710,335

 
1,012,313

 
6,039,230

 
 
 
—

 
14,072,542

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



49
Table of Contents

Core Earnings by Business Segment
For the Six Months Ended June 30, 2015
 
Farm & Ranch
 
USDA Guarantees
 
Rural 
Utilities
 
Institutional Credit
 
Corporate
 
Reconciling
Adjustments
 
Consolidated Net Income
 
(in thousands)
Interest income(1)
$
44,127

 
$
29,127

 
$
13,106

 
$
39,335

 
$
5,959

 
$
(1,311
)
 
$
130,343

Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income
(1,332
)
 
—

 
—

 
—

 
—

 
1,332

 
—

Interest expense(2)
(23,000
)
 
(20,436
)
 
(7,464
)
 
(18,050
)
 
(2,328
)
 
3,588

 
(67,690
)
Net effective spread
19,795

 
8,691

 
5,642

 
21,285

 
3,631

 
3,609

 
62,653

Guarantee and commitment fees
7,326

 
2

 
—

 
769

 
—

 
(1,332
)
 
6,765

Other income/(expense)(3)
247

 
87

 
—

 
—

 
(764
)
 
12,347

 
11,917

Non-interest income/(loss)
7,573

 
89

 
—

 
769

 
(764
)
 
11,015

 
18,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(186
)
 
—

 
—

 
—

 
—

 
—

 
(186
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for losses
(374
)
 
—

 
—

 
—

 
—

 
—

 
(374
)
Other non-interest expense
(8,630
)
 
(1,410
)
 
(1,726
)
 
(1,067
)
 
(5,989
)
 
—

 
(18,822
)
Non-interest expense(4)
(9,004
)
 
(1,410
)
 
(1,726
)
 
(1,067
)
 
(5,989
)
 
—

 
(19,196
)
Core earnings before income taxes
18,178

 
7,370

 
3,916

 
20,987

 
(3,122
)
 
14,624

(5) 
61,953

Income tax (expense)/benefit
(6,362
)
 
(2,579
)
 
(1,369
)
 
(7,345
)
 
2,872

 
(3,217
)
 
(18,000
)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest
11,816

 
4,791

 
2,547

 
13,642

 
(250
)
 
11,407

(5) 
43,953

Preferred stock dividends
—

 
—

 
—

 
—

 
(6,591
)
 
—

 
(6,591
)
Non-controlling interest
—

 
—

 
—

 
—

 
(5,235
)
 
—

 
(5,235
)
Loss on retirement of preferred stock
—

 
—

 
—

 
—

 
—

 
(8,147
)
 
(8,147
)
Segment core earnings/(losses)
$
11,816

 
$
4,791

 
$
2,547

 
$
13,642

 
$
(12,076
)
 
$
3,260

(5) 
$
23,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,780,018

 
$
1,913,390

 
$
962,702

 
$
5,874,088

 
$
3,614,399

 
$
—

 
$
15,144,597

Total on- and off-balance sheet program assets at principal balance
5,485,570

 
1,862,430

 
954,188

 
6,827,939

 
 
 
—

 
15,130,127

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


50
Table of Contents

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

 
$
26,266

 
$
14,525

 
$
40,455

 
$
10,420

 
$
(12,675
)
 
$
116,927

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

 
—

 
—

 
—

 
1,044

 
—

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

 
7,943

 
4,943

 
19,363

 
8,302

 
(15,786
)
 
39,699

Guarantee and commitment fees
7,716

 
49

 
—

 
766

 
—

 
(1,044
)
 
7,487

Other income/(expense)(3)
373

 
36

 
—

 
—

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

 
85

 
—

 
766

 
(1,174
)
 
(4,537
)
 
3,229

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of allowance for loan losses
1,010

 
—

 
—

 
—

 
—

 
—

 
1,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Release of reserve for losses
873

 
—

 
—

 
—

 
—

 
—

 
873

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

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

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

 
6,533

 
3,336

 
19,192

 
1,957

 
(20,323
)
(5) 
28,135

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

 
7,109

 
7,509

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

 
4,245

 
2,168

 
12,475

 
18,633

 
(13,214
)
(5) 
35,644

Preferred stock dividends
—

 
—

 
—

 
—

 
(3,260
)
 
—

 
(3,260
)
Non-controlling interest
—

 
—

 
—

 
—

 
(11,366
)
 
—

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

 
$
4,245

 
$
2,168

 
$
12,475

 
$
4,007

 
$
(13,214
)
(5) 
$
21,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at carrying value
$
2,387,899

 
$
1,721,003

 
$
1,022,421

 
$
5,115,147

 
$
4,423,632

 
$
—

 
$
14,670,102

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

 
1,710,335

 
1,012,313

 
6,039,230

 
 
 
—

 
14,072,542

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



51
Table of Contents


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 three subsidiaries – Farmer Mac Mortgage Securities Corporation, Farmer Mac II LLC, and Contour Valuation Services, 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, 2014 filed with the U.S. Securities and Exchange Commission ("SEC") on March 16, 2015.

FORWARD-LOOKING STATEMENTS

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

Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties.  Various factors or events, 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, 2014 filed with the SEC on March 16, 2015, and uncertainties regarding:
 
•
the availability to Farmer Mac of debt and equity financing and, if available, the reasonableness of rates and terms;
•
legislative or regulatory developments that could affect Farmer Mac or its sources of business;
•
fluctuations in the fair value of assets held by Farmer Mac and its subsidiaries;
•
the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the secondary market provided by Farmer Mac;
•
the general rate of growth in agricultural mortgage and rural utilities indebtedness;


52
Table of Contents

•
the impact of economic conditions, including the effects of drought and other weather-related conditions and fluctuations in agricultural real estate values, on agricultural mortgage lending and borrower repayment capacity;
•
developments in the financial markets, including possible investor, analyst, and rating agency reactions to events involving government-sponsored enterprises, including Farmer Mac;
•
changes in the level and direction of interest rates, which could, among other things, affect the value of collateral securing Farmer Mac's agricultural mortgage loan assets; and
•
volatility in commodity prices relative to costs of production and/or export demand for U.S. agricultural products.

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

Overview

Farmer Mac increased its outstanding business volume to $15.1 billion and continued to maintain its high asset quality during second quarter 2015. The effects of Farmer Mac's cash management and liquidity initiative and capital restructuring initiative are explained in the comparisons of financial results between second quarter 2015 and second quarter 2014 and first quarter 2015. These two initiatives were completed in first quarter 2015 and are described in more detail in Farmer Mac's Annual Report on Form 10-K filed with the SEC on March 16, 2015.

Net Income and Core Earnings

Farmer Mac's net income attributable to common stockholders for second quarter 2015 was $22.2 million, compared to $20.2 million for second quarter 2014. The increase was primarily attributable to the effects of unrealized fair value changes on financial derivatives and hedged assets, which was a $10.4 million after-tax gain in second quarter 2015, compared to a $3.1 million after-tax loss in second quarter 2014. In addition, preferred stock dividend expense decreased by $2.8 million after-tax in second quarter 2015 compared to second quarter 2014, primarily due to the redemption of all outstanding shares of Farmer Mac II LLC Preferred Stock on March 30, 2015. Second quarter 2014 included an $11.6 million tax benefit related to the cash management and liquidity initiative with no similar effect in second quarter 2015. The year-over-year increase in net income attributable to common stockholders was also offset by Farmer Mac's provision for losses in second quarter 2015 of $0.8 million after-tax, compared to a release from the allowance for losses of $1.7 million after-tax in second quarter 2014. For more information about quarter-to-quarter changes in net income attributable to common stockholders, see "—Results of Operations."

Farmer Mac's non-GAAP core earnings for second quarter 2015 were $11.6 million, compared to $23.2 million in second quarter 2014 and $9.1 million in first quarter 2015. The year-over-year decrease was primarily due to the absence in second quarter 2015 of the $11.6 million tax benefit realized in second quarter 2014 related to the cash management and liquidity initiative. Other significant contributors to the year-over-year decrease in core earnings were the increase in credit expenses of $2.5 million after-tax and the loss of $1.9 million after-tax in preferred dividend income resulting from the October 1, 2014 redemption of $78.5 million of high-yielding preferred stock previously held in Farmer Mac's investment


53
Table of Contents

portfolio. Operating expenses also increased by $0.6 million after-tax primarily due to higher compensation costs. The year-over-year decrease in core earnings was offset in part by: (1) a $2.8 million after-tax decrease in preferred dividend expense resulting from the redemption of all outstanding shares of Farmer Mac II LLC Preferred Stock, netted against the incremental preferred dividend costs incurred as part of the capital restructuring initiative and (2) a $1.9 million after-tax increase in net effective spread, excluding the effect of Farmer Mac's investment in the $78.5 million of redeemed preferred stock, resulting from net growth in outstanding business volume. The increase in core earnings in second quarter 2015 compared to first quarter 2015 was primarily due to the elimination of $3.5 million after-tax in dividend payments as a result of the completion of the capital restructuring initiative and an increase in after-tax net effective spread of $0.3 million. This increase was offset in part by a $1.3 million after-tax increase in credit expenses and a $0.4 million after-tax increase in operating expenses primarily attributable to legal fees incurred for the preparation of comment letters in response to the FCA's proposed rule on Farmer Mac's board governance and standards of conduct. Those comment letters were finalized and submitted in June 2015. The fair value changes on derivatives do not affect core earnings. For more information about the composition of core earnings, see "—Results of Operations."

Farmer Mac's net effective spread was $29.8 million (88 basis points) in second quarter 2015, compared to $29.0 million (92 basis points) in second quarter 2014 and $29.3 million (86 basis points) in first quarter 2015. The year-over-year decrease in basis points was primarily attributable to the loss of $2.1 million in preferred dividend income (7 basis points) from the October 2014 redemption of preferred stock held in Farmer Mac's investment portfolio and was partially offset by lower funding costs in second quarter 2015 compared to second quarter 2014. The decrease in funding costs was due to the maturity of older, higher cost debt and the issuance of new debt at lower market rates during the second half of 2014 and first half of 2015. The year-over-year increase in dollars was primarily attributable to growth in outstanding business volume. The increase in net effective spread compared to first quarter 2015 was primarily due to growth in outstanding business volume.

Business Volume

Farmer Mac added $731.1 million of new business volume during second quarter 2015. The new business volume included purchases of AgVantage securities of $307.3 million, Farm & Ranch loan purchases of $196.9 million, Farm & Ranch loans added under LTSPCs of $102.9 million, and USDA Securities purchases of $123.9 million. Taking into account maturities and paydowns on existing assets, Farmer Mac's outstanding business volume was $15.1 billion as of June 30, 2015, an increase of $469.9 million from March 31, 2015, $532.4 million from December 31, 2014, and $1.1 billion from June 30, 2014.

Capital

As of June 30, 2015, Farmer Mac's core capital level was $553.4 million, $109.6 million above the minimum capital level required by Farmer Mac's statutory charter.  As of December 31, 2014, Farmer Mac's core capital level was $766.3 million, which was $345.0 million above the minimum capital requirement. The decrease in capital in excess of the minimum capital level was due to the redemption of the Farmer Mac II LLC Preferred Stock.

Credit Quality

Farmer Mac continues to maintain very favorable credit metrics, as substandard assets and the total allowances and reserves for losses as a percentage of the Farm & Ranch portfolio remain at similar levels


54
Table of Contents

compared to first quarter 2015. During second quarter 2015, Farmer Mac increased its allowance for losses by $1.3 million, primarily as a result of an inherent loss on one canola facility loan with an unpaid principal balance of $13.5 million. As of June 30, 2015, Farmer Mac's 90-day delinquencies were $31.9 million (0.58 percent of the Farm & Ranch portfolio), up from $18.9 million (0.35 percent of the Farm & Ranch portfolio) as of December 31, 2014, and from $25.9 million (0.49 percent of the Farm & Ranch portfolio) as of June 30, 2014. The primary cause of the increase in 90-day delinquencies during 2015 was the delinquency in first quarter 2015 of one borrower in the Northwest geographic region. Farmer Mac's exposure to this borrower was $9.4 million as of June 30, 2015. In July 2015, Farmer Mac received full repayment on loans to this borrower. For more information about Farmer Mac's credit metrics, including 90-day delinquencies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

Results of Operations

Farmer Mac's net income attributable to common stockholders for the three months ended June 30, 2015 was $22.2 million, or $1.94 per diluted common share, compared to $20.2 million, or $1.78 per diluted common share, for the same period in 2014. For the six months ended June 30, 2015, Farmer Mac's net income attributable to common stockholders was $24.0 million, or $2.11 per diluted common share, compared to $21.0 million, or $1.85 per diluted common share, for the six months ended June 30, 2014. Farmer Mac's non-GAAP core earnings were $11.6 million, or $1.02 per diluted common share for the three months ended June 30, 2015, compared to $23.2 million, or $2.05 per diluted common share for the same period in 2014. Farmer Mac's non-GAAP core earnings were $20.7 million, or $1.82 per diluted common share, for the six months ended June 30, 2015, compared to $34.2 million, or $3.02 per diluted common share, for the same period in 2014.

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics, and business trends. Core earnings principally differs from net income attributable to common stockholders by excluding the effects of fair value fluctuations, which are not expected to have a cumulative net impact on financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is generally expected. Core earnings also differs from net income attributable to common stockholders by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. Accordingly, the loss from retirement of the Farmer Mac II LLC Preferred Stock in first quarter 2015 has been excluded from core earnings because it is not a frequently occurring transaction and not indicative of future operating results. This is also consistent with Farmer Mac's previous treatment of these types of origination costs associated with securities underwriting that are capitalized and deferred during the life of the security. The non-GAAP financial measure of core earnings used by Farmer Mac may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of this non-GAAP measure is intended to be supplemental in nature, and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.



55
Table of Contents

A reconciliation of Farmer Mac's net income attributable to common stockholders to core earnings is presented in the following table along with a breakdown of the composition of core earnings:

Table 1
Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
22,162

 
$
20,205

Less the after-tax effects of:
 
 
 

Unrealized gains/(losses) on financial derivatives and hedging activities
10,388

 
(3,053
)
Unrealized gains on trading assets (1)
110

 
(46
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(81
)
 
(179
)
Net effects of settlements on agency forward contracts
128

 
236

      Sub-total
10,545

 
(3,042
)
Core earnings
$
11,617

 
$
23,247

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread
$
29,787

 
$
29,049

Guarantee and commitment fees
4,085

 
4,216

Other(2)
(24
)
 
(520
)
Total revenues
33,848

 
32,745

 
 
 
 
Credit related expense/(income):
 
 
 
Provision for/(release of) losses
1,256

 
(2,557
)
REO operating expenses
—

 
59

Gains on sale of REO
—

 
(168
)
Total credit related expense/(income)
1,256

 
(2,666
)
 
 
 
 
Operating expenses:
 
 
 
Compensation and employee benefits
5,733

 
4,889

General and administrative
3,374

 
3,288

Regulatory fees
600

 
594

Total operating expenses
9,707

 
8,771

 
 
 
 
Net earnings
22,885

 
26,640

Income tax expense/(benefit)(3)
8,091

 
(4,734
)
Net (loss)/income attributable to non-controlling interest
(119
)
 
5,819

Preferred stock dividends
3,296

 
2,308

Core earnings
$
11,617

 
$
23,247

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
1.06

 
$
2.13

  Diluted
1.02

 
2.05

Weighted-average shares:
 
 
 
  Basic
11,010

 
10,924

  Diluted
11,438

 
11,361

(1)
Excludes unrealized gains related to securities sold, not yet purchased of $7.8 million during the three months ended June 30, 2014.
(2)
Includes $7.8 million of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased and $7.8 million of unrealized gains on securities sold, not yet purchased during the three months ended June 30, 2014.
(3)
Includes the reduction of $11.6 million of tax valuation allowance against capital loss carryforwards related to capital gains on securities sold, not yet purchased during the three months ended June 30, 2014.


56
Table of Contents

Reconciliation of Net Income Attributable to Common Stockholders to Core Earnings
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
(in thousands, except per share amounts)
Net income attributable to common stockholders
$
23,980

 
$
21,018

Less the after-tax effects of:
 
 
 

Unrealized gains/(losses) on financial derivatives and hedging activities
9,806

 
(5,448
)
Unrealized gains on trading assets (1)
346

 
380

Amortization of premiums/discounts and deferred gains on assets consolidated at fair value(2)
(610
)
 
(8,206
)
Net effects of settlements on agency forward contracts
(36
)
 
60

Loss on retirement of Farmer Mac II LLC Preferred Stock(3)
(6,246
)
 
—

      Sub-total
3,260

 
(13,214
)
Core earnings
$
20,720

 
$
34,232

 
 
 
 
Composition of Core Earnings:
 
 
 
Revenues:
 
 
 
Net effective spread
$
59,044

 
$
55,485

Guarantee and commitment fees
8,097

 
8,531

Other(4)
(429
)
 
(930
)
Total revenues
66,712

 
63,086

 
 
 
 
Credit related expense/(income):
 
 
 
Provision for/(release of) losses
560

 
(1,883
)
REO operating expenses
(1
)
 
61

Losses/(gains) on sale of REO
1

 
(165
)
Total credit related expense/(income)
560

 
(1,987
)
 
 
 
 
Operating expenses:
 
 
 
Compensation and employee benefits
11,426

 
9,345

General and administrative
6,197

 
6,082

Regulatory fees
1,200

 
1,188

Total operating expenses
18,823

 
16,615

 
 
 
 
Net earnings
47,329

 
48,458

Income tax expense/(benefit)(5)
14,783

 
(400
)
Net income attributable to non-controlling interest
5,235

 
11,366

Preferred stock dividends
6,591

 
3,260

Core earnings
$
20,720

 
$
34,232

 
 
 
 
Core earnings per share:
 
 
 
  Basic
$
1.89

 
$
3.14

  Diluted
1.82

 
3.02

Weighted-average shares:
 
 
 
  Basic
10,974

 
10,906

  Diluted
11,385

 
11,354

(1) 
Excludes unrealized gains related to securities sold, not yet purchased of $7.8 million during the six months ended June 30, 2014
(2) 
Includes $7.5 million related to the acceleration of premium amortization in first quarter 2014 due to significant refinancing activity in the Rural Utilities line of business.
(3) 
Relates to the write-off of deferred issuance costs as a result of the retirement of Farmer Mac II LLC Preferred Stock.
(4) 
Includes $7.8 million of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased and $7.8 million of unrealized gains on securities sold, not yet purchased during the six months ended June 30, 2014.
(5) 
Includes the reduction of $11.6 million of tax valuation allowance against capital loss carryforwards related to capital gains on securities sold, not yet purchased during the six months ended June 30, 2014. Includes the reduction in tax valuation allowance of $0.8 million associated with certain gains on investment portfolio assets during the six months ended June 30, 2014.



57
Table of Contents

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

Net Interest Income.  Net interest income for the three and six months ended June 30, 2015 was $31.9 million and $62.7 million, respectively, compared to $22.0 million and $39.7 million for the same period in 2014. The increase in net interest income primarily resulted from the absence of the following two items that did not recur in the first six months of 2015 but were included in net interest income for the first six months of 2014: (1) the acceleration of amortization of $11.6 million in premiums associated with certain Rural Utilities loans that were refinanced into other loan products in first quarter 2014; and (2) interest expense of $7.8 million associated with securities purchased under agreements to resell and securities sold, not yet purchased (related to Farmer Mac's cash management and liquidity initiative that began in second quarter 2014). The increase in net interest income was also attributable in part to an increase in the average outstanding balance of Farm & Ranch loans, USDA Securities, and AgVantage securities. The increase in net interest income was partially offset by the loss of $4.3 million in preferred dividend income due to the October 2014 redemption of high-yielding preferred stock previously held in Farmer Mac's investment portfolio. The overall net interest yield was 89 basis points for the six months ended June 30, 2015, compared to 60 basis points for the six months ended June 30, 2014.

The following table provides information regarding interest-earning assets and funding for the six months ended June 30, 2015 and 2014.  The average balance of non-accruing loans is included in the average balance of loans, Farmer Mac Guaranteed Securities, and USDA Securities presented, though the related income is accounted for on a cash basis.  Therefore, as the average balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly.  The average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities.  The interest income and expense associated with these trusts are shown in the net effect of consolidated trusts. 



58
Table of Contents

Table 2

  
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
 
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and investments(1)
$
3,249,476

 
$
5,959

 
0.37
%
 
$
3,290,497

 
$
10,338

 
0.63
%
Loans, Farmer Mac Guaranteed Securities and USDA Securities(2)(3)
10,363,677

 
115,330

 
2.23
%
 
9,693,192

 
100,288

 
2.07
%
Total interest-earning assets
13,613,153

 
121,289

 
1.78
%
 
12,983,689

 
110,626

 
1.70
%
Funding:
 

 
 

 
 
 
 

 
 

 
 

Notes payable due within one year
5,554,106

 
4,996

 
0.18
%
 
4,727,444

 
3,697

 
0.16
%
Notes payable due after one year(4)
7,492,262

 
54,972

 
1.47
%
 
7,285,762

 
60,531

 
1.66
%
Other interest-bearing liabilities(5)
—

 
—

 
—
%
 
368,034

 
7,743

 
4.21
%
Total interest-bearing liabilities(6)
13,046,368

 
59,968

 
0.92
%
 
12,381,240

 
71,971

 
1.16
%
Net non-interest-bearing funding
566,786

 
—

 
 

 
602,449

 
—

 
 

Total funding
13,613,154

 
59,968

 
0.88
%
 
12,983,689

 
71,971

 
1.11
%
Net interest income/yield prior to consolidation of certain trusts
13,613,154

 
61,321

 
0.90
%
 
12,983,689

 
38,655

 
0.60
%
Net effect of consolidated trusts(7)
478,225

 
1,332

 
0.56
%
 
318,883

 
1,044

 
0.66
%
Adjusted net interest income/yield
$
14,091,379

 
$
62,653

 
0.89
%
 
$
13,302,572

 
$
39,699

 
0.60
%
(1)
Average balance includes $371.7 million of securities purchased under agreements to resell in 2014. Includes $0.1 million of interest expense related to securities purchased under agreements to resell in 2014.
(2)
Includes $11.6 million related to the acceleration of premium amortization in first quarter 2014 due to refinancing activity in the Rural Utilities line of business. Excludes interest income of $9.1 million and $6.3 million in 2015 and 2014, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(3)
See Note 1(d) to the consolidated financial statements for more information about the reclassification of certain amounts in prior periods from guarantee and commitment fees to interest income related to on-balance sheet Farmer Mac Guaranteed Securities.
(4)
Includes current portion of long-term notes.
(5)
Represents securities sold, not yet purchased.
(6)
Excludes interest expense of $7.7 million and $5.3 million in 2015 and 2014, respectively, related to consolidated trusts with beneficial interests owned by third parties.
(7)
Includes the effect of consolidated trusts with beneficial interests owned by third parties.

The lower average rate earned on cash and investments during the first six months of 2015 compared to the first six months of 2014 reflects reinvestment from higher yielding investment securities which matured or were called during 2014 into lower yielding assets and an increase in the average balance of cash and cash equivalents earning minimal yields. The average rate earned on cash and investments during the first six months of 2014 included the effects of interest costs resulting from the slightly negative rate of return received on the securities purchased under agreements to resell (repos) that were part of Farmer Mac's cash management and liquidity initiative. Farmer Mac's positions in these securities were closed in fourth quarter 2014 and therefore did not have an effect during the first six months of 2015 as compared to the first six months of 2014.  The higher average rate on loans, Farmer Mac Guaranteed Securities, and USDA Securities was due to the absence during the first six months of 2015 of the acceleration of amortization in premiums associated with certain Rural Utilities loans that occurred in the first six months of 2014, partially offset by the decline in market rates as reflected in the rates on loans and AgVantage securities acquired, reset, or refinanced during 2014 and 2015. The average rates on notes payable due within one year are consistent with general trends in average short-term rates during the period presented.  The downward trend in the average rate on notes payable due after one year for the first six months of 2015 as compared to the same period in 2014 reflects the retirement of older debt and the issuance of new debt at lower market rates. Other-interest bearing liabilities consist of high coupon fixed-rate U.S. Treasury securities and represent Farmer Mac's positions in securities sold, not yet purchased entered into beginning in second quarter 2014 as part of Farmer Mac's cash management and liquidity


59
Table of Contents

initiative. These positions were closed in fourth quarter 2014 and therefore did not have an effect during the first six months of 2015 as compared to the first six months of 2014.

The following table sets forth information regarding changes in the components of Farmer Mac's net interest income for the periods indicated.  For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume).  Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size.  

Table 3

  
For the Six Months Ended June 30, 2015 Compared to Same Period 2014
 
Increase/(Decrease) Due to
 
Rate
 
Volume
 
Total
 
(in thousands)
Income from interest-earning assets:
 
 
 
 
 
Cash and investments(1)
$
(4,252
)
 
$
(127
)
 
$
(4,379
)
Loans, Farmer Mac Guaranteed Securities and USDA Securities(2)
7,835

 
7,207

 
15,042

Total
3,583

 
7,080

 
10,663

Expense from other interest-bearing liabilities(3)
(15,704
)
 
3,701

 
(12,003
)
Change in net interest income prior to consolidation of certain trusts(4)
$
19,287

 
$
3,379

 
$
22,666

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

The reasons for the decrease in income due to changes in rate on cash and investments, the increase in income due to changes in rate on loans, Farmer Mac Guaranteed Securities, and USDA Securities, and the decrease in expense due to changes in rate are the same as described above. Aside from the decrease in income earned from cash and investments, the increases in income from interest-earning assets and in expense from other interest-bearing liabilities due to changes in volume reflect the increase in the average balance of on-balance sheet assets and the related funding for those assets, respectively, during the first six months of 2015 compared to the first six months 2014.

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

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


60
Table of Contents

related to the accrual of the contractual amounts due in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated statements of operations.  However, Farmer Mac does include the accrual of the contractual amounts due for undesignated financial derivatives in its calculation of net effective spread, which is intended to reflect the net spread between the asset and all of its related funding, including any associated derivatives, whether or not they are in a hedge accounting relationship.

Farmer Mac's net interest income and net interest yield include net yield adjustments related to the amortization of premiums and discounts on assets consolidated at fair value. These premiums and discounts are amortized as adjustments to yield in interest income over the contractual or estimated remaining lives of the underlying assets. Farmer Mac excludes these amounts from net effective spread because they either do not reflect actual cash premiums paid for the assets at acquisition or are not expected to have an economic effect on Farmer Mac's financial performance if the assets are held to maturity, as is generally expected. Farmer Mac also excluded from net effective spread the amount of interest expense included in net interest income that was incurred during the first six months of 2014 related to securities purchased under agreements to resell and securities sold, not yet purchased because the associated benefits from these securities were not similarly recorded in net interest income, but rather were recorded as income tax benefits. Because Farmer Mac's positions in these securities were closed during fourth quarter 2014, adjustments to net interest income for interest expense related to these securities were not necessary for the first six months of 2015.

The following table presents the net effective spread between Farmer Mac's interest-earning assets and its net funding costs.  This spread is measured by including income or expense related to undesignated financial derivatives (the income or expense related to financial derivatives designated in hedge accounting relationships is already included in net interest income) and excluding the amortization of premiums and discounts on assets consolidated at fair value and the interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased. Farmer Mac's net effective spread was $29.8 million and $59.0 million for the three and six months ended June 30, 2015, respectively, compared to $29.0 million and $55.5 million for the same periods in 2014, respectively. In percentage terms, net effective spread for the three and six months ended June 30, 2015 was 0.88 percent and 0.87 percent, respectively, compared to 0.92 percent and 0.88 percent for the same periods in 2014, respectively. The contraction in net effective spread in percentage terms compared to the six months ended June 30, 2014 was primarily attributable to the loss of $4.3 million in preferred dividend income (7 basis points) from the October 2014 redemption of the high-yielding preferred stock previously held in Farmer Mac's investment portfolio. The contraction in net effective spread in percentage terms was offset in part by lower funding costs in the first six months of 2015 compared to the first six months of 2014 resulting from the maturity of older, higher cost debt and the issuance of new debt at lower market rates during the second half of 2014 and first half of 2015. Additionally, funding costs in the first six months of 2014 were higher because the early refinance of certain Rural Utilities loans and AgVantage securities in first quarter 2014 caused Farmer Mac to incur incremental financing costs of $1.3 million (2 basis points) as the related original funding remained outstanding until the end of that quarter. See Note 9 to the consolidated financial statements for more information regarding net effective spread from Farmer Mac's individual business segments. Additionally, see "—Supplemental Information" for quarterly net effective spread by line of business.



61
Table of Contents

Table 4
  
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollar
 
Yield
 
Dollar
 
Yield
 
(dollars in thousands)
Net interest income/yield prior to consolidation of certain trusts(1)(2)
$
31,167

 
0.92
 %
 
$
21,460

 
0.68
 %
 
$
61,321

 
0.90
 %
 
$
38,655

 
0.62
 %
Expense related to undesignated financial derivatives
(1,577
)
 
(0.05
)%
 
(624
)
 
(0.02
)%
 
(3,588
)
 
(0.05
)%
 
(3,589
)
 
(0.06
)%
Amortization of premiums on assets consolidated at fair value(2)
197

 
0.01
 %
 
386

 
0.01
 %
 
1,311

 
0.02
 %
 
12,592

 
0.20
 %
Interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased
—

 
—
 %
 
7,827

 
0.25
 %
 
—

 
—
 %
 
7,827

 
0.12
 %
Net effective spread
$
29,787

 
0.88
 %
 
$
29,049

 
0.92
 %
 
$
59,044

 
0.87
 %
 
$
55,485

 
0.88
 %
(1)
For the three and six months ended June 30, 2014, net interest yield is adjusted to remove the average balance of $743.5 million and $371.7 million, respectively, related to securities purchased under agreements to resell.
(2)
Includes $11.6 million related to the acceleration of premium amortization in first quarter 2014 due to refinancing activity in the Rural Utilities line of business.




62
Table of Contents

Provision for and Release of Allowance for Loan Losses and Reserve for Losses.

The following table summarizes the components of Farmer Mac's total allowance for losses for the three and six months ended June 30, 2015 and 2014:

Table 5
 
 
As of June 30, 2015
 
As of June 30, 2014
 
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
5,940

 
$
3,491

 
$
9,431

 
$
7,410

 
$
6,569

 
$
13,979

Provision for/(release of) losses
 
110

 
1,146

 
1,256

 
(1,583
)
 
(974
)
 
(2,557
)
Charge-offs
 
(111
)
 
—

 
(111
)
 
(57
)
 
—

 
(57
)
Ending Balance
 
$
5,939

 
$
4,637

 
$
10,576

 
$
5,770

 
$
5,595

 
$
11,365

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
5,864

 
$
4,263

 
$
10,127

 
$
6,866

 
$
6,468

 
$
13,334

Provision for/(release of) losses
 
186

 
374

 
560

 
(1,010
)
 
(873
)
 
(1,883
)
Charge-offs
 
(111
)
 
—

 
(111
)
 
(86
)
 
—

 
(86
)
Ending Balance
 
$
5,939

 
$
4,637

 
$
10,576

 
$
5,770

 
$
5,595

 
$
11,365


The provisions recorded during three and six months ended 2015 were primarily attributable to a specific allowance for an impaired loan to a canola facility underlying an LTSPC. The establishment of a specific allowance for this loan was due to a downgrade in risk rating resulting from collateral shortfalls relative to the unpaid principal balance for such loan, and Farmer Mac believes it is adequately reserved for loss related to this loan. The provisions were partially offset by a decrease in the general allowance of processing loans and processing loans underlying LTSPCs due to paydowns of these loans. The releases recorded during the three and six months ended June 30, 2014 were primarily related to a decrease in the general allowance due to substantial paydowns of on-balance sheet ethanol loans and ethanol loans underlying LTSPCs, partially offset by an increase in the general allowance of non-ethanol related on-balance sheet loans due to overall net business volume growth. As of both June 30, 2015 and December 31, 2014, Farmer Mac's allowance for loan losses was $5.9 million. As of June 30, 2015, Farmer Mac's reserve for losses was $4.6 million, compared to $4.3 million as of December 31, 2014. See Note 5 and "—Risk Management—Credit Risk – Loans and Guarantees."

Guarantee and Commitment Fees.  Guarantee and commitment fees, which compensate Farmer Mac for assuming the credit risk on loans underlying off-balance sheet Farmer Mac Guaranteed Securities and LTSPCs, were $3.4 million and $6.8 million, respectively, for the three and six months ended June 30, 2015, compared to $3.7 million and $7.5 million for the same periods in 2014, respectively. The decrease in guarantee and commitment fees was primarily attributable to a lower average balance outstanding for off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs. See Note 1(d) to the consolidated financial statements for more information about the reclassification of certain amounts in prior periods from guarantee and commitment fees to interest income related to on-balance sheet Farmer Mac Guaranteed Securities.
 


63
Table of Contents

Gains/(Losses) on Financial Derivatives and Hedging Activities.  The effect of unrealized and realized gains and losses on Farmer Mac's financial derivatives and hedging activities was net gains of $14.4 million and $10.5 million for the three and six months ended June 30, 2015, respectively, compared to net losses of $5.7 million and $13.3 million for the same periods in 2014, respectively.

The components of gains and losses on financial derivatives and hedging activities for the three and six months ended June 30, 2015 and 2014 are summarized in the following table:

Table 6

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Fair value hedges:
 
 
 
 
 
 
 
Unrealized gains/(losses) due to fair value changes:
 
 
 
 
 
 
 
Financial derivatives(1)
$
14,075

 
$
(799
)
 
$
8,316

 
$
(599
)
Hedged items
(11,354
)
 
3,818

 
(2,478
)
 
6,568

Gains on hedging activities
2,721

 
3,019

 
5,838

 
5,969

No hedge designation:
 
 
 
 
 
 
 
Unrealized gains/(losses) due to fair value changes
13,261

 
(7,715
)
 
9,249

 
(14,349
)
Realized:
 
 
 
 
 
 
 
Expense related to financial derivatives
(1,577
)
 
(624
)
 
(3,588
)
 
(3,589
)
Losses due to terminations or net settlements
(16
)
 
(378
)
 
(992
)
 
(1,307
)
Gains/(losses) on financial derivatives not designated in hedging relationships
11,668

 
(8,717
)
 
4,669

 
(19,245
)
Gains/(losses) on financial derivatives and hedging activities
$
14,389

 
$
(5,698
)
 
$
10,507

 
$
(13,276
)
(1)
Included in the assessment of hedge effectiveness as of June 30, 2015, but excluded from the amounts in the table, were losses of $2.9 million and $5.8 million for the three and six months ended June 30, 2015, respectively, attributable to the fair value of the swaps at the inception of the hedging relationship. Accordingly, the amounts recognized as hedge ineffectiveness for the three and six months ended June 30, 2015 were losses of of $0.2 million and gains of $0.1 million. The comparable amounts as of June 30, 2014 were losses of $2.9 million and $5.9 million for the three and six months ended June 30, 2014, respectively, attributable to the fair value of the swaps at the inception of the hedging relationship and, accordingly, gains of $0.1 million for the three and six months ended June 30, 2014, attributable to hedge ineffectiveness.

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

Gains on Trading Securities.  During the three and six months ended June 30, 2015, Farmer Mac recorded unrealized gains on trading securities of $0.2 million and $0.5 million, respectively, compared to unrealized gains of $7.7 million and $8.4 million during the same period in 2014, respectively. Of the total gains recognized during the three and six months ended June 30, 2015, $11,000 and $0.2 million of gains related to financial assets selected to be carried at fair value with changes in fair value included in earnings (the fair value option). During the three and six months ended June 30, 2014, $7.8 million of


64
Table of Contents

gains related to securities sold, not yet purchased as part of Farmer Mac's cash management and liquidity initiative and $0.2 million of losses and $0.2 million of gains, respectively, related to financial assets accounted for under the fair value option. Farmer Mac has not elected to account for any financial assets under the fair value option since 2008.

Other Income. Other income totaled $0.3 million and $0.9 million, respectively, for the three and six months ended June 30, 2015, compared to $0.2 million and $0.3 million, respectively, for the same periods in 2014. Other income during the three and six months ended 2015 included the recognition of $0.1 million and $0.4 million, respectively, of gains previously deferred in accumulated other comprehensive income related to fair value changes of certain available-for-sale securities contributed to Farmer Mac II LLC in 2010 and other miscellaneous items.

Compensation and Employee Benefits.  Compensation and employee benefits were $5.7 million and $11.4 million, respectively, for the three and six months ended June 30, 2015, compared to $4.9 million and $9.3 million, respectively, for the same periods in 2014. The increase in compensation and employee benefits in the first half of 2015 compared to the first half of 2014 was due primarily to higher incentive compensation driven by meeting certain performance targets, an increase in headcount, annual salary adjustments, and adjustments to stock compensation expense to reflect changes in forfeiture rates. The increase in annual salary adjustments reflects a change in 2014 to the allocation of total compensation elements for Farmer Mac's executive officers that resulted in a shift in compensation toward base salary and annual cash compensation and a commensurate reduction in the targeted value of equity-based long-term incentive compensation. Additionally, compensation costs for the three and six months ended June 30, 2015 included $0.2 million and $0.3 million, respectively, in compensation costs of Farmer Mac's consolidated appraisal company subsidiary which was formed in fourth quarter 2014.

General and Administrative Expenses.  General and administrative expenses, including legal, audit, and consulting fees, were $3.4 million and $6.2 million, respectively, for the three and six months ended June 30, 2015, compared to $3.3 million and $6.1 million, respectively, for the same periods in 2014.

Regulatory Fees.  Regulatory fees (which consist of the fees paid to FCA) were $0.6 million and $1.2 million, respectively, for both the three and six months ended June 30, 2015 and 2014. FCA has advised Farmer Mac that its estimated fees for the federal fiscal year ending September 30, 2015 will be $2.4 million ($0.6 million per federal fiscal quarter), which will not be a material increase from the prior federal fiscal year.  After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.

Income Tax Expense/Benefit.  Income tax expense totaled $13.8 million and $18.0 million, respectively, for the three and six months ending June 30, 2015, compared to an income tax benefit of $6.4 million and $7.5 million, respectively, for the same periods in 2014. The increase in income tax expense in 2015 was a result of higher pre-tax income and the absence of the income tax benefit of $11.6 million related to the cash management and liquidity initiative that was recorded in second quarter 2014. The consolidated tax benefits of the dividends declared on Farmer Mac II LLC Preferred Stock, which is presented as "Net loss/(income) attributable to non-controlling interest" on the consolidated statements of operations on a pre-tax basis, and the loss on retirement of the Farmer Mac II LLC Preferred Stock were the primary reasons Farmer Mac's effective tax rate was lower than the statutory federal rate of 35 percent for the six months ended June 30, 2015 and for the three and six months ending June 30, 2014.



65
Table of Contents

Loss on Retirement of Preferred Stock. On March 30, 2015, Farmer Mac II LLC redeemed all of the outstanding shares of Farmer Mac II LLC Preferred Stock which, in turn, triggered the redemption of all of the outstanding FALConS on that same day. As a result, Farmer Mac recognized an expense of $8.1 million of deferred issuance costs related to those shares of Farmer Mac II LLC Preferred Stock as "Loss on retirement of preferred stock" on the consolidated statements of operations.


Business Volume.  During second quarter 2015, Farmer Mac added $731.1 million of new business volume Specifically, Farmer Mac:
 
•
purchased $307.3 million of AgVantage securities;
•
purchased $196.9 million of newly originated Farm & Ranch loans;
•
purchased $111.4 million of USDA Securities;
•
added $102.9 million of Farm & Ranch loans under LTSPCs; and
•
purchased $12.5 million of Farmer Mac Guaranteed USDA Securities.

Of the new business volume in AgVantage securities for second quarter 2015, $76.9 million was purchased under Farm Equity AgVantage facilities with agricultural real estate investment funds. Farmer Mac also purchased $180.0 million in AgVantage securities from the National Rural Utilities Cooperative Finance Corporation ("CFC") as part of a transaction involving the refinancing of existing Rural Utilities Service debt completed by a large generation and transmission utility.

Farmer Mac's outstanding business volume was $15.1 billion as of June 30, 2015, an increase of $469.9 million from March 31, 2015 and an increase of $532.4 million from December 31, 2014. The increase in Farmer Mac's outstanding business volume was attributable to broad-based portfolio growth across most of Farmer Mac's products, including AgVantage securities, Farm & Ranch loans, and USDA Securities.
  


66
Table of Contents

The following table sets forth purchases of non-delinquent eligible loans, new loans added under LTSPCs, and new guarantees during the periods indicated in the Farm & Ranch, USDA Guarantees, and Rural Utilities lines of business, as well as purchases of AgVantage securities in the Institutional Credit line of business:

Table 7

Farmer Mac New Purchases, Guarantees, and LTSPCs
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Farm & Ranch:
 
 
 
 
 
 
 
Loans
$
196,927

 
$
159,116

 
$
327,151

 
$
351,523

LTSPCs
102,944

 
34,850

 
162,255

 
220,444

USDA Guarantees:
 
 
 
 
 
 
 
USDA Securities
111,421

 
90,785

 
200,607

 
158,769

   Farmer Mac Guaranteed USDA Securities
12,512

 
—

 
12,512

 
—

Rural Utilities:
 
 
 
 
 
 
 
Loans
—

 
4,689

 
8,703

 
58,592

Institutional Credit:
 
 
 
 
 
 
 
AgVantage
307,250

 
300,775

 
522,165

 
529,465

Total purchases, guarantees, and LTSPCs
$
731,054

 
$
590,215

 
$
1,233,393

 
$
1,318,793


The decrease in new business volume in the Farm & Ranch line of business for the six months ended June 30, 2015 as compared to the same period in 2014 reflects a return to volume levels more consistent with historical trends, and demand seems stable in this range. Prepayment rates remain subdued and therefore trends in net loan growth are favorable. The increase in new business volume in the USDA Guarantees line of business for the first six months of 2015 compared to the same period in 2014 reflects an increase in lender usage of USDA guaranteed loan programs and the resultant increase in loans available for purchase on the secondary market, as well as the increasing willingness of banks to sell the lower-return guaranteed portions of these loans to fund other new loan originations. Rural Utilities loan volume remains low due to reduced demand associated with slow historical economic growth and greater energy efficiency in recent years. Changes in AgVantage securities volume are primarily driven by the generally larger transaction sizes for that product and the fluctuating funding and liquidity needs of Farmer Mac's customer network and scheduled maturity amounts.

The purchase price of non-delinquent eligible loans and portfolios is their respective fair value based on current market interest rates and Farmer Mac's target net yield. The purchase price includes an amount to compensate Farmer Mac for credit risk that is similar to the guarantee or commitment fees it receives for assuming credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs.  Based on market conditions, Farmer Mac either retains the loans it purchases or securitizes them and retains or sells Farmer Mac Guaranteed Securities backed by those loans.  Historically, Farmer Mac has retained the vast majority of loans it has purchased.  The weighted-average age of the Farm & Ranch non-delinquent eligible loans purchased and retained (excluding the purchases of defaulted loans) during second quarter 2015 and 2014 was less than one year. Of those loans, 56 percent and 39 percent, respectively, had principal amortization periods longer than the maturity date, resulting in balloon payments at maturity, with a weighted-average remaining term to maturity of 16.2 years and 15.8 years, respectively.



67
Table of Contents

During second quarter 2015 and 2014, Farmer Mac securitized some of the Farm & Ranch loans it had purchased and sold the resulting Farmer Mac Guaranteed Securities in the amount of $63.0 million and $66.6 million, respectively. Farmer Mac consolidates these loans and presents them as "Loans held for investment in consolidated trusts, at amortized cost" on the consolidated balance sheets. For the three and six months ended June 30, 2015, $39.7 million and $83.6 million, respectively, of Farmer Mac Guaranteed Securities were sold to Zions First National Bank ("Zions"), which is a related party to Farmer Mac, compared to $52.2 million and $107.6 million of sales for the three and six months ended June 30, 2014, respectively.

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

Table 8

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Loans securitized and sold as Farm & Ranch Guaranteed Securities
$
62,953

 
$
66,554

 
$
112,440

 
$
129,305

AgVantage Securities
307,250

 
300,775

 
522,165

 
529,465

Total Farmer Mac Guaranteed Securities Issuances
$
370,203

 
$
367,329

 
$
634,605

 
$
658,770




68
Table of Contents

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

Table 9

Lines of Business - Outstanding Business Volume
 
As of June 30, 2015
 
As of December 31, 2014
 
(in thousands)
On-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
Loans
$
2,197,934

 
$
2,118,867

Loans held in trusts:
 
 
 
Beneficial interests owned by third party investors
512,559

 
421,355

USDA Guarantees:
 
 
 
USDA Securities
1,817,720

 
1,756,224

Farmer Mac Guaranteed USDA Securities
33,822

 
27,832

Rural Utilities:
 
 
 
Loans(1)
954,188

 
718,213

Loans held in trusts:
 
 
 
Beneficial interests owned by Farmer Mac(1)
—

 
267,396

Institutional Credit:
 
 
 
AgVantage Securities
5,841,410

 
5,410,413

Total on-balance sheet
$
11,357,633

 
$
10,720,300

Off-balance sheet:
 
 
 
Farm & Ranch:
 
 
 
LTSPCs
$
2,199,266

 
$
2,240,866

Guaranteed Securities
575,811

 
636,086

USDA Guarantees:
 
 
 
Farmer Mac Guaranteed USDA Securities
10,888

 
13,978

Institutional Credit:
 
 
 
AgVantage Securities
986,529

 
986,528

Total off-balance sheet
$
3,772,494

 
$
3,877,458

Total
$
15,130,127

 
$
14,597,758

(1)
Reflects the unwinding of certain consolidated trusts with the effect that loans previously consolidated on the balance sheet as "Loans held in trusts" currently are included within "Loans."




69
Table of Contents

The following table summarizes by maturity date the scheduled principal amortization of loans held, loans underlying off-balance sheet Farmer Mac Guaranteed Securities (excluding AgVantage securities) and LTSPCs, USDA Securities, and Farmer Mac Guaranteed USDA Securities as of June 30, 2015:

Table 10
Schedule of Principal Amortization as of June 30, 2015
 
Loans Held
 
Loans Underlying Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs
 
 USDA Securities and Farmer Mac Guaranteed USDA Securities
 
Total
 
(in thousands)
2015
$
104,318

 
$
128,803

 
$
125,288

 
$
358,409

2016
180,654

 
232,908

 
136,495

 
550,057

2017
181,975

 
214,394

 
115,285

 
511,654

2018
203,129

 
205,967

 
135,807

 
544,903

2019
166,714

 
184,021

 
124,593

 
475,328

Thereafter
2,827,891

 
1,808,984

 
1,224,962

 
5,861,837

Total
$
3,664,681

 
$
2,775,077

 
$
1,862,430

 
$
8,302,188



Of the $15.1 billion outstanding principal balance of volume included in Farmer Mac's four lines of business as of June 30, 2015, $6.8 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 June 30, 2015:

Table 11

AgVantage Balances by Year of Maturity
 
As of
 
June 30, 2015
 
(in thousands)
2015
$
645,336

2016
1,348,298

2017
1,472,419

2018
855,738

2019
320,350

Thereafter(1)
2,185,798

Total
$
6,827,939

(1) Includes various maturities ranging from 2020 to 2044.

The weighted-average remaining maturity of the outstanding AgVantage securities shown in the table above was 4.4 years as of June 30, 2015.  As a general matter, if maturing AgVantage securities are not


70
Table of Contents

replaced with new AgVantage securities, either from the same issuer or from new business, or if the spread earned by Farmer Mac on new AgVantage securities that replace maturing AgVantage securities is lower than the spread earned on the maturing securities, Farmer Mac's income could be adversely affected.

As part of fulfilling its guarantee obligations for Farm & Ranch Guaranteed Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted loans, all of which are at least 90-days delinquent or in material non-monetary default at the time of purchase, out of the loan pools underlying those securities and LTSPCs, and records the purchased loans as such on its balance sheet.  The purchase price for a defaulted loan purchased out of a pool of loans backing Farm & Ranch Guaranteed Securities is the then-current outstanding principal balance of the loan plus accrued and unpaid interest.  The purchase price for a defaulted loan purchased under an LTSPC is the then-current outstanding principal balance of the loan, with accrued and unpaid interest on the defaulted loan payable out of any future loan payments or liquidation proceeds as received.  The purchase price of a defaulted loan is not an indicator of the expected loss on that loan; many other factors affect expected loss, if any, on any loan so purchased. The weighted-average age of delinquent loans purchased out of securitized pools and LTSPCs was 16 years during second quarter 2015. Farmer Mac did not purchase any delinquent loans during second quarter 2014. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans and Guarantees."

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

Table 12

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Defaulted loans purchased underlying Farm & Ranch Guaranteed Securities owned by third party investors
$
1,324

 
$
—

 
$
1,981

 
$
—

Defaulted loans purchased underlying LTSPCs
—

 
—

 
—

 
440

Total loan purchases
$
1,324

 
$
—

 
$
1,981

 
$
440


Outlook  

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

•
As agricultural and rural utilities lenders face increased equity capital requirements under new regulatory frameworks or rating agency requirements, or seek to reduce exposure due to lending limits or concentration limits, Farmer Mac can provide relief for those institutions through loan purchases, guarantees, or LTSPCs.
•
Lending in the rural utilities industry may increase as rural utilities seek alternatives for financing, including refinancing existing debt.


71
Table of Contents

•
As a result of targeted marketing and product development efforts, Farmer Mac's lender network and customer base continues to expand, which may generate additional demand for Farmer Mac's products from new sources.

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

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

Farmer Mac continues to monitor land values and commodity prices in response to cyclical swings. Although farmland values and commodity prices have declined recently in some sectors, primarily in the Midwest, Farmer Mac believes that its portfolio remains sufficiently diversified, both geographically and by commodity, and that its portfolio has generally demonstrated historically high credit quality and low delinquency rates to endure reasonably foreseeable volatility in farmland values and commodity prices. Farmer Mac also continues to closely monitor sector profitability, economic conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions. For more information about the loan balances and loan-to-value ratios for Farm & Ranch loans in Farmer Mac's portfolio as of June 30, 2015, see "—Risk Management—Credit Risk – Loans and Guarantees."

The western part of the United States, including California, continues to experience drought conditions, with the water level in many California reservoirs at historically low levels. Although to date Farmer Mac has not observed any material effect on its portfolio from drought conditions, the persistence of extreme drought conditions in the western states could have an adverse effect on Farmer Mac’s delinquency rates or loss experience. This is particularly true in the permanent plantings sector, where the value of the related collateral is closely tied to the production value and capability of the permanent plantings, and in the dairy sector, which may experience increased feed costs as water is diverted away from hay acreage commonly relied upon by dairy producers and toward land supporting other agricultural commodities. Farmer Mac continues to remain informed about the drought and its effects on the agricultural industries located in the western states and on Farmer Mac's Farm & Ranch portfolio through regular discussions with its loan servicers that service loans in drought-stricken areas, as well as customers and other lenders in the industry.

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


72
Table of Contents


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

Farmer Mac also directs marketing efforts towards the agricultural industry by trying to identify and develop relationships with potential issuers of AgVantage securities who can pledge loans as collateral to obtain financing as part of Farmer Mac's Institutional Credit line of business. As part of these efforts, Farmer Mac has recently increased its focus on wholesale financing for institutional investors in agricultural assets that qualify as eligible collateral under Farmer Mac's charter. In July 2014, Farmer Mac expanded its AgVantage product to this new type of issuer and refers to this product variation as the Farm Equity AgVantage product. Farmer Mac directs its outreach efforts to these potential issuers through its business relationships within the agricultural community and through executive outreach to institutions whose profile presents opportunity to benefit from wholesale financing. As institutional investment in agricultural assets continues to grow, Farmer Mac believes that it is in a unique position to help increase access to capital for these types of counterparties and thereby provide a new source of capital to benefit rural America. Farmer Mac designed the Farm Equity AgVantage product to provide an efficient, low-cost source of financing tailored to meet the needs of institutional investors that can be adapted to many different types of organizational structures and for both public and private institutional investors. Although this product is in the early stages of development, Farmer Mac believes there is opportunity to expand this type of business as both the trend toward institutional investment in agricultural assets and awareness of the Farm Equity AgVantage product continue to grow. For more information about the Farm Equity AgVantage product, see "Business—Farmer Mac Lines of Business—Institutional Credit" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015 and "—Risk Management—Credit Risk – Institutional."

Rural Utilities Industry. Reduced demand for capital within the rural utilities industry has increased competition for rural cooperative borrowers among lenders that either are not eligible or choose not to participate in Farmer Mac's Rural Utilities line of business. The rural utilities industry may experience needs for financing over the next several years to make improvements in response to environmental and clean energy policies and to refinance government loans made by the USDA's Rural Utilities Service. In addition, CFC, the rural utilities lender that is the only current participant in Farmer Mac's Rural Utilities line of business, may experience increased needs for term funding and LTSPC business from Farmer Mac as a result of new requirements implemented by debt rating agencies. Domestic economic indicators also continue to show modest growth, and as the economy strengthens, Farmer Mac believes that demand for rural utilities loans may increase. Farmer Mac also foresees opportunities for growth pertaining to the rural utilities industry within Farmer Mac's Institutional Credit line of business related to the increasing trend in the past year of rural utilities cooperatives beginning to shift their debt refinancing activities away from the Rural Utilities Service and towards market-based lenders, including rural utilities cooperative lenders. Farmer Mac has the opportunity to help these lenders as they seek lower-cost wholesale


73
Table of Contents

financing alternatives, which could allow them to become more competitive in pursuing these refinancing opportunities.

Balance Sheet Review

Assets.  Farmer Mac's total assets as of June 30, 2015 were $15.1 billion, compared to $14.3 billion as of December 31, 2014.  The increase in total assets was primarily attributable to an increase in cash and cash equivalents and Farmer Mac Guaranteed Securities.

As of June 30, 2015, Farmer Mac had $1.7 billion of cash and cash equivalents and $1.9 billion of investment securities, compared to $1.4 billion of cash and cash equivalents and $1.9 billion of investment securities as of December 31, 2014. As of June 30, 2015, Farmer Mac had $5.9 billion of Farmer Mac Guaranteed Securities, $1.9 billion of USDA Securities, and $3.7 billion of loans, net of allowance. This compares to $5.5 billion of Farmer Mac Guaranteed Securities, $1.8 billion of USDA Securities, and $3.5 billion of loans, net of allowance, as of December 31, 2014.

Liabilities.  Farmer Mac's total liabilities increased to $14.6 billion as of June 30, 2015 from $13.5 billion as of December 31, 2014.  The increase in liabilities was primarily attributable to an increase in total notes payable.

Equity.  As of June 30, 2015, Farmer Mac had total equity of $576.3 million, comprised of stockholders' equity of $576.1 million and non-controlling interest of $0.2 million related to Farmer Mac's appraisal subsidiary, Contour Appraisal Services, LLC.  As of December 31, 2014, Farmer Mac had total equity of $781.8 million, comprised of stockholders' equity of $545.8 million and non-controlling interest of $236.0 million.  The decrease in total equity was a result of the redemption of all of the outstanding shares of Farmer Mac II LLC Preferred Stock (presented as "Non-controlling interest" within equity on Farmer Mac's consolidated balance sheets) during first quarter 2015, offset in part by an increase in retained earnings and in accumulated other comprehensive income due to increases in the fair value of available-for-sale securities. These increases in the fair value of available-for-sale securities were driven primarily by lower U.S. Treasury rates.

Off-Balance Sheet Arrangements 

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

Risk Management

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


74
Table of Contents

•
loans held;
•
loans underlying Farmer Mac Guaranteed Securities; and
•
loans underlying LTSPCs.

Farmer Mac generally assumes 100 percent of the credit risk on loans held in the Farm & Ranch and Rural Utilities lines of business and loans underlying LTSPCs and Farmer Mac Guaranteed Securities in the Farm & Ranch line of business. Farmer Mac has direct credit exposure to loans in non-AgVantage transactions and indirect credit exposure to loans that secure AgVantage transactions because AgVantage securities represent a general obligation of an issuer that is in turn secured by qualified loans.  The credit exposure of Farmer Mac and Farmer Mac II LLC on USDA Securities, including those underlying Farmer Mac Guaranteed USDA Securities, is covered by the full faith and credit of the United States.  Therefore, Farmer Mac believes that Farmer Mac and Farmer Mac II LLC have little or no credit risk exposure in the USDA Guarantees line of business because of the USDA guarantee.  As of June 30, 2015, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any business under the USDA Guarantees line of business, and neither expects to incur any such losses in the future.

Farmer Mac has established underwriting, collateral valuation, and documentation standards for agricultural real estate mortgage loans and rural utilities loans. Farmer Mac believes that these standards mitigate the risk of loss from borrower defaults and provide guidance about the management, administration, and conduct of underwriting and appraisals to all participating and potential lenders.  These standards were developed on the basis of industry norms for agricultural real estate mortgage loans and rural utilities loans and are designed to assess the creditworthiness of the borrower, as well as the value of the collateral securing the loan.  Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions.  For more information about Farmer Mac's underwriting and collateral valuation standards, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Underwriting and Collateral Valuation (Appraisal) Standards" and "Business—Farmer Mac Lines of Business—Rural Utilities—Underwriting" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015.

Farmer Mac requires approved lenders to make representations and warranties regarding the conformity of eligible agricultural mortgage and rural utilities loans to Farmer Mac's standards, the accuracy of loan data provided to Farmer Mac, and other requirements related to the loans.  Sellers are responsible to Farmer Mac for breaches of those representations and warranties, and Farmer Mac has the ability to require a seller to cure, replace, or repurchase a loan sold or transferred to Farmer Mac if any breach of a representation or warranty is discovered that was material to Farmer Mac's decision to purchase the loan or that directly or indirectly causes a default or potential loss on a loan sold or transferred by the seller to Farmer Mac.  Farmer Mac has not required a seller to cure or repurchase a loan purchased by Farmer Mac for breach of a representation or warranty in the last three years. In addition to relying on the representations and warranties of lenders, Farmer Mac also underwrites all of the agricultural mortgage loans (other than rural housing and part-time farm mortgage loans) and rural utilities loans that it holds in its portfolio. For rural housing and part-time farm mortgage loans, Farmer Mac relies on representations and warranties from the seller that those loans conform to Farmer Mac's specified underwriting criteria without exception. For more information about Farmer Mac's loan eligibility requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Loan Eligibility" and "Business—Farmer Mac Lines of Business—Rural Utilities—Loan Eligibility" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015.
 
Under contracts with Farmer Mac and in consideration for servicing fees, Farmer Mac-approved central servicers service loans in accordance with Farmer Mac's requirements.  Central servicers are responsible


75
Table of Contents

to Farmer Mac for serious errors in the servicing of those loans.  If a central servicer materially breaches the terms of its servicing agreement with Farmer Mac, such as failing to forward payments received or releasing collateral without Farmer Mac's consent, or experiences insolvency or bankruptcy, Farmer Mac has the right to terminate the servicing relationship for a particular loan or the entire portfolio serviced by the central servicer. In addition, Farmer Mac can proceed against the central servicer in arbitration or exercise any remedies available to it under law. In the last three years, Farmer Mac has not exercised any remedies or taken any formal action against any central servicers. For more information about Farmer Mac's servicing requirements, see "Business—Farmer Mac Lines of Business—Farm & Ranch—Servicing" and "Business—Farmer Mac Lines of Business—Rural Utilities—Servicing" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015.

Farmer Mac's AgVantage securities are general obligations of institutions approved by Farmer Mac and are secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because Farmer Mac has only indirect credit risk on those loans and because of the other characteristics of AgVantage securities that mitigate credit risk. Those characteristics include a general obligation of an issuing institution approved by Farmer Mac, the required collateralization level for the securities, and the requirement for delinquent loans to be removed from the pool of pledged loans and replaced with current eligible loans.  As such, all AgVantage securities are secured by current loans representing at least 100 percent of the outstanding amount of these securities.  As of June 30, 2015, Farmer Mac had not experienced any credit losses on any AgVantage securities and does not expect to incur any such losses in the future. See "—Credit Risk – Institutional" for more information about Farmer Mac's credit risk on AgVantage securities.

Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative. As of June 30, 2015, there were no delinquencies in Farmer Mac's portfolio of rural utilities loans, and Farmer Mac has not experienced any credit losses on rural utilities loans since Congress authorized Farmer Mac's Rural Utilities line of business in 2008. Based on this performance, Farmer Mac excludes the loans in the Rural Utilities line of business from the credit risk metrics it discloses. Farmer Mac's direct credit exposure to rural utilities loans as of June 30, 2015 was $954.2 million across 37 states, of which $936.3 million were loans to electric distribution cooperatives and $17.9 million were loans to G&T cooperatives. Farmer Mac also had indirect credit exposure to the rural utilities loans securing AgVantage securities and included in the Institutional Credit line of business, some of which are loans to G&T cooperatives. For more information, see "—Credit Risk – Institutional."

Farmer Mac maintains an allowance for loan losses to cover estimated probable losses on loans held and a reserve for losses to cover estimated probable losses on loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities.  The methodology that Farmer Mac uses to determine the level of its allowance for losses is described in Note 2(j) to the consolidated financial statements included in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015. Management believes that this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs.



76
Table of Contents

The following table summarizes the components of Farmer Mac's total allowance for losses for three and six months ended June 30, 2015 and 2014:

Table 13
 
 
June 30, 2015
 
June 30, 2014
 
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
Allowance
for Loan
Losses
 
Reserve
for Losses
 
Total
Allowance
for Losses
 
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
5,940

 
$
3,491

 
$
9,431

 
$
7,410

 
$
6,569

 
$
13,979

Provision for/(release of) losses
 
110

 
1,146

 
1,256

 
(1,583
)
 
(974
)
 
(2,557
)
Charge-offs
 
(111
)
 
—

 
(111
)
 
(57
)
 
—

 
(57
)
Ending Balance
 
$
5,939

 
$
4,637

 
$
10,576

 
$
5,770

 
$
5,595

 
$
11,365

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
5,864

 
$
4,263

 
$
10,127

 
$
6,866

 
$
6,468

 
$
13,334

Provision for/(release of) losses
 
186

 
374

 
560

 
(1,010
)
 
(873
)
 
(1,883
)
Charge-offs
 
(111
)
 
—

 
(111
)
 
(86
)
 
—

 
(86
)
Ending Balance
 
$
5,939

 
$
4,637

 
$
10,576

 
$
5,770

 
$
5,595

 
$
11,365


Activity affecting the allowance for loan losses and reserve for losses is discussed in "—Results of Operations—Provision for and Release of Allowance for Loan Losses and Reserve for Losses." As of June 30, 2015, Farmer Mac's allowances for losses totaled $10.6 million, or 19 basis points of the outstanding principal balance of loans held for investment and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities, compared to $10.1 million, or 19 basis points, as of December 31, 2014.

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 June 30, 2015, Farmer Mac's 90-day delinquencies were $31.9 million (0.58 percent of the Farm & Ranch portfolio), compared to $18.9 million (0.35 percent of the Farm & Ranch portfolio) as of December 31, 2014 and $25.9 million (0.49 percent of the Farm & Ranch portfolio) as of June 30, 2014. Those 90-day delinquencies were comprised of 26 delinquent loans as of June 30, 2015, compared with 29 delinquent loans as of December 31, 2014 and 34 delinquent loans as of June 30, 2014. As described in more detail below, the primary cause of the increase in 90-day delinquencies during the first half of 2015 was the delinquency during first quarter 2015 of one borrower in the Northwest geographic region. Farmer Mac's exposure to this borrower was $9.4 million as of June 30, 2015. In July 2015, Farmer Mac received full repayment on loans to this borrower.

When analyzing the overall risk profile of its lines of business, Farmer Mac takes into account more than the Farm & Ranch loan delinquency percentages provided above. The lines of business also include AgVantage securities and rural utilities loans, neither of which have any delinquencies, and USDA Securities, which are backed by the full faith and credit of the United States. Across all of Farmer Mac's lines of business, 90-day delinquencies represented 0.21 percent of total outstanding business volume as of June 30, 2015, compared to 0.13 percent as of December 31, 2014 and 0.18 percent as of June 30, 2014 .



77
Table of Contents

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

Table 14
 
 
Farm & Ranch Line of Business
 
90-Day
Delinquencies
 
Percentage
 
(dollars in thousands)
As of:
 
 
 
 
 
June 30, 2015
$
5,485,570

 
$
31,852

 
0.58
%
March 31, 2015
5,347,248

 
32,101

 
0.60
%
December 31, 2014
5,417,174

 
18,917

 
0.35
%
September 30, 2014
5,314,437

 
24,661

 
0.46
%
June 30, 2014
5,310,664

 
25,911

 
0.49
%
March 31, 2014
5,293,975

 
29,437

 
0.56
%
December 31, 2013
5,163,080

 
28,296

 
0.55
%
September 30, 2013
5,035,748

 
33,042

 
0.66
%
June 30, 2013
4,917,489

 
33,922

 
0.69
%


As shown in the table above, Farmer Mac's 90-day delinquency rates have been declining since 2013 and reached historical lows by the end of 2014, primarily due to strong economic and market conditions in the agricultural industry generally. The increase in the 90-day delinquency rate in the first half of 2015 was primarily related to the delinquency in first quarter 2015 of a single borrower to which Farmer Mac had $9.4 million of exposure as of June 30, 2015, and whose delinquency was not related to industry conditions or the profitability of the borrower's operation. As noted above, Farmer Mac received full repayment on loans to this borrower in July 2015. Farmer Mac expects that over time its 90-day delinquency rate will eventually revert closer to Farmer Mac's historical averages due to macroeconomic and other potential factors, but Farmer Mac has not yet seen an impact on its portfolio or a rise in delinquencies related to these factors. Farmer Mac's average 90-day delinquency rate for the Farm & Ranch line of business over the last fifteen years is approximately 1.00 percent.

As of June 30, 2015, Farmer Mac individually analyzed $28.1 million of the $105.8 million of recorded investment in impaired loans for collateral shortfalls against updated appraised values, other updated collateral valuations, or discounted values. For the remaining $77.7 million of impaired assets for which updated valuations were not available, Farmer Mac evaluated them in the aggregate in consideration of their similar risk characteristics and historical statistics. Farmer Mac recorded specific allowances of $5.5 million for undercollateralized assets as of June 30, 2015. Farmer Mac's non-specific or general allowances were $5.1 million as of June 30, 2015.

Loans in the Farm & Ranch line of business are all secured by first liens on agricultural real estate. Accordingly, Farmer Mac's exposure on a loan is limited to the difference between (1) the total of the accrued interest, advances, and the principal balance of a loan and (2) the value of the property less the cost to sell. Measurement of that excess or shortfall is the best predictor and determinant of loss, compared to other measures that evaluate the efficiency of a particular farm operator.  Debt service ratios depend upon farm operator efficiency and leverage, which can vary widely within a geographic region, commodity type, or an operator's business and farming skills.  A loan's original loan-to-value ratio is one of many factors Farmer Mac considers in evaluating loss severity and is calculated by dividing the loan


78
Table of Contents

principal balance at the time of guarantee, purchase, or commitment by the appraised value at the date of loan origination or, when available, updated appraised value at the time of guarantee, purchase, or commitment.  Other factors include, but are not limited to, other underwriting standards, commodity and farming forecasts, and regional economic and agricultural conditions.

Loan-to-value ratios depend upon the market value of a property, as determined in accordance with Farmer Mac's collateral valuation standards.  As of June 30, 2015 and December 31, 2014, the average unpaid loan balance for loans outstanding in the Farm & Ranch line of business was $474,000 and $462,000, respectively. The original loan-to-value ratio is based on the original appraised value that has not been indexed to provide a current market value or reflect amortization of loans. The weighted average original loan-to-value ratio for Farm & Ranch loans purchased during second quarter 2015 was 44 percent, compared to 45 percent for loans purchased in the same period for 2014. The weighted average original loan-to-value ratio for all Farm & Ranch loans held and all loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 46 percent as of June 30, 2015 and 47 percent as of December 31, 2014. The weighted-average original loan-to-value ratio for all 90-day delinquencies was 46 percent as of both June 30, 2015 and December 31, 2014.

The weighted average current loan-to-value ratio, which is the loan-to-value ratio based on original appraised value but which reflects loan amortization since purchase, for Farm & Ranch loans held and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs was approximately 44 percent as of both June 30, 2015 and December 31, 2014.







79
Table of Contents

The following table presents outstanding Farm & Ranch loans held and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities and 90-day delinquencies as of June 30, 2015 by year of origination, geographic region, commodity/collateral type, and original loan-to-value ratio:

Table 15
Farm & Ranch 90-Day Delinquencies as of June 30, 2015
 
Distribution of Farm & Ranch Line of Business
 
Farm & Ranch Line of Business
 
90-Day Delinquencies(1)
 
Percentage
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
 
 
Before 2002 and prior
8
%
 
$
436,033

 
$
3,942

 
0.90
%
2003
2
%
 
137,589

 
832

 
0.60
%
2004
3
%
 
157,052

 
559

 
0.36
%
2005
4
%
 
213,930

 
61

 
0.03
%
2006
4
%
 
201,405

 
6,725

 
3.34
%
2007
4
%
 
198,161

 
5,934

 
2.99
%
2008
4
%
 
243,529

 
1,315

 
0.54
%
2009
3
%
 
177,762

 
177

 
0.10
%
2010
5
%
 
277,622

 
701

 
0.25
%
2011
7
%
 
385,331

 
9,397

 
2.44
%
2012
14
%
 
778,708

 
—

 
—
%
2013
21
%
 
1,128,224

 
2,209

 
0.20
%
2014
14
%
 
779,357

 
—

 
—
%
2015
7
%
 
370,867

 
—

 
—
%
Total
100
%
 
$
5,485,570

 
$
31,852

 
0.58
%
By geographic region(2):
 

 
 

 
 

 
 

Northwest
11
%
 
$
591,539

 
$
12,916

 
2.18
%
Southwest
31
%
 
1,720,074

 
4,731

 
0.28
%
Mid-North
35
%
 
1,907,771

 
1,027

 
0.05
%
Mid-South
12
%
 
670,976

 
2,172

 
0.32
%
Northeast
4
%
 
209,909

 
483

 
0.23
%
Southeast
7
%
 
385,301

 
10,523

 
2.73
%
Total
100
%
 
$
5,485,570

 
$
31,852

 
0.58
%
By commodity/collateral type:
 
 
 

 
 

 
 

Crops
56
%
 
$
3,036,565

 
$
4,185

 
0.14
%
Permanent plantings
17
%
 
948,128

 
21,214

 
2.24
%
Livestock
22
%
 
1,216,229

 
3,916

 
0.32
%
Part-time farm
3
%
 
181,555

 
2,537

 
1.40
%
Ag. Storage and Processing
2
%
 
97,004

 
—

 
—
%
Other
—

 
6,089

 
—

 
—
%
Total
100
%
 
$
5,485,570

 
$
31,852

 
0.58
%
By original loan-to-value ratio:
 
 
 
 
 
 
 
0.00% to 40.00%
28
%
 
$
1,519,879

 
$
12,226

 
0.80
%
40.01% to 50.00%
22
%
 
1,199,417

 
14,320

 
1.19
%
50.01% to 60.00%
28
%
 
1,523,119

 
2,839

 
0.19
%
60.01% to 70.00%
20
%
 
1,102,646

 
1,675

 
0.15
%
70.01% to 80.00%(3)
2
%
 
119,189

 
792

 
0.66
%
80.01% to 90.00%(3)
—
%
 
21,320

 
—

 
—
%
Total
100
%
 
$
5,485,570

 
$
31,852

 
0.58
%
(1) 
Includes loans and loans underlying off-balance sheet Farm & Ranch Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.
(2) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(3) 
Primarily part-time farm loans. Loans with an original loan-to-value ratio of greater than 80% are required to have private mortgage insurance.


80
Table of Contents

The following table presents Farmer Mac's cumulative net credit losses relative to the cumulative original balance for all Farm & Ranch loans purchased and loans underlying LTSPCs and off-balance sheet Farm & Ranch Guaranteed Securities as of June 30, 2015 by year of origination, geographic region, and commodity/collateral type.  The purpose of this information is to present information regarding losses relative to original Farm & Ranch purchases, guarantees, and commitments.

Table 16

Farm & Ranch Credit Losses Relative to Cumulative
Original Loans, Guarantees, and LTSPCs as of June 30, 2015
 
Cumulative Original Loans, Guarantees and LTSPCs
 
 Cumulative Net Credit Losses
 
 Cumulative Loss Rate
 
(dollars in thousands)
By year of origination:
 
 
 
 
 
Before 2001
$
7,032,722

 
$
10,987

 
0.16
 %
2001
1,043,874

 
178

 
0.02
 %
2002
1,087,636

 
89

 
0.01
 %
2003
933,012

 
350

 
0.04
 %
2004
739,831

 
311

 
0.04
 %
2005
894,364

 
(184
)
 
(0.02
)%
2006
904,502

 
9,545

 
1.06
 %
2007
716,403

 
4,638

 
0.65
 %
2008
782,240

 
3,247

 
0.42
 %
2009
530,209

 
1,508

 
0.28
 %
2010
640,023

 
—

 
—
 %
2011
717,947

 
—

 
—
 %
2012
1,061,771

 
—

 
—
 %
2013
1,327,788

 
—

 
—
 %
2014
887,700

 
—

 
—
 %
2015
386,295

 
—

 
—
 %
Total
$
19,686,317

 
$
30,669

 
0.16
 %
By geographic region(1):
 

 
 

 
 

Northwest
$
2,713,378

 
$
7,402

 
0.27
 %
Southwest
6,930,763

 
9,036

 
0.13
 %
Mid-North
4,949,834

 
12,830

 
0.26
 %
Mid-South
2,261,165

 
(211
)
 
(0.01
)%
Northeast
1,244,662

 
169

 
0.01
 %
Southeast
1,586,515

 
1,443

 
0.09
 %
Total
$
19,686,317

 
$
30,669

 
0.16
 %
By commodity/collateral type:
 

 
 

 
 

Crops
$
9,010,152

 
$
4,310

 
0.05
 %
Permanent plantings
4,019,132

 
9,332

 
0.23
 %
Livestock
4,865,347

 
3,859

 
0.08
 %
Part-time farm
1,014,418

 
1,156

 
0.11
 %
Ag. Storage and Processing(2)
631,969

 
12,012

 
1.90
 %
Other
145,299

 
—

 
—
 %
Total
$
19,686,317

 
$
30,669

 
0.16
 %
(1) 
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).
(2) 
As of June 30, 2015, approximately $10.1 million of these loans that are underlying LTSPCs were not yet disbursed by the lender.

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


81
Table of Contents

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

However, in Farmer Mac's experience, the degree to which the collateral for a commodity group is single-use or highly improved is a more significant determinant of the probability of ultimate losses on a given loan than diversity of geographic location within a commodity group. Commodity groups that tend to be single-use or highly improved include permanent plantings (for example, nut crops), agricultural storage and processing facilities (for example, canola plants and grain processing facilities), and certain livestock facilities (for example, dairy facilities). The versatility of a borrower's operation (and in the case of persisting adverse economic conditions, the borrower's ability to switch commodity groups) will more likely result in profitability for the borrower and, consequently, a lower risk of decreased value for the underlying collateral. Producers of agricultural commodities that require highly improved property are less able to adapt their operations when faced with adverse economic conditions. In addition, in the event of a borrower's default, the prospective sale value of the collateral is more likely to decrease and the related loan may become undercollateralized.  This analysis is consistent with corresponding commodity analyses, which indicate that Farmer Mac has experienced higher loss and collateral deficiency rates in permanent planting loans and Agricultural Storage and Processing loans, for which the collateral is typically highly improved and specialized.




82
Table of Contents

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 17

 
As of June 30, 2015
 
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
$
305,144

 
$
86,587

 
$
160,931

 
$
25,377

 
$
13,500

 
$
—

 
$
591,539

 
5.6
%
 
1.6
%
 
2.9
%
 
0.5
%
 
0.2
%
 
—
%
 
10.8
%
Southwest
528,276

 
665,560

 
469,348

 
40,508

 
15,956

 
426

 
1,720,074

 
9.6
%
 
12.1
%
 
8.6
%
 
0.7
%
 
0.3
%
 
—
%
 
31.3
%
Mid-North
1,636,277

 
27,261

 
184,705

 
17,912

 
37,004

 
4,612

 
1,907,771

 
29.8
%
 
0.5
%
 
3.4
%
 
0.3
%
 
0.7
%
 
0.1
%
 
34.8
%
Mid-South
390,062

 
26,212

 
213,663

 
27,181

 
13,541

 
317

 
670,976

 
7.1
%
 
0.5
%
 
3.9
%
 
0.5
%
 
0.2
%
 
—
%
 
12.2
%
Northeast
72,970

 
21,576

 
55,944

 
50,343

 
8,939

 
137

 
209,909

 
1.3
%
 
0.4
%
 
1.0
%
 
0.9
%
 
0.2
%
 
—
%
 
3.8
%
Southeast
103,836

 
120,932

 
131,638

 
20,234

 
8,064

 
597

 
385,301

 
2.0
%
 
2.2
%
 
2.4
%
 
0.4
%
 
0.1
%
 
—
%
 
7.1
%
Total
$
3,036,565

 
$
948,128

 
$
1,216,229

 
$
181,555

 
$
97,004

 
$
6,089

 
$
5,485,570

 
55.4
%
 
17.3
%
 
22.2
%
 
3.3
%
 
1.7
%
 
0.1
%
 
100.0
%
(1)
Geographic regions:  Northwest (AK, ID, MT, OR, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NE, ND, SD, WI); Mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, GA, MS, NC, SC, TN).





        


83
Table of Contents

Table 18

 
As of June 30, 2015

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

 
$
(79
)
 
$
(107
)
 
$
—

 
$
—

 
$
91

1996
(721
)
 
2,296

 
(73
)
 
—

 
—

 
1,502

1997
(397
)
 
2,785

 
(131
)
 
—

 
—

 
2,257

1998
(438
)
 
1,803

 
1,781

 
—

 
—

 
3,146

1999
(108
)
 
723

 
158

 
296

 
—

 
1,069

2000
7

 
1,907

 
1,049

 
(41
)
 
—

 
2,922

2001
45

 
1

 
132

 
—

 
—

 
178

2002
—

 
—

 
—

 
89

 
—

 
89

2003
309

 
—

 
—

 
41

 
—

 
350

2004
—

 
—

 
162

 
149

 
—

 
311

2005
(87
)
 
(263
)
 
—

 
166

 
—

 
(184
)
2006
1,616

 
—

 
40

 
201

 
7,688

 
9,545

2007
1,083

 
11

 
779

 
255

 
2,510

 
4,638

2008
2,626

 
—

 
—

 
—

 
621

 
3,247

2009
98

 
148

 
69

 
—

 
1,193

 
1,508

2010
—

 
—

 
—

 
—

 
—

 
—

2011
—

 
—

 
—

 
—

 
—

 
—

2012
—

 
—

 
—

 
—

 
—

 
—

2013
—

 
—

 
—

 
—

 
—

 
—

2014
—

 
—

 
—

 
—

 
—

 
—

2015
—

 
—

 
—

 
—

 
—

 
—

Total
$
4,310

 
$
9,332

 
$
3,859

 
$
1,156

 
$
12,012

 
$
30,669


Farmer Mac regularly conducts detailed, statistical stress tests of its portfolio for credit risk and compares those results to current and historical credit quality metrics and to the various statutory, regulatory, and Farmer Mac's board of directors' capital policy metrics. Farmer Mac's methodologies for pricing its guarantee and commitment fees, managing credit risk, and providing adequate allowances for losses consider all of the foregoing factors and information.

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

Farmer Mac approves AgVantage counterparties and manages institutional credit risk related to those AgVantage counterparties by requiring them to meet Farmer Mac's standards for creditworthiness for the particular counterparty and transaction.  The required collateralization level is established at the time of issuance and does not change during the life of the security.  In AgVantage transactions, the corporate obligor is required to remove from the pool of pledged collateral any loan that becomes more than 30 days


84
Table of Contents

delinquent in the payment of principal or interest and to substitute an eligible loan that is current in payment to maintain the minimum required collateralization level.  In the event of a default on the general obligation, Farmer Mac would have recourse to the pledged collateral and have rights to the ongoing borrower payments of principal and interest. For Farm Equity AgVantage counterparties, Farmer Mac also requires that the counterparty (1) maintain a higher collateralization level, through lower loan-to-value ratio thresholds and higher overcollateralization than required for traditional AgVantage securities and (2) comply with specified financial covenants for the life of the related Farm Equity AgVantage security to avoid default. For a more detailed description of AgVantage securities, see "Business—Farmer Mac Lines of Business—Institutional Credit—AgVantage Securities" in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 16, 2015.

The unpaid principal balance of outstanding on-balance sheet AgVantage securities secured by loans eligible for the Farm & Ranch line of business totaled $3.8 billion as of June 30, 2015 and $3.7 billion as of December 31, 2014. The unpaid principal balance of on-balance sheet AgVantage securities secured by loans eligible for the Rural Utilities line of business totaled $2.1 billion as of June 30, 2015 and $1.7 billion as of December 31, 2014. In addition, the unpaid principal balance of outstanding off-balance sheet AgVantage transactions totaled $1.0 billion as of both June 30, 2015 and December 31, 2014.

The following table provides information about the issuers of AgVantage securities, as well as the required collateralization levels for those transactions as of June 30, 2015 and December 31, 2014:

Table 19

 
 
As of June 30, 2015
 
As of December 31, 2014
Counterparty
 
Balance
 
Credit Rating
 
Required Collateralization
 
Balance
 
Credit Rating
 
Required Collateralization
 
 
(dollars in thousands)
AgVantage:
 
 
 
 
 
 
 
 
 
 
 
 
MetLife(1)
 
$
2,750,000

 
AA-
 
103%
 
$
2,750,000

 
AA-
 
103%
CFC
 
2,104,605

 
A
 
100%
 
1,741,601

 
A
 
100%
Rabo Agrifinance, Inc.
 
1,700,000

 
None
 
106%
 
1,700,000

 
None
 
106%
Other(2)
 
86,546

 
(3) 
 
102% to 120%
 
110,387

 
(3) 
 
102% to 120%
Farm Equity AgVantage(4)
 
186,788

 
None
 
110%
 
94,953

 
None
 
110%
Total outstanding
 
$
6,827,939

 
 
 
 
 
$
6,396,941

 
 
 
 
(1) 
Includes securities issued by Metropolitan Life Insurance Company and MetLife Insurance Company USA.
(2) 
Consists of AgVantage securities issued by 5 different issuers as of both June 30, 2015 and December 31, 2014 .
(3) 
Includes $26.4 million related to an issuer with a credit rating of BBB- and $60.1 million related to 4 issuers without a credit rating as of June 30, 2015 and $50.2 million related to an issuer with a credit rating of BBB- and $60.2 million related to 4 issuers without a credit rating as of December 31, 2014.
(4) 
Consists of securities from 2 separate issuers as of both June 30, 2015 and December 31, 2014.

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 Lines of Business—Farm & Ranch—Approved Lenders" and "Business—Farmer Mac Lines of Business—Rural Utilities—Approved Lenders" in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 16, 2015.

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


85
Table of Contents

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

Credit Risk – Other Investments. As of June 30, 2015, Farmer Mac had $1.7 billion of cash and cash equivalents and $1.9 billion of investment securities. The management of the credit risk inherent in these investments is governed by Farmer Mac's internal policies as well as FCA regulations, which establish limitations on dollar amount, issuer concentration, and credit quality. Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the "Liquidity and Investment Regulations"). In addition to establishing a portfolio of highly liquid investments as an available source of cash, the goals of Farmer Mac's investment policies are designed to minimize Farmer Mac's exposure to financial market volatility, preserve capital, and support Farmer Mac's access to the debt markets.

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

The Liquidity and Investment Regulations and Farmer Mac's policies also establish concentration limits, which are intended to limit exposure to any one counterparty. The Liquidity and Investment Regulations limit Farmer Mac's total credit exposure to any single issuer of securities and uncollateralized financial derivatives to 25 percent of Farmer Mac's regulatory capital (as of June 30, 2015, 25 percent of Farmer Mac's regulatory capital was $141.0 million), though Farmer Mac's current policy, for any investments made after the effective date of this policy, limits this total credit exposure to 5 percent of its regulatory capital (as of June 30, 2015, 5 percent of Farmer Mac's regulatory capital was $28.2 million). These exposure limits do not apply to obligations of the United States or GSEs, though Farmer Mac is restricted by the Liquidity and Investment Regulations and its own policy from investing more than 100 percent of its regulatory capital in any one GSE.

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


86
Table of Contents

reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-cost debt. As discussed below, Farmer Mac manages this interest rate risk by funding assets purchased with liabilities matching the duration and cash flow characteristics of the assets purchased.

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

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

In certain cases, yield maintenance provisions and other prepayment penalties contained in agricultural mortgage loans and rural utilities loans reduce, but do not eliminate, prepayment risk.  Those provisions require borrowers to make an additional payment when they prepay their loans, thus compensating Farmer Mac for the shortened duration of the prepaid loan.  As of June 30, 2015, 1 percent of the total outstanding balance of loans in the Farm & Ranch line of business where Farmer Mac either owned the loan or the beneficial interest in the underlying loan had yield maintenance provisions and less than 1 percent had other forms of prepayment protection (together covering 2 percent of all loans with fixed interest rates).  Of the Farm & Ranch loans purchased in second quarter 2015, none had yield maintenance or another form of prepayment protection. As of June 30, 2015, none of Farmer Mac's USDA Securities had yield maintenance provisions; however, 6 percent contained prepayment penalties.  Of the USDA Securities purchased in second quarter 2015, 6 percent contained various forms of prepayment penalties.  As of June 30, 2015, 61 percent of the rural utilities loans owned by Farmer Mac had yield maintenance provisions.  Farmer Mac did not purchase any rural utilities loans in second quarter 2015.  

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


87
Table of Contents


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

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

Farmer Mac's $1.7 billion of cash and cash equivalents mature within three months and are funded with discount notes having similar maturities. As of June 30, 2015, $1.852 billion of the $1.853 billion of investment securities (nearly 100 percent) were floating rate securities with rates that adjust within one year or fixed rate securities with original maturities between three months and one year. Those securities are funded with effectively floating rate debt that closely matches the rate adjustment dates of the associated investments. As of June 30, 2015, Farmer Mac had outstanding discount notes of $5.2 billion, medium-term notes that mature within one year of $2.4 billion, and medium-term notes that mature after one year of $6.0 billion.

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

Farmer Mac's NII is the difference between the yield on its interest-earning assets and its funding costs. Farmer Mac's NII may be affected by changes in market interest rates resulting from timing differences


88
Table of Contents

between maturities and re-pricing characteristics of assets and liabilities. The direction and magnitude of any such effect depends on the direction and magnitude of the change in interest rates as well as the composition of Farmer Mac's portfolio. The NII forecast represents an estimate of the net interest income that Farmer Mac's current portfolio is expected to produce over a twelve-month horizon. As a result, NII sensitivity statistics provide a short-term view of Farmer Mac's interest rate sensitivity.

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

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

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

The following schedule summarizes the results of Farmer Mac's MVE and NII sensitivity analysis as of June 30, 2015 and December 31, 2014 to an immediate and instantaneous uniform or "parallel" shift in the yield curve:

Table 20

 
 
Percentage Change in MVE from Base Case
Interest Rate Scenario
 
As of June 30, 2015
 
As of December 31, 2014
+100 basis points
 
0.7
 %
 
3.2
 %
-25 basis points
 
(1.0
)%
 
(1.8
)%

 
 
Percentage Change in NII from Base Case
Interest Rate Scenario
 
As of June 30, 2015
 
As of December 31, 2014
+100 basis points
 
2.1
 %
 
4.3
 %
-25 basis points
 
(9.3
)%
 
(8.7
)%


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



89
Table of Contents

As of June 30, 2015, Farmer Mac's effective duration gap was minus 1.4 months, compared to minus 2.6 months as of December 31, 2014.  Long-term interest rates increased significantly during second quarter 2015. This rate movement lengthened the duration of Farmer Mac's mortgage assets relative to its liabilities, thereby reducing slightly Farmer Mac's duration gap and overall interest rate sensitivity.

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

As of June 30, 2015, Farmer Mac had $7.5 billion combined notional amount of interest rate swaps, with terms ranging from less than one year to twenty-five years, of which $1.6 billion were pay-fixed interest rate swaps, $4.6 billion were receive-fixed interest rate swaps, and $1.3 billion were basis swaps.

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

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

As discussed in Note 4 to the consolidated financial statements, all financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Changes in the fair values of financial derivatives are reported in "Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in fair value hedging relationships, changes in the fair values of the hedged items related to the risk being hedged are also


90
Table of Contents

reported in "Gains/(losses) on financial derivatives and hedging activities" in the consolidated statements of operations. For financial derivatives designated in cash flow hedging relationships, the effective portion of the derivative gain/loss is recorded in other comprehensive income; amounts are disclosed as a reclassification out of other comprehensive income when the hedge transaction affects earnings. Any ineffective portion of designated hedge transactions is recognized immediately in "Gains/(losses) on financial derivatives and hedging activities".  All of Farmer Mac's financial derivative transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty.  As of June 30, 2015, Farmer Mac had uncollateralized net exposures of $0.7 million to three counterparties. As of December 31, 2014, Farmer Mac had uncollateralized net exposures of $0.4 million to two counterparties.

Liquidity and Capital Resources

Farmer Mac regularly accesses the capital markets for funding, and Farmer Mac has maintained access to the capital markets at favorable rates throughout 2014 and the first six months of 2015. Assuming continued access to the capital markets, Farmer Mac believes it has sufficient liquidity and capital resources to support its operations for the next 12 months and for the foreseeable future. Farmer Mac also has a liquidity contingency plan to manage unanticipated disruptions in its access to the capital markets. That plan involves borrowing through repurchase agreement arrangements and the sale of liquid assets. Farmer Mac is required to maintain a minimum of 90 days of liquidity under the Liquidity and Investment Regulations. In accordance with the methodology for calculating available days of liquidity prescribed by those regulations, Farmer Mac maintained an average of 194 days of liquidity during second quarter 2015 and had 187 days of liquidity as of June 30, 2015.
                              
Debt Issuance.  Farmer Mac funds its purchases of eligible loan assets and investment assets and finances its operations primarily by issuing debt obligations of various maturities through a network of dealers in the public capital markets.  Farmer Mac works to enhance its funding operations by undertaking extensive debt investor relations initiatives, including conducting non-deal roadshows with institutional investors, making periodic dealer sales force presentations, and speaking at fixed income investor conferences throughout the United States. Debt obligations issued by Farmer Mac include discount notes and fixed and floating rate medium-term notes, including callable notes.

Farmer Mac's board of directors has authorized the issuance of up to $18.0 billion of discount notes and medium-term notes (of which $13.6 billion was outstanding as of June 30, 2015), subject to periodic review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac's board of directors increased that authorization from $15.0 billion to $18.0 billion in June 2015. Farmer Mac invests the proceeds of its debt issuances in purchases of loans, USDA Securities, Farmer Mac Guaranteed Securities, and investment assets in accordance with policies established by its board of directors and subject to regulations established by FCA.

Liquidity.  The funding and liquidity needs of Farmer Mac's lines of business are driven by the purchase and retention of eligible loans, USDA Securities, and Farmer Mac Guaranteed Securities (including AgVantage securities); the maturities of Farmer Mac's discount notes and medium-term notes; and payment of principal and interest on Farmer Mac Guaranteed Securities.  Farmer Mac's primary sources of funds to meet these needs are the proceeds of its debt issuances, fees for its guarantees and commitments, net effective spread, loan repayments, and maturities of AgVantage securities.
 


91
Table of Contents

Farmer Mac uses a combination of pay-fixed interest rate swaps and receive-fixed interest rate swaps to mitigate its exposure to interest rate risk and monitors the effects of actual and potential fair value changes on its capital position. From time to time, Farmer Mac uses pay-fixed interest rate swaps, combined with a planned series of discount note or short-term floating rate medium-term note issuances, as an alternative source of effectively fixed rate funding. While the swap market may provide favorable effectively fixed rates, interest rate swap transactions expose Farmer Mac to the risk of future variability of its own issuance spreads versus corresponding LIBOR rates. If the spreads on the Farmer Mac discount notes or short-term floating rate medium-term notes were to deteriorate relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets. Conversely, if the rates on the Farmer Mac discount notes or short-term floating rate medium-term notes were to improve relative to LIBOR, Farmer Mac would benefit from a commensurate increase on its net interest yield on the notional amount of its pay-fixed interest rate swaps and its LIBOR-based floating rate assets.

Farmer Mac maintains cash, cash equivalents (including U.S. Treasury securities and other short-term money market instruments), and other investment securities that can be drawn upon for liquidity needs.  The following table presents these assets as of June 30, 2015 and December 31, 2014:

Table 21
 
As of June 30, 2015
 
As of December 31, 2014

 
(in thousands)
Cash and cash equivalents
$
1,683,156

 
$
1,363,387

Investment securities:
 

 
 

Guaranteed by U.S. Government and its agencies
1,008,392

 
1,404,156

Guaranteed by GSEs
728,637

 
398,600

Corporate debt securities
25,045

 
40,116

Asset-backed securities
90,431

 
96,316

Total
$
3,535,661

 
$
3,302,575


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

The carrying value of Farmer Mac's ARCs investments was $40.2 million as of June 30, 2015, compared to $40.6 million as of December 31, 2014. As of June 30, 2015, Farmer Mac's carrying value of its ARCs was 86 percent of par.  The discounted carrying value reflects uncertainty regarding the ability to obtain


92
Table of Contents

par in the absence of any active market trading. See Note 8 to the consolidated financial statements for more information on the carrying value of ARCs.

Capital. Farmer Mac is subject to the following capital requirements – minimum, critical, and risk-based. Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement. The minimum capital requirement is expressed as a percentage of on-balance sheet assets and off-balance sheet obligations. The critical capital requirement is equal to one-half of the minimum capital amount. Farmer Mac's statutory charter does not specify the required level of risk-based capital but directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress test parameters. Certain enforcement powers are given to FCA depending on Farmer Mac's compliance with these capital standards. As of June 30, 2015, Farmer Mac was in compliance with its statutory capital requirements and was classified as within "level I" (the highest compliance level). See Note 7 to the consolidated financial statements for more information about Farmer Mac's capital position and see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015 for more information on the statutory and regulatory capital requirements applicable to Farmer Mac.

In accordance with FCA's rule on capital planning, Farmer Mac's board of directors has adopted a policy for maintaining a sufficient level of "Tier 1" capital (consisting of retained earnings, paid-in-capital, common stock, qualifying preferred stock, and accumulated other comprehensive income allocable to investments not included in one of the four operating lines of business). That policy imposes restrictions on Tier 1-eligible dividends and any discretionary bonus payments in the event that Tier 1 capital falls below specified thresholds. As of June 30, 2015 and December 31, 2014, Farmer Mac's Tier 1 capital ratio was 11.7% and 11.3%, respectively. For more information about Farmer Mac's capital adequacy policy and FCA's rule on capital planning, see "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015. As of June 30, 2015, Farmer Mac was in compliance with its capital adequacy policy.

Regulatory Matters

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

On March 26, 2015, FCA published a proposed rule in the Federal Register to address Farmer Mac's board governance and standards of conduct, including director election procedures, director fiduciary duties, conflicts of interest, and risk governance, as well as Farmer Mac's existing disclosure and reporting requirements. Farmer Mac submitted a comment letter on this proposed rule to FCA on June 24, 2015.



93
Table of Contents

Other Matters

Common Stock Dividends. For the first and second quarters of 2015, Farmer Mac paid a quarterly dividend of $0.16 per share on all classes of its common stock. For each quarter in 2014, Farmer Mac paid a quarterly dividend of $0.14 per share on all classes of its common stock. Farmer Mac's ability to declare and pay dividends on common stock could be restricted if it fails to comply with applicable capital requirements. See "Business—Government Regulation of Farmer Mac—Regulation—Capital Standards—Enforcement Levels" in Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015.

Preferred Stock Dividends. For each of the first and second quarters of 2015 and for each quarter of 2014, Farmer Mac paid a quarterly dividend of $0.3672 per share on its Series A Preferred Stock. For each of the first and second quarters of 2015 and for the last two quarters of 2014, Farmer Mac paid a quarterly dividend of $0.4297 per share on its Series B Preferred Stock, and for the period from, but not including, its issuance date on March 25, 2014 through and including the regularly scheduled quarterly payment date of April 17, 2014, Farmer Mac paid an initial dividend of $0.105 per share on its Series B Preferred Stock. For each of the first and second quarters of 2015, Farmer Mac paid a quarterly dividend of $0.375 per share on its Series C Preferred Stock, and for the period from, but not including, its issuance date on June 20, 2014 through and including the regularly scheduled quarterly payment date of October 17, 2014, Farmer Mac paid an initial dividend of $0.4875 per share on its Series C Preferred Stock.

Supplemental Information

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

Table 22
New Business Volume
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
LTSPCs
 
USDA Securities
 
Loans
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
$
196,927

 
$
102,944

 
$
123,933

 
$
—

 
$
307,250

 
$
731,054

March 31, 2015
130,224

 
59,311

 
89,186

 
8,703

 
214,915

 
502,339

December 31, 2014
196,058

 
72,045

 
86,942

 
6,972

 
454,490

 
816,507

September 30, 2014
150,243

 
77,368

 
97,275

 
9,936

 
295,700

 
630,522

June 30, 2014
159,116

 
34,850

 
90,785

 
4,689

 
300,775

 
590,215

March 31, 2014
192,407

 
185,594

 
67,984

 
53,903

 
228,690

 
728,578

December 31, 2013
245,770

 
75,731

 
58,438

 
41,374

 
295,000

 
716,313

September 30, 2013
193,089

 
198,783

 
70,372

 
5,107

 
353,500

 
820,851

June 30, 2013
226,135

 
99,504

 
110,897

 
10,222

 
200,000

 
646,758

 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
697,824

 
369,857

 
342,986

 
75,500

 
1,279,655

 
2,765,822

December 31, 2013
824,881

 
540,798

 
361,894

 
86,965

 
1,273,500

 
3,088,038





94
Table of Contents

Table 23
Repayments of Assets by Line of Business
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
AgVantage
 
Total
 
(in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
8,687

 
$
11,126

 
$
34,064

 
$
31,064

 
$
19

 
$
9,245

 
$
94,205

Unscheduled
48,659

 
11,299

 
47,714

 
45,357

 
13,910

 
—

 
166,939

June 30, 2015
$
57,346

 
$
22,425

 
$
81,778

 
$
76,421

 
$
13,929

 
$
9,245

 
$
261,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
39,803

 
$
21,163

 
$
53,747

 
$
33,388

 
$
25,805

 
$
81,922

 
$
255,828

Unscheduled
59,731

 
16,687

 
68,330

 
38,914

 
390

 
—

 
184,052

March 31, 2015
$
99,534

 
$
37,850

 
$
122,077

 
$
72,302

 
$
26,195

 
$
81,922

 
$
439,880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
7,000

 
$
19,821

 
$
28,472

 
$
16,966

 
$
—

 
$
9,349

 
$
81,608

Unscheduled
29,284

 
21,907

 
58,882

 
31,890

 
—

 
—

 
141,963

December 31, 2014
$
36,284

 
$
41,728

 
$
87,354

 
$
48,856

 
$
—

 
$
9,349

 
$
223,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
37,361

 
$
11,560

 
$
45,631

 
$
18,123

 
$
43,612

 
$
383,130

 
$
539,417

Unscheduled
59,601

 
15,002

 
54,683

 
29,539

 
—

 
—

 
158,825

September 30, 2014
$
96,962

 
$
26,562

 
$
100,314

 
$
47,662

 
$
43,612

 
$
383,130

 
$
698,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
9,813

 
$
13,623

 
$
52,622

 
$
28,681

 
$
—

 
$
361,831

 
$
466,570

Unscheduled
45,094

 
13,575

 
42,550

 
38,465

 
19,622

 
—

 
159,306

June 30, 2014
$
54,907

 
$
27,198

 
$
95,172

 
$
67,146

 
$
19,622

 
$
361,831

 
$
625,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
41,587

 
$
24,430

 
$
48,157

 
$
29,319

 
$
23,744

 
$
176,268

 
$
343,505

Unscheduled
63,329

 
9,747

 
59,856

 
39,086

 
55,164

 
—

 
227,182

March 31, 2014
$
104,916

 
$
34,177

 
$
108,013

 
$
68,405

 
$
78,908

 
$
176,268

 
$
570,687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
6,729

 
$
24,367

 
$
36,063

 
$
17,463

 
$
6,897

 
$
303,087

 
$
394,606

Unscheduled
54,277

 
11,586

 
61,147

 
30,651

 
—

 
—

 
157,661

December 31, 2013
$
61,006

 
$
35,953

 
$
97,210

 
$
48,114

 
$
6,897

 
$
303,087

 
$
552,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
34,455

 
$
13,133

 
$
47,143

 
$
21,235

 
$
31,994

 
$
258,488

 
$
406,448

Unscheduled
84,889

 
12,232

 
81,761

 
39,514

 
5,259

 
—

 
223,655

September 30, 2013
$
119,344

 
$
25,365

 
$
128,904

 
$
60,749

 
$
37,253

 
$
258,488

 
$
630,103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
7,242

 
$
11,749

 
$
50,222

 
$
26,056

 
$
—

 
$
206,511

 
$
301,780

Unscheduled
46,479

 
17,682

 
57,385

 
65,776

 
—

 
—

 
187,322

June 30, 2013
$
53,721

 
$
29,431

 
$
107,607

 
$
91,832

 
$
—

 
$
206,511

 
$
489,102

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
95,761

 
$
69,434

 
$
174,882

 
$
93,089

 
$
67,356

 
$
930,578

 
$
1,431,100

Unscheduled
197,308

 
60,231

 
215,971

 
138,980

 
74,786

 
—

 
687,276

December 31, 2014
$
293,069

 
$
129,665

 
$
390,853

 
$
232,069

 
$
142,142

 
$
930,578

 
$
2,118,376

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scheduled
$
82,440

 
$
77,702

 
$
170,690

 
$
94,672

 
$
61,400

 
$
846,011

 
$
1,332,915

Unscheduled
286,825

 
67,917

 
264,314

 
195,684

 
5,259

 
—

 
819,999

December 31, 2013
$
369,265

 
$
145,619

 
$
435,004

 
$
290,356

 
$
66,659

 
$
846,011

 
$
2,152,914





95
Table of Contents

Table 24

Lines of Business - Outstanding Business Volume
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit
 
 
 
Loans
 
Guaranteed Securities
 
LTSPCs
 
USDA Securities
 
Loans
 
AgVantage
 
Total
 
(in thousands)
As of:
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
$
2,710,493

 
$
575,811

 
$
2,199,266

 
$
1,862,430

 
$
954,188

 
$
6,827,939

 
$
15,130,127

March 31, 2015
2,570,912

 
598,236

 
2,178,100

 
1,814,918

 
968,117

 
6,529,934

 
14,660,217

December 31, 2014
2,540,222

 
636,086

 
2,240,866

 
1,798,034

 
985,609

 
6,396,941

 
14,597,758

September 30, 2014
2,380,448

 
677,814

 
2,256,175

 
1,759,948

 
978,637

 
5,951,800

 
14,004,822

June 30, 2014
2,327,167

 
704,376

 
2,279,121

 
1,710,335

 
1,012,313

 
6,039,230

 
14,072,542

March 31, 2014
2,222,958

 
731,574

 
2,339,443

 
1,686,696

 
1,027,246

 
6,100,286

 
14,108,203

December 31, 2013
2,135,467

 
765,751

 
2,261,862

 
1,687,117

 
1,052,251

 
6,047,864

 
13,950,312

September 30, 2013
1,950,704

 
801,703

 
2,283,341

 
1,676,793

 
1,017,774

 
6,055,951

 
13,786,266

June 30, 2013
1,876,958

 
827,069

 
2,213,462

 
1,667,170

 
1,049,920

 
5,960,939

 
13,595,518



Table 25

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:
 
 
 
 
 
 
 
June 30, 2015
$
5,136,559

 
$
2,118,999

 
$
4,102,075

 
$
11,357,633

March 31, 2015
5,006,542

 
2,020,600

 
3,857,363

 
10,884,505

December 31, 2014
5,020,085

 
2,002,943

 
3,697,272

 
10,720,300

September 30, 2014
4,823,897

 
1,919,353

 
3,324,703

 
10,067,953

June 30, 2014
4,955,560

 
1,881,625

 
3,247,011

 
10,084,196

March 31, 2014
4,890,979

 
1,834,352

 
3,304,094

 
10,029,425

December 31, 2013
4,980,500

 
1,827,744

 
3,113,224

 
9,921,468

September 30, 2013
4,970,420

 
1,802,255

 
2,924,785

 
9,697,460

June 30, 2013
4,714,119

 
1,871,225

 
2,964,004

 
9,549,348





96
Table of Contents

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

Table 26

 
Net Effective Spread by Line of Business
 
 
 
Farm & Ranch
 
USDA Guarantees
 
Rural Utilities
 
Institutional Credit(1)
 
Corporate
 
Net Effective Spread
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
Dollars
 
Yield
 
(dollars in thousands)
For the quarter ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
$
9,681

 
1.82
%
 
$
4,466

 
0.98
%
 
$
2,838

 
1.18
%
 
$
10,860

 
0.78
%
 
$
1,942

 
0.25
%
 
$
29,787

 
0.88
%
March 31, 2015(2)
10,114

 
1.97
%
 
4,225

 
0.95
%
 
2,804

 
1.15
%
 
10,425

 
0.77
%
 
1,689

 
0.20
%
 
29,257

 
0.86
%
December 31, 2014(3)
8,682

 
1.71
%
 
5,250

 
1.19
%
 
2,908

 
1.18
%
 
9,871

 
0.78
%
 
1,732

 
0.26
%
 
28,443

 
0.91
%
September 30, 2014
8,207

 
1.68
%
 
5,073

 
1.18
%
 
2,890

 
1.16
%
 
9,822

 
0.78
%
 
3,773

 
0.59
%
 
29,765

 
0.97
%
June 30, 2014
7,820

 
1.64
%
 
4,159

 
0.99
%
 
2,953

 
1.16
%
 
9,957

 
0.78
%
 
4,160

 
0.57
%
 
29,049

 
0.92
%
March 31, 2014(4)
7,114

 
1.53
%
 
3,784

 
0.91
%
 
1,990

 
0.73
%
 
9,406

 
0.74
%
 
4,142

 
0.56
%
 
26,436

 
0.84
%
December 31, 2013(4)
10,113

 
2.20
%
 
4,022

 
0.97
%
 
2,379

 
0.89
%
 
9,088

 
0.72
%
 
4,420

 
0.58
%
 
30,022

 
0.94
%
September 30, 2013
7,980

 
1.86
%
 
4,505

 
1.09
%
 
2,974

 
1.12
%
 
9,117

 
0.72
%
 
4,117

 
0.57
%
 
28,693

 
0.93
%
June 30, 2013
8,228

 
2.08
%
 
4,508

 
1.12
%
 
3,056

 
1.14
%
 
8,805

 
0.71
%
 
4,294

 
0.63
%
 
28,891

 
0.97
%
(1) 
See Note 1(d) to the consolidated financial statements for more information about the reclassification of certain amounts in prior periods from guarantee and commitment fees to interest income related to on-balance sheet Farmer Mac Guaranteed Securities.
(2) 
Beginning in first quarter 2015, Farmer Mac revised its methodology for interest expense allocation among the Farm & Ranch, USDA Guarantees, and Rural Utilities lines of business. As a result of this revision, a greater percentage of interest expense has been allocated to the longer-term assets included within the USDA Guarantees and Rural Utilities lines of business. Net effective spread for periods prior to the quarter ended March 31, 2015 does not reflect this revision.
(3) 
On October 1, 2014, $78.5 million of preferred stock issued by CoBank was called, resulting in a loss of net effective spread of $2.1 million or 30 basis points
in the corporate segment. The impact on consolidated net effective spread was 7 basis points.
(4) 
First quarter 2014 includes the impact of spread compression in the Rural Utilities line of business from the early refinancing of loans (41 basis points). Fourth quarter 2013 includes the impact in net effective spread in the Farm & Ranch line of business of one-time adjustments for recovered buyout interest and yield maintenance (40 basis points in aggregate) and the impact of spread compression in the Rural Utilities line of business from the early refinancing of loans (26 basis points).


























97
Table of Contents

The following table presents quarterly core earnings reconciled to net income attributable to common stockholders:

Table 27
 
 
June 2015
 
March 2015
 
December 2014
 
September 2014
 
June 2014
 
March 2014
 
December 2013
 
September 2013
 
June 2013
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net effective spread(1)
$
29,787

 
$
29,257

 
$
28,443

 
$
29,765

 
$
29,049

 
$
26,436

 
$
30,022

 
$
28,693

 
$
28,891

Guarantee and commitment fees
4,085

 
4,012

 
4,096

 
4,153

 
4,216

 
4,315

 
4,252

 
4,134

 
4,126

Other(2)
(24
)
 
(405
)
 
(1,285
)
 
(2,001
)
 
(520
)
 
(410
)
 
427

 
(466
)
 
3,274

Total revenues
33,848

 
32,864

 
31,254

 
31,917

 
32,745

 
30,341

 
34,701

 
32,361

 
36,291

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit related expense/(income):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for/(release of) losses
1,256

 
(696
)
 
(479
)
 
(804
)
 
(2,557
)
 
674

 
12

 
(36
)
 
(704
)
REO operating expenses
—

 
(1
)
 
48

 
1

 
59

 
2

 
3

 
35

 
259

Losses/(gains) on sale of REO
—

 
1

 
28

 
—

 
(168
)
 
3

 
(26
)
 
(39
)
 
(1,124
)
Total credit related expense/(income)
1,256

 
(696
)
 
(403
)
 
(803
)
 
(2,666
)
 
679

 
(11
)
 
(40
)
 
(1,569
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
5,733

 
5,693

 
4,971

 
4,693

 
4,889

 
4,456

 
4,025

 
4,523

 
4,571

General and administrative
3,374

 
2,823

 
2,992

 
3,123

 
3,288

 
2,794

 
3,104

 
2,827

 
2,715

Regulatory fees
600

 
600

 
600

 
593

 
594

 
594

 
594

 
593

 
594

Total operating expenses
9,707

 
9,116

 
8,563

 
8,409

 
8,771

 
7,844

 
7,723

 
7,943

 
7,880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
22,885

 
24,444

 
23,094

 
24,311

 
26,640

 
21,818

 
26,989

 
24,458

 
29,980

Income tax expense/(benefit)(3)
8,091

 
6,692

 
4,858

 
6,327

 
(4,734
)
 
4,334

 
5,279

 
6,263

 
7,007

Net (loss)/income attributable to non-controlling interest
(119
)
 
5,354

 
5,414

 
5,412

 
5,819

 
5,547

 
5,546

 
5,547

 
5,547

Preferred stock dividends
3,296

 
3,295

 
3,296

 
3,283

 
2,308

 
952

 
882

 
881

 
881

Core earnings
$
11,617

 
$
9,103

 
$
9,526

 
$
9,289

 
$
23,247

 
$
10,985

 
$
15,282

 
$
11,767

 
$
16,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciling items (after-tax effects):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on financial derivatives and hedging activities
10,388

 
(582
)
 
(3,717
)
 
2,685

 
(3,053
)
 
(2,395
)
 
8,003

 
4,632

 
11,021

Unrealized gains/(losses) on trading assets
110

 
236

 
679

 
(21
)
 
(46
)
 
426

 
(50
)
 
(407
)
 
(212
)
Amortization of premiums/discounts and deferred gains on assets consolidated at fair value
(81
)
 
(529
)
 
(811
)
 
(440
)
 
(179
)
 
(8,027
)
 
(10,864
)
 
(421
)
 
(564
)
Net effects of settlements on agency forwards
128

 
(164
)
 
(30
)
 
73

 
236

 
(176
)
 
114

 
(158
)
 
955

Loss on retirement of Farmer Mac II LLC Preferred Stock
—

 
(6,246
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net income attributable to common stockholders
$
22,162

 
$
1,818

 
$
5,647

 
$
11,586

 
$
20,205

 
$
813

 
$
12,485

 
$
15,413

 
$
27,745

(1) 
The difference between first quarter 2014 and fourth quarter 2013 net effective spread was due to the impact of one-time adjustments for recovered buyout interest and yield maintenance of $1.8 million in fourth quarter 2013, $0.6 million associated with the early refinancing of AgVantage securities and the recasting of certain Rural Utilities loans, and a lower day count in first quarter 2014.
(2) 
Fourth quarter 2014 and third quarter 2014 include $13.6 million and $17.9 million, respectively, of interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased and $12.8 million and $16.4 million, respectively of gains on securities sold, not yet purchased. First quarter 2014 includes additional hedging costs of $0.6 million. Fourth quarter 2013 includes gains on the repurchase of debt of $1.5 million, partially offset by realized losses on the sale of available-for-sale securities of $0.9 million and additional hedging costs of $0.2 million. Second quarter 2013 includes $3.1 million of realized gains from the sale of an available-for-sale investment security.
(3) 
Fourth quarter 2014 and second quarter 2014 reflect a reduction of $1.4 million and $11.6 million, respectively, in the tax valuation allowance against capital loss carryforwards related to capital gains on securities sold, not yet purchased. First quarter 2014 and fourth quarter 2013 reflect a reduction in tax valuation allowance of $0.8 million and $2.1 million, respectively, associated with certain gains on investment portfolio assets. Second quarter 2013 includes the reduction of $1.1 million of tax valuation allowance against capital loss carryforwards related to realized gains from the sale of an available-for-sale investment security.



98
Table of Contents

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.
Controls and Procedures

Management's Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its periodic filings under the Securities Exchange Act of 1934 (the “Exchange Act”), including this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to Farmer Mac's management on a timely basis to allow decisions regarding required disclosure. Management, including Farmer Mac's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Farmer Mac's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2015.
  
Farmer Mac carried out the evaluation of the effectiveness of its disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Farmer Mac's disclosure controls and procedures were effective as of June 30, 2015.

Changes in Internal Control Over Financial Reporting. There were no changes in Farmer Mac's internal control over financial reporting during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, Farmer Mac's internal control over financial reporting.



99

PART II

Item 1.
Legal Proceedings

None.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 16, 2015.

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

(a)Farmer Mac is a federally chartered instrumentality of the United States and its debt and equity securities are exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933.
  
During second quarter 2015, the following transactions related to Farmer Mac's equity securities that were not registered under the Securities Act of 1933 and were not otherwise reported on a Current Report on Form 8-K occurred:

Class C non-voting common stock. Under Farmer Mac's policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 135 shares of its Class C non-voting common stock on April 7, 2015 to the three directors who elected to receive stock in lieu of their cash retainers. Farmer Mac calculated the number of shares issued to the directors based on a price of $28.19 per share, which was the closing price of the Class C non-voting common stock on March 31, 2015 as reported by the New York Stock Exchange.

On April 1, 2015, Farmer Mac granted stock appreciation rights under its 2008 Omnibus Incentive Plan with respect to an aggregate of 64,500 shares of Class C non-voting common stock, at an exercise price of $32.39 per share, to nineteen employees as incentive compensation. On that same day, Farmer Mac also granted 3,088 shares of restricted stock to one employee under its 2008 Omnibus Incentive Plan. All of those shares of restricted stock will "cliff" vest three years after the grant date if the employee remains employed by Farmer Mac at that time.

(b)
Not applicable.

(c)
None.

Item 3. Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4.
Mine Safety Disclosures

Not applicable.



100
Table of Contents

Item 5.     Other Information

(a) None.

(b) None.




101
Table of Contents

Item 6. Exhibits

(3)           Exhibits.
*
 
3.1
 
—
 
Title VIII of the Farm Credit Act of 1971, as most recently amended by the Food, Conservation and Energy Act of 2008 (Previously filed as Exhibit to Form 10-Q filed August 12, 2008).
*
 
3.2
 
—
 
Amended and Restated By-Laws of the Registrant (Previously filed as Exhibit 3.1 to Form 8-K filed June 9, 2014).
*
 
4.1
 
—
 
Specimen Certificate for Farmer Mac Class A Voting Common Stock (Previously filed as Exhibit 4.1 to Form 10-Q filed May 15, 2003).
*
 
4.2
 
—
 
Specimen Certificate for Farmer Mac Class B Voting Common Stock (Previously filed as Exhibit 4.2 to Form 10-Q filed May 15, 2003).
*
 
4.3
 
—
 
Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Previously filed as Exhibit 4.3 to Form 10-Q filed May 15, 2003).
*
 
4.4
 
—
 
Specimen Certificate for 5.875% Non-Cumulative Preferred Stock, Series A (Previously filed as Exhibit 4.4.1 to Form 10-Q filed May 9, 2013).
*
 
4.4.1
 
—
 
Certificate of Designation of Terms and Conditions of 5.875% Non-Cumulative Preferred Stock, Series A (Previously filed as Exhibit 4.1 to Form 8-A filed January 17, 2013).
*
 
4.5
 
—
 
Specimen Certificate for 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as Exhibit 4.5 to Form 10-Q filed May 12, 2014).
*
 
4.5.1
 
—
 
Certificate of Designation of Terms and Conditions of 6.875% Non-Cumulative Preferred Stock, Series B (Previously filed as Exhibit 4.1 to Form 8-A filed March 25, 2014).
*
 
4.6
 
—
 
Specimen Certificate for 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.6 to Form 10-Q filed August 11, 2014).
*
 
4.6.1
 
—
 
Certificate of Designation of Terms and Conditions of 6.000% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (Previously filed as Exhibit 4.1 to Form 8-A filed June 20, 2014).
*
 
10.1
 
—
 
Form of SARs Award Agreement for grants on or after April 1, 2015 (Previously filed as Exhibit 10.1 to Form 8-K filed on April 3, 2015).
*
 
10.2
 
—
 
Form of Performance-Based Restricted Stock Award Agreement for grants made to non-directors on or after April 1, 2015 (Previously filed as Exhibit 10.2 to Form 8-K filed on April 3, 2015).
*
 
10.3
 
—
 
Form of Time-Based Restricted Stock Award Agreement for grants made to non-directors on or after April 1, 2015 (Previously filed as Exhibit 10.3 to Form 8-K filed on April 3, 2015).
**
 
31.1
 
—
 
Certification of Registrant's principal executive officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**
 
31.2
 
—
 
Certification of Registrant's principal financial officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**
 
32
 
—
 
Certification of Registrant's principal executive officer and principal financial officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Incorporated by reference to the indicated prior filing.
**
Filed with this report.
†
Management contract or compensatory plan.




102
Table of Contents

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

FEDERAL AGRICULTURAL MORTGAGE CORPORATION

          /s/ Timothy L. Buzby
 
August 10, 2015
By:
Timothy L. Buzby
 
Date
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 

          /s/ R. Dale Lynch
 
August 10, 2015
By:
R. Dale Lynch
 
Date
 
Executive Vice President – Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 




103